Founder Interview: Lessons from the founder of Flight Centre (Part 3)

First published in Firstlinks, 14 February 2024


This article is Part 3 of a three-part series about Graham Turner, Founder of Flight Centre.

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Applying Evolutionary Psychology to Corporate Culture

Conventional corporate structure is made of a hierarchical, pyramid structure which Skroo does not ascribe to. The reason is because it slows decision-making, adds bureaucratic layers and disrupts the flow of customer feedback back up to management. The secret formula Flight Centre employed during their rapid pace was based on the theory of evolutionary psychology written by Professor Nigel Nicholson from London School of Economics. The design of an organisation is centred around teams of 5 to 8 people which hark back to how our hunter gatherer ancestors liked to live and work as a family. Typically 5 to 8 families make a village (an informal group that helps and works with each other), and 3 to 8 villages make a tribe. A tribe ideally consists of 80-150 people. Any larger unnecessary bureaucracy starts to creep in.

On organisational design: “You can take people from the Stone Age, but you can’t take the Stone Age out of people” – Graham Turner

This is how Skroo designed Flight Centre’s frontline teams – roughly 5 to 8 team members in any new shop, belonging to a village of 5 to 8 shops, which in turn linked to a tribe consisting of about 3 to 5 villages (15 to 25 shops). The ideal tribe had around 150 people. As Flight Centre grew beyond those limits, it had to inevitably embrace a level of bureaucracy which Skroo minimised by limiting it to a maximum of 3 or 4 levels – team level, followed by tribe level,  then region level, then country level. Senior management should be a maximum of 4 or 5 levels away from frontline staff.

Organisational Structure In the Context of Evolutionary Psychology

To this day Flight Centre is structured this way and Skroo remains adamant the size of its board and senior management team should be no different than a family – a maximum of 5 to 8.

How To Acquire Companies

Skroo has overseen a 20 year track record of acquisitions and proudly stands by the fact he’s made plenty of mistakes. He is the first to admit a success rate of “50/50” is not impressive, but the courage of continuing to take risks is part of why Flight Centre has been successful. It is the reason that has enabled its longstanding leadership team to finetune its acquisition criteria and continue learning from mistakes.

For starters, he eschews “renovators” where on balance more time and capital is required than one estimates. He instead prefers ready-made targets that can already contribute immediately. The premium on acquiring these companies is worth it. Its biggest successes have come from acquisitions in adjacent markets. For example, Flight Centre was able to move into the corporate travel business through a string of acquisitions; it is now one of its largest business areas.

These days, Flight Centre has significant internal capabilities to grow by itself; it will only look to acquire where there are opportunities in niche markets where it does not already have exposure. That may be in new travel segments (such as leisure) or niche geographies where there are new growth opportunities. And this is the other key lesson Skroo has learnt – acquiring is not about empire building for the sake of organisational size; it is about building an advantage in a new niche.

The Makings of a Founder

To this day Skroo remains the CEO and retains a significant shareholding. Reflecting on his own journey, I ask him the ingredients which made him a successful founder and what separated him from others. In typical Skroo fashion, he responds analytically with a sense of realism: “getting my hands dirty on an apple orchard by the age of six set a foundation for understanding small business. It’s not a requirement for success, but certainly helped me learn the basics.”

As he developed, it became clear he was a builder – 2 buses was never enough. With a dry grin he points out he was motivated to pursue life outside the family’s apple orchard because “it was so boring” and of course he pays heed to a splash of luck which helped him survive the cash crisis early on. Somehow I suspect the element of luck is less than Skroo purports.

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Founder Interview: Lessons from the founder of Flight Centre (Part 2)

First published in Firstlinks, 7 February 2024


This article is Part 2 of a three-part series about Graham Turner, Founder of Flight Centre.

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Finding a Niche

Founders like Skroo always find a way to reinvent and adapt. Motivated by a return to Australia with his family, he looked to exit Topdeck but still had one eye on his next move. From his time in London, he noticed the travel market in Australia by comparison was relatively homogenous, controlled predominantly by big institutions who were happy selling exorbitant airfares with little competition. Skroo saw this environment as a ripe opportunity to build a niche – discount travel. He would have an edge sourcing flights from overseas airlines looking to offload tickets at the last minute given his connections in London.

The discount airfare retailers, known as bucket shops in London, was a concept not well known to Australia. At the time, airfare discounting was illegal, it was only a few years later that regulations would change and allow the market to open. As Skroo recalls, there were a few discount retailers who were prosecuted, but he was lucky to avoid this and flourish when the regulations were updated. He fondly remembers the deliberately handwriting messy promotions on shopfront blackboards as a tactic to attract the discount bargain hunters.

“Again we got into a niche that meant we could almost have as many customers as we wanted within reason” – Graham Turner

Taking the cash lessons from Topdeck, market entry was conservatively executed, preserving cash through the use of partnerships in the pursuit of an expansion strategy. When Flight Centre opened its first stores in Brisbane, Sydney and Melbourne, it did so via joint venture arrangements which minimised the amount of cash required. From those three domestic shops, they would eventually spread internationally not long after.

Graham Turner and Lawrence Lam

Going Global The Right Way

Global expansion has traditionally been difficult for many Australian companies. It was no different for Flight Centre. The difference maker was at Flight Centre, there was a group of co-founders at the helm determined to figure out and evolve their overseas operations. They also had the ability to make quick changes without heavy bureaucracy many other organisations face.

In 1989 the business opened its first overseas shops in London and California. Despite Skroo’s extensive experience in London, the shops struggled to gain traction. Skroo puts it down to two factors: timing and leadership talent. The expansion overseas was premature because in those days Flight Centre did not yet have the level of buying power it needed to acquire the cheapest possible airfares, meaning it could not offer the competitive pricing it needed to break into a new market. Its leadership talent was also quite thin which meant decision-making was made from afar in Australia; on the ground experience was lacking. The disappointing results led to the eventual closing of the London and Californian shops in 1991.

But unlike large corporates, Skroo’s operation was agile, could make quick decisions, and was determined to make the global expansion work. In 1995 they revisited the plan with a much stronger foundation. By then Flight Centre had just floated and had built up 350 shops in Australia, generating about $1 billion in revenues. With that also came a deeper talent pool of managers with greater skill and affinity to what Flight Centre was about – its corporate culture. The previous constraints which prevented a successful expansion were fixed. As Skroo puts it “this time we didn’t underestimate how difficult it was to start something up like that.”

Instead of hiring leaders overseas, Flight Centre sent, as Skroo put it “really good expats”, from Australia with a horizon of five to ten years to lead and grow the overseas operations. This tweak worked. It highlighted the importance of corporate culture and business acumen, which took years to develop. Eventually the expat would hand over to a local manager. Even today the formula for spotting internal talent has not changed – Skroo looks for those who make the right commercial judgements, reflect the corporate culture and are willing to relocate even with young families – “it is a big commitment and people prepared to make those commitments tells you something”.

It was with this approach that Skroo and his team would successfully expand into the UK and US throughout the 1990’s and would set Flight Centre on the path towards a true multinational business it is today.

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Founder Interview: Lessons from the founder of Flight Centre (Part 1)

First published in Firstlinks, 7 February 2024


Much has been written about Graham Turner’s career and how he grew Flight Centre from a single shop in 1982 to a global enterprise generating $3 billion of revenue in over 80 countries. But not many know about the proverbial mountains he’s climbed to get to where he is today. It is through these many storms that his uncanny business intuition has been honed. In my interview with ‘Skroo’ (as he prefers to be called), we unstitch the fabric of these experiences and the lessons he’s learnt over decades in business.

Graham Turner and Lawrence Lam

Big Businesses Start Small… But Always Differentiated

Introverted, Intuitive, Thinking and Prospecting. This is the combination of descriptors that make up Skroo’s Myer’s-Briggs personality type. In their natural state, INTP types are quiet thinkers with vigorous intellects. They enjoy seeking out unlikely paths and taking an unconventional approach.

It becomes abundantly clear these descriptors fit very well with all that Skroo has overcome in his business journey. It explains why he started a business on the other side of the world ‘just for fun’ with a few mates over 50 years ago.

Just as intriguing as the why, is how he scaled from one bus in 1973 to over seventy by 1980, running tours all over Europe. Skroo tells me the story of how he purchased the first bus and launched Top Deck Travel. At the time bus tour companies were in great abundance throughout London. There was no shortage of competition. But when Skroo and his mates fitted out their first bus, he fitted them with a kitchen and bedrooms, capable of taking long-haul trips as far as Afghanistan. It came simply from the fact they wanted to see more countries on a shoestring budget, but in doing so had inadvertently stumbled across his first business lesson: in competitive markets, a subtle differentiation can open up new pockets of demand. Competitors at the time were focused on coach camping tours, not long-haul tours like Skroo’s bus. What Top Deck offered was unique and fun. Customers could cook, sleep and visit more countries, which made it an attractive and unique proposition.

A Unique Value Proposition

The ease with which seats were filled gave Skroo and his business partner a taste of early success. Although the business concept of blue oceans would be popularised some decades later, Skroo had already discovered the advantages of creating new markets early on through the differentiation of the tour experience. The unit economics were prime for scaling. At a cost of £12 in weekly marketing costs (Skroo tells me the first ads were placed in a weekly travel newspaper published in London called the Australiasian Express), Topdeck could confidently fill a bus which would deliver revenues of £1,650. Even accounting for other expenses, each trip was profoundly profitable.

Scaling became easy with the growing demand and self-generating cashflows. Two years into operations, Topdeck made £15,000 profit and had several buses touring all over Europe. Along the way, he enjoyed many free overland trips, including a 3-month drive from London to Kathmandu. Underneath Skroo’s thoughtful and calm demeanour was a strong desire for growth and success. He still enjoys winning in the game of business. As he says “Founders are generally empire builders. One bus was never enough for me. It had to be 2, 3, or 10.”

But how does a founder balance the investment required to scale, with the cash needs in the short-term? It was a question of balancing long-term growth and short-term liquidity. Initially, they developed a general rule: every bus purchase should only be made if they were confident it could be paid back in 2-3 trips. The model worked well for the first 10 years as they scaled to 70 buses but by 1980 the market changed. Skroo was about to learn his toughest lesson in business when Topdeck almost filed for bankruptcy.

Balancing Liquidity and Scalable Unit Economics

By 1980 Topdeck had seventy buses all over Europe and despite the strong growth trajectory, found itself short of cash when forward bookings in the winter were weaker than expected. And because it had a model that relied on rapid scaling and reinvestment of cash back into more buses, Topdeck became exceptionally reliant on forward bookings. It was the business’s first near death experience and taught Skroo a lesson in cash management. Its importance became abundantly clear as Skroo was turned down by banks who had no interest in financing a bus tour business. There would be no white knights. No one was going to save Topdeck in its most crucial time of need. As Skroo aptly puts it: “banks are more likely to loan money to those that don’t need it”.

They survived by the skin of their teeth only because cash from bookings originating from Australia and New Zealand started flowing through in April of 1980. The southern hemisphere booking season had come through just in time. It was a close call. Survival had come from internal cash, not external. In business there is no such thing as a deus ex machina.

For Skroo, the importance of cash is a recurring lesson he sees over and over again. Forty years on, even after he left the Topdeck business in 1986 and returned to Australia to eventually start Flight Centre, his recollection of that moment is as visceral as ever. That moment shaped how Flight Centre would manage its cash position, and the amount of debt it would hold going forward.

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Founder Interview: Lessons from the founder of Chemist Warehouse (Part 2)

First published in Morningstar, 8 June 2023


In Part 1 we detailed how Jack Gance and his brother, Sam, built the sunglass and cosmetics distributor Le Specs before selling the business in 1990. The Le Specs business was originally launched as a pharmacist-to-pharmacist wholesaler, and Jack and his brother Sam were themselves qualified pharmacists with their own established pharmacies.

Separate to the Le Specs business, Jack was concurrently cultivating a footprint of pharmacies in Victoria which grew from 2 to 35 through a series of partnerships. This chain of stores would eventually be branded as the MyChemist. It would be the first iteration of what would spark the creation of Chemist Warehouse – the second phase of Jack’s career and his biggest success. It would become a pharmacy brand that would dominate the Australian market.

Jack Gance (right) with author Lawrence Lam

Creating new opportunities in crowded markets

Prior to Chemist Warehouse, the pharmacy market in Australia was fragmented and traditionally hard to scale due to strict regulations and the requirement to have qualified pharmacists on premises. That was until Jack changed the business model.

Traditionally, the local chemist was a member of the community, just like the local doctor. Roughly 70% of revenues of the average pharmacy store were from prescription drugs, and the remaining 30% being from non-prescription drugs and other health-related products.

The Chemist Warehouse model flips this script. Most sales are from non-prescription drugs such as vitamins, fragrances, cosmetics, skincare, and natural medicines. This segment, often referred to as the ‘front-of-shop’ sales, accounts for approximately 70% of revenues, whereas prescription medicines (behind-the-counter) are 30% of revenues. Readers should not misinterpret Chemist Warehouse as generating less prescription sales, but rather it sells far more front-of-shop products than the average pharmacy in Australia. Prescription sales remain on par, if not more, than the average pharmacy.

Chemist Warehouse’s growth comes from the ability to create a new market within an established industry. It does this by increasing the floorspace allocated to front-of-shop products, flipping the traditional drug-focused pharmacy model into a warehouse focused on showcasing all the non-prescription products. Jack’s retail philosophy centres around bombarding customers with such a wide variety of products that they will eventually find something that they want. “If you walk into a shop looking for a tie and the shop has three ties, you might not buy one. But if the shop has 1,000 ties, you’re more likely to find one or more that suit you”, Jack says.

“If you walk into a shop looking for a tie and the shop has three ties, you might not buy one. But if the shop has 1,000 ties, you’re more likely to find one or more that suit you” – Jack Gance

This philosophy also gives the ability to cross-sell more products. Like the Costco model, customers of Chemist Warehouse often walk out buying more than they intended simply because of the overwhelming product range and overt signage which serves as a reminder of all the forgotten shopping list items. On average, the revenue of a Chemist Warehouse store is roughly four to six times that of an average pharmacy store due to the velocity at which they turn over stock. This brings scale and buying power from suppliers which in turn enables low pricing for customers.

From an investment perspective, Chemist Warehouse is akin to a platform business. It’s reputation as the preeminent low-cost pharmacy brand means consumers will gravitate to their shops. They match these consumers with vendors selling cosmetics, vitamins, skincare, and health products. Their ‘platform’ is the network of 500 stores that give them the footprint to be the country’s number one pharmacy retailer.

The physical store network is connected by unified sales systems and inventory management systems which allow head office a centralised view of the platform. Like most platform businesses, they have self-perpetuating monopolistic characteristics as buyers and sellers reinforce the need to transact through Chemist Warehouse. Ultimately this creates scale and reduces inventory risk for Jack’s business. The more they sell, the lower the prices they can offer, and the more customers they win.

A founder’s connection to their business

Many pharmacy retailers have attempted to create a national chain though none have dominated the market like Chemist Warehouse.

From the outset of my interview with Jack, it’s abundantly clear he retains intimate knowledge of the business despite much of the daily operations now being run by his team of 500 at head office. He cites store sales figures from the prior week and tells me which products are trending in his stores. He receives daily reports from the centralised sales and inventory management systems.

What he detests are business leaders detached from their customers. Jack tells me about a conversation he had with the CEO of a leading Australian health company selling a significant amount of product to Chemist Warehouse. Jack asked the freshly appointed CEO, a non-founder, if he knew the name of Chemist Warehouse’s representative buyer – the key influencer who determines which products Chemist Warehouse will buy and in what quantity. The CEO was not able to. Jack asked if the CEO knew the buyer’s name from one of Australia’s largest supermarkets, another key client. “Jack, I know the CEO of the supermarket chain, but I don’t know the buyer by name. I’m a CEO of a multinational business, I have thousands of clients and it’s impossible for me to know every buyer by name”, he said.

But that is the essence of why founder-led businesses are different. As Jack points out, both Chemist Warehouse and the supermarket chain represent a significant portion of this company’s revenues. In his view, a CEO must foster a close relationship with those individuals at the heart of the decision-making process of their customers.

In search of the next Jack Gance

Jack is cautiously aggressive when it comes to business. An example is Chemist Warehouse’s expansion into the New Zealand and Ireland. “Many companies have failed with big overseas expansion plans,” he tells me, reeling off names of Australian companies that have expanded too fast overseas. Although the eventual plan is to expand into the United Kingdom, Chemist Warehouse has opted to test the market in nearby Ireland first by piloting a small number of stores.

“I don’t assume I know more than the local market,” Jack emphasises. He looks to form partnerships with local operators to minimise the learning curve and expansion costs.

Like many founder-led companies, Jack runs Chemist Warehouse with very little debt. The focus has been on positive cashflow generation and long-term financial stability, an awareness he gained from his Le Specs days which was an operation hungry for working capital.

He favours organic growth over large acquisitions. In 2017, Chemist Warehouse expanded into New Zealand with its first stores initially funded with $5 million of starting capital. New Zealand, with its less stringent regulatory framework compared to Australia, has proven a fertile ground for Chemist Warehouse’s expansion. Aside from the initial capital, the expansion has not required additional investment – the new stores continue to be self-funded by revenues from existing New Zealand stores.

With organic opportunities in abundance, very few acquisitions make sense to Jack. Like most long-term minded founders, that is exactly the way he prefers.

Jack’s style errs on self-reliance rather than outsourcing. Early on he chose to run his own centralised sales software system on Chemist Warehouse’s cash registers to centralise the sales data. The vertically integrated model is a core strategic advantage of the business. It gives head office granular visibility over the entire store network and standardises the technology infrastructure, enabling efficiency when rolling out new stores and products.

A lesson on risk taking

Jack believes true entrepreneurs are risk mitigators. He did this with the marketing deal he struck to launch Le Specs, paying no upfront costs, and instead sharing a percentage of subsequent profits, thereby reducing the expenditure outlayed in case the venture was unsuccessful. And Chemist Warehouse’s cautiously aggressive UK expansion plan has Jack’s risk management philosophy written all over it.

Though a success story, Jack has experienced his share of failures. After he sold Le Specs, Jack remained in management for two years, working with the new owner during the transition. He watched Le Tan decline under new ownership as he lost the decision-making power to reverse the trend. He attributes the experience as a lesson in the importance of maintaining good relationships with suppliers, not just customers. When the new owner took over, suppliers were strong-armed into renegotiating contracts with unfavourable terms for them. This proved successful for Le Tan in the short-term but eroded the quality of the product as relationships later deteriorated.

Companies that localise an already proven global model

Smaller niche markets may appear less appealing to investors, but even in the sunglasses and pharmacy market in a relatively small country like Australia, Jack Gance has managed to create significant value. The conventional view teaches investors to focus on markets with a large Total Addressable Market (“TAM”), but with larger TAM comes greater attention and increased competition. Instead, investors may find opportunity in companies that localise products and services that have already been proven to work overseas.

For instance, Le Specs introduced a tougher, more flexible sunglass range that was first manufactured and sold in France. Jack localised it for the Australian market after his wife Evelynne visited a trade show in France.

Similarly, he describes how the idea of Chemist Warehouse came about after having visited the “busy, in-you-face, warehouse-style” pharmacies in the US during the 1970s.

The localisation strategy epitomises Jack’s focus on risk minimisation; adapting a proven model overseas is much less risky than creating an untested one.

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Founder Interview: Lessons from the founder of Chemist Warehouse (Part 1)

First published in Morningstar, 31 May 2023


Jack Gance is a rare entrepreneur who’s created not one but two dominant market leaders from scratch. He built Australia’s leading pharmacy retailer, Chemist Warehouse, after founding and ultimately selling Le Specs, one of the top brands in fragrances, cosmetics, suntan lotion and sunglasses. Throughout my interview with Jack, he sprinkles lessons in getting businesses off the ground with limited capital, on how to create and extend strategic advantages, building businesses over a long horizon, as well as the importance of making fair deals with suppliers.

Jack Gance (right) with author Lawrence Lam

Getting your foot in the door

Within the opening few minutes of our interview, it becomes apparent Jack chooses to take calculated risks in areas where he has a strategic advantage. ‘What exactly do you define as a strategic advantage?’ I ask. In a matter-of-fact tone, Jack explains it’s about getting yourself into unfair fights.

For example, the Le Specs sunglasses business was launched as a pharmacist-to-pharmacist wholesaler. Jack and his brother Sam were themselves qualified pharmacists with their own established pharmacies. Jack had the insider’s advantage of being a relatable colleague familiar with how pharmacists should position the product. Jack was able to distinguish Le Specs, which had a unique feature of being unbreakable, from the hundreds of other sunglass products and distributors to garner the support of fellow colleagues.

The insider’s angle combined with a unique product proved to be enough of a differentiator to give Jack the leg-up he needed. He knew how to price the sunglasses, and he could coach his sales team on how to maximise sales.

A story he recalls involves a time when he would ask pharmacists to step on the sunglasses to demonstrate why they would appeal to the masses. He would also encourage them to repeat this in front of customers – a way to grab their attention.

Combined with the attractive wholesale prices, Le Specs was an immediate success. And as any founder would, Jack pressed on further with an innovative marketing deal which would propel the brand on a national level.

Getting the first break with limited capital

Jack recalls approaching an advertising agency in 1979 to propose a unique marketing deal (at the time he didn’t have the capital to invest large amounts into advertising). Instead of Le Specs giving the agency a large upfront fee, the agency would receive a percentage of sales. In return they would help brand, launch and create the advertising for the product. Jack won them over by ‘throwing the sunglasses on the ground and stepping on them’ – to demonstrate the uniqueness of the product.

The deal incentivised the advertising agency and it went above and beyond to promote the product, finding extra TV marketing slots for Le Specs that otherwise would not have been filled. A year later, Le Specs expanded nationally, having established itself as the market leader in tough and affordable sunglasses.

The marketing deal allowed Jack to limit his initial capital outlay, de-risk the venture and create an incentive structure with the advertising agency that would allow Le Specs to gain national brand recognition.

By the time competitors started entering a year later, Le Specs had already established a substantial lead in market share and support from customers. As Jack says, ‘the advertising deal gave us the break we needed to kickstart our operations’.

Minimise initial risk and capital outlay, gain a foothold and expand your strategic advantage over time – this is the modus operandi that would resonate through Jack’s career.

Expanding your strategic advantage

As more competitors entered the market, Jack had to secure exclusive distribution agreements from the French manufacturer. On one trip, he flew to Lyon to meet the manufacturer to convince them he should be the sole distributor in Australia of its unbreakable sunglasses. Exclusivity helped to temporarily prolong Le Specs’ first mover advantage, crucial in the early stages of the business. Over time, more manufacturers appeared but Jack could only secure exclusivity deals with so many. He could see Le Spec’s strategic advantage was under the microscope of its competitors, soon to be studied, dissected, and replicated. But Jack had other ideas to broaden his business. He was already thinking about the next horizon – In his mind the key question was:

Is Le Specs a sunglasses business, or is it a distribution business?

With the leading brand name and national sales channels, Jack saw Le Specs as a distribution business first, which just so happened to sell sunglasses. And with this conclusion, the way he needed to expand his strategic foothold was to sell another product to his customers.

It was Jack’s intention to diversify into a winter-orientated product to balance out the summer-heavy sales of sunglasses, but he struggled to think of any promising ideas. Instead of taking a dogmatic approach, Jack went with developing another summer product – suntan lotion. Yes, it meant his sales profile was heavily tied to the summer season, but suntan lotion had the advantage of being an easier sell. Jack’s orchestrated sales process made sure every salesperson pitched a bottle of suntan lotion at the same time they sold a pair of sunglasses. The lotion was branded Le Tan, designed to ride off the positive branding of Le Specs. It worked. Sales grew organically as the product range expanded.

With the self-clarity of knowing he was running a distribution business, not a sunglasses or suntan lotion business, there was an impetus to keep rolling out new products. The next idea was the perfume market, which was a much larger market and traditionally sold through department stores, not pharmacies.

This led to the acquisition of Australis, a brand which had historically struggled to grow. The reason, in Jack’s view, was because Australis’s branding was competing head on with fragrance brands like Chanel and Dior. The branding was too serious; Australis would always lose in a battle for sophistication. Instead, Jack emphasised the need for products to create a ‘smile factor’ – he was going to counter the strategic advantage (and million-dollar marketing budgets) of the well-established European brands, with a fun factor with which they could not compete. He commissioned artwork from Ken Done and progressively launched variants of Australis products each year. Australis was followed by Australis for Men, which was followed by Love Is Australis. Sales volumes were stable each year, but the growth came from expansion of new product lines.

Jack gestures the size of each market to me. ‘The sunglasses business is this big, the suntan lotion business is this big, the perfume market is this big,’ his hands widening as he describes each market. And finally, he describes his eventual move into cosmetics and widens his hands even further. ‘And that’s why I decided to move into the cosmetics market with Colours of Australis, which is this big.’

With each product launch, Le Specs’ offering broadened. Concurrently to the growth of the distribution business, Jack and his brother Sam would simultaneously expand their footprint of pharmacies which went from 2 stores to 35 while the distribution business was expanding in its own right. This chain of stores would eventually be branded as the MyChemist chain of pharmacies. The hidden benefit of running both a distribution business and a chain of pharmacies was the inside knowledge of which products sold best. The pharmacies owned by Jack were used as testing arenas for different colours of eye shadow, lipstick and makeup – once demand was established, the new line would be sold externally to other pharmacies.

Fine tuning the optimal business model

There are businesses that face more structural headwinds than others. For example, some businesses generate revenue on a per hour basis, which naturally limits how truly scalable the model can be. That is not to say these businesses cannot be profitable and successful, but they face greater challenges and are more vulnerable to adverse market conditions. This was the nature of Jack’s distribution business.

As revenues grew, the working capital required to manufacture and pre-order the sunglasses, suntan lotion, cosmetics and fragrances snowballed. This business model required a large outlay of cash each year, with cash sales received sometimes up to one year later. There would be a build-up of debtors over the year. Compounding this headwind were the banks, who offered working capital financing but required a personal guarantee from Jack and Sam. The larger the business grew, so too did the working capital outlays. It made Jack uncomfortable knowing that he was personally vulnerable to any unforeseen changes in market conditions.

In 1990, twelve years after he started the Le Specs brand, Jack received an offer to sell his business. He and Sam didn’t hesitate to accept, knowing the buyer had much deeper pockets to absorb the working capital requirements. At the time of the sale, Le Specs, Le Tan and Australis business were one of the largest cosmetic distributors in Australia.

The experience gained from the distribution business would serve Jack well in years to come. Jack and Sam had a group of 35 pharmacies in various partnerships and re-focused on growing those to 50 stores. It would be the early formation of what would become Chemist Warehouse – the second phase of Jack’s career and his biggest success. It would become a pharmacy brand that would dominate the Australian market.

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Part 2 of this feature story on Jack Gance will appear in Morningstar and Firstlinks. 

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Founder Interview: The founder who beat the banks at their own game (Part 2)

First published on Firstlinks, 15 June 2022


In Part 2 of my interview, Barry shares his approach to scaling, how he differentiated Count Financial from the plethora of financial services companies, and what he defines as good management.

For readers interested in finding the next Barry Lambert, you must first understand how long-term founders think, as their philosophies are reflected in business strategy, and ultimately flows through to financial performance. In other words, financial performance is only the outcome. To catch founders early, readers need to recognise the hidden engine of the philosophy, strategy and thinking that fuels it all.

Let’s take Count Financial as an example. If my readers were presented with the opportunity to invest in a boutique accounting firm that specialised in tax returns, many would baulk. On the surface, there’s nothing sexy about tax return service providers. But that’s the superficial view. Those readers may not have considered the philosophy and strategy underpinning the business, they may not have looked under the hood to uncover the real source of growth – the engine that allowed Count Financial to morph and evolve their business over a very long period of time. If readers want to find great founder-led investment opportunities, they must first understand how a founder builds a business from the ground up. Results are only the output. The entire picture consists of philosophy, strategy, execution, which leads to results.

Barry Lambert saw it differently than most. Through his business strategies, the initial $90k of capital he invested in the beginning eventually became $373m decades later (a 4000x return). Investors who recognised the nuances of how he ran the business were able to ride his coat tails and participate in the rewards.

The theory of multipliers

In Part 1 we saw how Barry transformed Count from an accounting network into a financial advisory network. Accountants had long-term relationships with their clients, understood their financial goals and had the technical background to provide advice. But back then most accountants weren’t interested in offering investment advice; opening a new business line brought more licencing and compliance obligations – something they didn’t have appetite for as owners of single accounting firms. But therein lay the opportunity for someone like Count Financial. They had a network business that had scale.

As Barry recalls, he saw the opportunity to transition into an investments business and could execute the strategy ahead of others because he was the founder and didn’t have the multiple layers of bureaucracy that prevented many others from pursuing bold untested business models (I’ve written previously about the merits of less bureaucratic companies).

The idea was to obtain investment licencing and offer training to his accounting network, provide all the know-how and investment knowledge to help facilitate them providing investment advice to their clients. In return, Count would take a percentage of all the investment revenues generated by his network. As Barry highlights to me during our interview, he had no interest in servicing individual clients but saw a greater opportunity to instead target accountants and to ‘leverage their client base’, as he says. Count generated revenues as a percentage of total Funds Under Advice across the network, so its growth was scaled across multiple dimensions. First by the number of accounting firms in the network, then by the number of clients within each accounting firm, and each client would have a growing investment portfolio which would also contribute to Count’s bottom line. The model was exponential, not linear.

When I quiz Barry now about how this model was so successful, he attributes it to the ‘multiplier effect’ – the ability for the business to scale revenues by more than one factor, and being the first mover with the truly differentiated service.

Elevation through differentiation

One advantage companies that are still run by their founders have over other companies is that founders have the confidence to be unconventional. Employees worry they’ll get in trouble if they do things differently. Founders don’t. – Paul Graham (Founder of Y Combinator)

As I chat to Barry, he describes a made-up word to me: ‘Surpetition’ he says, in a tone that implies it’s a word I should know. He tells me it’s the name of a book written by Edward De Bono and its concepts stuck with him for decades, and a key ingredient of how he differentiated Count from its competitors.

For Barry to compete with the incumbents on their arena would be like driving into a traffic jam. As he says to me during the interview, ‘the concept of surpetition is you have to elevate yourself to another level so your competitors don’t come looking for you – you’re operating on a different plane altogether’. 

Barry aimed to add a new service each year. Starting with his network of accountants, he soon offered investment licensing and training, then progressively expanding into superannuation, savings, leasing and asset finance. He launched software to aid in the efficiency of his network of accountants. At one point Count had the goal of moving into mortgage broking.

The pace at which new services were being launched was fast. The quicker Count could help its network of accountants entangle their customers, the more entrenched they could become in their financial lives. That was how Count differentiated itself from the competition. 

A recipe for longevity

The pursuit of growth for any business requires capital expenditure, funded either with internal cashflows or externally through the use of debt or additional equity. Under Barry’s leadership, Count always chose internal cashflows, never debt. Barry recalls in the late 1980’s when he took out a $200,000 working capital facility and discovered the interest rate was 20.5% (in those days interest rates weren’t shown on statements so he had to call up to discover that surprise). Barry paid off the loan and decided from then on he would never take out another loan for the business ever again. 

And Count never had to. It was profitable and able to use internal cashflows to fund its growth strategies (I’ve discussed this compounding mindset previously). Unlike his competitors, Barry had a conservative approach to expenses. Competitors would come and go, often bursting onto the scene with big marketing budgets that eventually fizzled out. Barry tells me there was one competitor backed by a large corporate who muscled in with a $2 million marketing budget over 1-2 years. They didn’t last in the end.

A debt-free capital structure makes sense in some environments, but not necessarily in others. Count could use its strong financial foundation as a weapon to outlast its competitors. The strategy proved effective in the financial services environment where market saturation takes time. 

Readers interested in these founder profiles can subscribe to the Lumenary newsletter for the latest updates and future publications.

Founder Interview: The founder who beat the banks at their own game (Part 1)

First published on Firstlinks, 15 June 2022


Barry Lambert founded Count Financial in 1980, bootstrapping the business and running it whilst still juggling a full-time job at CBA. The business that started out as a “necessity to pay for three kids and a big mortgage” was eventually sold to CBA for $373 million 31 years later.

I interviewed Count Financial’s founder Barry Lambert to understand how he built the business from the ground up, bootstrapping it for many years. Investors that rode the journey with this founder were handsomely rewarded. But how did Barry do it?

In this publication I distil some of Barry’s lessons which apply not only to business, but to life. And with each interview session I delved deeper into his mindset, drawing out the behavioural differences which make founder-led companies such a special hunting ground for investors.

For those looking to find the next Barry, the clues are sprinkled in his recollections; behavioural tendencies which permeated through Count Financial’s culture and ultimately translated into business success. I see this time and time again with the founder-led companies I analyse. Sound business decision-making leads to long-term profits – the source of it all is the unrelenting heartbeat of a founder.

The heart behind a founder’s business

After Hours Tax Services. That was the name first given to Count when it was born in 1980. If ever there was a business name that aptly reflected the inner personality of it’s founder, After Hours Tax Services would be it. Barry oozes an aura of pragmatism and straight talk.

In a deep raspy voice Barry tells me he needed side income and that’s why he started working on tax returns as a side hustle. He explains how he sought approval from his then employer CBA, noting to them there was no conflict of interest, since he was working at head office and had no direct contact with customers, therefore posed no risk to the bank. He was approved, and the next day he placed an ad in the Yellow Pages.

The response from the ad was strong. Because he was busy with his day job and couldn’t travel to service all the customers, he started outsourcing the work to other accountants, taking a skim for each client he referred. That was how Count’s accounting network started in the early days.

As the network and customer base grew, so too did Barry’s income. Barry chuckles as he recalls how after a few years the side gig was making him four times the salary of his full-time job at CBA. He had achieved his original goal – the business was making ample income for him to support his family whilst concurrently developing a career in banking.

So why not keep the side business going while he built his career in banking? What motivated Barry enough to ultimately quit CBA and pursue business full-time?

The answer came down to the very core of Barry’s philosophy in business – do what’s right for the client. And he didn’t see this philosophy at all when he was at CBA. In fact he witnessed the opposite. Back then incentive frameworks were designed to push clients into low-yielding products called Non-Interest Bearing Accounts (NIBA) and with inflation at all time highs in the 1980’s, clients’ wealth were being eroded away in these NIBAs. Yet the banks continued to promote NIBAs. This didn’t sit well with Barry. As he says to me “I’m not particularly religious, but I have a strong sense of right and wrong”.

He voiced his disagreement to higher ups to no avail, and so he eventually left CBA after 18 years to pursue his business full-time, knowing that he was in control of doing the right thing by his clients. This was the fundamental crux of what Count Financial was about, and would motivate Barry for the next three decades. The concept of doing the right thing by the client proved to be a winning formula not only for Count’s corporate persona, but also because it was a genuine commercial advantage that won market share. Clients listened to technical experts (accountants), rather than salespeople with vested interests.

Speed of improvement

Barry’s matter-of-fact approach to business rubbed off on the way Count was run – if improvements made sense, they would be done quickly without bureaucratic red tape. Take for instance licencing. Count was an early adopter of Australian Financial Services (AFS) Licensing for its financial advisors, the philosophy being to remain ahead of regulations, rather than on the back foot. Back then this wasn’t the norm, many companies took a wait-and-see approach when it came to regulatory compliance. There were some of Count’s competitors that were outright complacent – Barry recalls how he raised the need for licencing at a lunch with a Big 4 bank and was told “licencing is for people like you; we don’t need to be licenced”.

Improvement is a necessity of business. Change is inevitable and that was how Barry saw it. As it turns out, he was right.

The speed at which improvements could be made at Count was enabled by its relatively flat hierarchy. Barry remained the brains of the business and all major decisions went through him. There were no convoluted committees and steering groups to contend with. If the strategy made sense, it could be executed much faster than the competition. Case in point – Count converted into a paperless operation over a few weeks, again an early adopter of emails. They lost seven accounting firms in the transition, but as Barry says, it was necessary to keep improving the efficiency of the business. Making a change this bold in any other organisation would have taken years to decide and even more years to implement. For a founder, speed is an advantage.

I can still picture Barry chuckling as he says to me “I don’t mind the banks being a competitor because I know I’ll be 5 years ahead of them”. How true.

Problem solving

Barry points out the subtle difference between speed of execution versus speed of decision-making. Executing quickly doesn’t mean decisions are rushed and ill-considered. Quite the contrary as Barry explains to me. He often took his time with decisions “it [the solution] often doesn’t come to you straight away, you usually have to sit on it a bit”.

There are two main criteria Barry uses to make big decisions:

  1. solve the problem from first principles rather than copying others; benchmarking is a flawed concept
  2. the answer should be simple to manage and not too stressful to implement

It was with this framework that Count morphed itself from an accounting network into a wealth management network. In the 1980’s there were no other hybrid accountant/financial planner firms. As with all great ideas, it always seems so obvious in hindsight; there was no one better placed to provide finance advice than accountants who knew the financial position of their clients intimately.

The solution came about not because Barry copied a competitor, but because he started receiving a lot of calls from wealth advisors who wanted referrals from Count’s network. The problem was these were all salespeople who were motivated by selling investment products, not providing the right advice for clients. Barry disagreed with that. “Clients deserve to receive financial advice from professionals and not salespeople” was how he put it to me. Count applied for its financial advisory licence and started the new service the following year.

Count had carved out a unique position in a competitive field. By not copying others, Barry created a first mover advantage because Count was truly independent and relied on accountants providing tailored financial advice, a clear differentiator from his competitors who appointed salespeople to promote the selling of financial products as though they were selling a pair of shoes.

The unique strategies Barry used to scale Count Financial will be covered in Part 2 of my interview along with how he extended the gap between Count and its competitors, and his thoughts on effective management.

Now is the time to beat the fundies

This article was first published in Livewire Markets, 2 April 2020: https://www.livewiremarkets.com/wires/now-is-the-time-to-beat-the-fundies

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Plenty of commentary has already been written about the economic impact of COVID-19. Whilst these opinions make for interesting reading and dinner table debate, they distract investors from the main issue at hand. How can enterprising investors capitalise on the tangible advantage they have over large institutional investors right now? How should long-term investors allocate capital in this environment? What can you do now to prepare for the inevitable rebound?

Current Sentiments – am I catching a falling knife?

Some investors are cautious about the current environment. Is there worse to come? Am I catching a falling knife?

The fact is most stock prices have been falling. They are all falling knives. Catch the best knife and you’ll be rewarded when this uncertainty clears. Stock prices will be volatile over the coming months. It is highly likely we haven’t seen the worst. The question shouldn’t be ‘am I catching a falling knife?’, it should instead be ‘which is the sharpest knife to catch?’.

Structural constraints for some, inherent advantage for others

Large institutional investors have in-built risk triggers that have been set in motion by the market pullback. Rather than making rational decisions about the merits of the actual underlying investments they hold, hardcoded rules force large institutional investors to divest during this current pandemic. For example, the government’s $10,000 tax-free superannuation withdrawals has forced super funds to liquidate investments to maintain appropriate cash buffers for redemptions, even as their portfolios continue to be devalued. The pressure to divest is strong. Clients are redeeming and this places pressure on large funds to crystalise their losses and hold cash during this time. The selldown leads to more selling and an even sharper self-fulfilling pullback.

Companies I have been stalking for years have been written down significantly, some by more than one third. These remain sound companies with strong balance sheets and moats, yet their valuations are suggesting permanent irreparable damage to their businesses. This is simply irrational.

For enterprising investors without institutional constraints, this is a once-in-decade opportunity. Sure, there will be volatility ahead, but capital is being pulled with no sensible consideration to the actual underlying value of companies. Now is when you can exploit the structural constraints faced by large institutional fund managers.

Instead of the usual buy/sell stock recommendation, I’ll share a framework for how you can strategically position your portfolio during this period in preparation for when institutional investors come flooding back and you can get in ahead of the rebound. So here’s how you might do exactly that.

Read the play – cash allocation

Of course to fully capture the discounted pricing at the moment, investors should have enough capital to deploy for these opportunities that arise. I’ve written previously about gauging the investment climate and how to utilise trends to your advantage. Unlike large fund managers, you are not hamstrung by requirements to be fully invested. The absolute freedom to control the level of cash in your portfolio is a key advantage. To realise this, preparation should have been done to take stock of the prevailing market environment. The low interest rate environment in recent years has lulled investors into holding less cash and encouraged them to seek out more adventurous investment opportunities. Besides a buying opportunity in late 2018, enterprising investors who held higher than usual levels of cash are now being rewarded with the opportunity to invest in quality companies at very reasonable prices.

For Lumenary Investment Management, we came into 2020 with a quarter of our fund held as cash. Many thought we were being too conservative, but my view was the fundamentals justified such an approach. The dry powder is now coming in handy.

But for investors who have not been able to fully prepare coming into this correction, it is not too late. You can still maximise your chances in anticipation of the next phase, and the inevitable rebound.

The first question you need to ask

‘Will this company survive the economic hiatus?’. This is the first question investors must address. The answer? Look at the cash flow statement. Break it down into controllable and non-controllable items.

Which cash flows must be paid and which ones can management control?

What short and long term liabilities need to be supported?

How much cash will a dividend suspension save the company?

Are there any debt facilities available immediately to cushion cash flows?

Bank analysts will term this as consideration of a company’s liquidity position.

Never has the cash flow statement and balance sheet been so in fashion.

Assuming you’re comfortable with the prospects of survival, only then should investors draw their attention to the post-COVID-19 world.

A simple (maybe controversial?) systematic risk reduction strategy

The central component to how I systematically reduce risk is by focusing on founder-led companies.

Founders are very attached to their companies, they reap the economic and reputational reward (and risks) of a well-run company. This is exactly why we like investing in them. In extreme times, knowing that we are invested alongside a founder who has just as much to gain (if not more), gives us a strong foundation of confidence. We are also very fond of the governance structure that typically allows for long-term continuity and a focus on compound growth rather than individualised short-term bonus incentives. Sure, pundits will point to plenty of bad founders (we’re all thinking of Adam Neumann of WeWork here) and no doubt these exist, but that is why being a founder-led company should only be the start of the search. There are still plenty of other criteria that must be addressed before you should consider a company worthy of investment.

Look for income deferral, not permanent loss

One thing is certain – almost all companies will see a fall in revenues. This shouldn’t be a surprise to investors. Instead, look for companies that have a product or service that their customers will come flooding back to when business resumes. Just think about that car you’re set on buying. You’ll buy it. It’s simply a matter of when. Even if you can’t buy it now, you’ll wait until after the lockdown. Look for companies where income is deferred, not permanently lost.

We have recently invested in a biomedical company that is one of only five global suppliers to the world’s fertility market. Many clinics are shut for now, but the baby-making business and human desire to have children is most certainly only in hibernation. Expect it to resume booming once the lockdown is over.

To further maximise your chances of success, investors should be prepared for unknown unknowns.

Is the house in order, or are they living on borrowed time?

Look for companies with minimal debt. Better still, look for zero-debt companies like I do. Why? For starters you can be sure they cannot go bankrupt. But secondly, those with minimal or zero debt will be cushioned against impacts by the still unknown market effects yet to play out.

We have yet to see the flow-on effects of the extreme government stimulus packages seen globally. How these packages are funded is not yet clear, but expect the credit quality of many governments to be put under pressure. This may have further impacts on broader credit markets and corporate debt. For this reason, maintain a level of appropriate caution.

We have recently entered into a position holding one of Europe’s largest live entertainment organisers. Acquiring their dominant market position and multi-channel distribution network at a 40% discount to the price at the start of this year is a no-brainer to us. And yes, it’s founder-led, has expected permanent income and zero debt.

Closing remarks

Catch the falling knife and catch the best one.

Institutions are under pressure to divest. The advantage now sits squarely with enterprising investors who are able to prepare for the stock market’s next phase.

Read the medical predictions if you want to contribute to the dinner table debate, but know it won’t help a great deal when it comes to making investment decisions. Instead, the cash flow statement and balance sheet is where you will find the clues you need.

If you’re sure the company can survive, then check the income is deferred, not lost, and be prepared for further volatility and uncertainty.

The opportunity to acquire quality companies at reasonable prices doesn’t come very often – allocate your capital wisely and you’ll profit when the lagging institutional investors follow you back into the market.

Happy compounding.

About me

Lawrence Lam is the Managing Director & Founder of Lumenary, a fund that uncovers the best founder-led companies in the world. We invest in unique, overlooked companies in markets and industries beyond most managers’ reach. We are a different type of global fund – for more articles and information about us, visit www.lumenaryinvest.com

Lawrence Lam
Managing Director & Founder

How to determine if the trend is your friend

This article was first published in Livewire Markets, 18 September 2019: https://www.livewiremarkets.com/wires/is-the-trend-really-your-friend

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At a recent lunch with another fund manager, I found myself engaged in a discussion about the state of the current market, ‘From your perspective, are you seeing many good opportunities?’ I asked.

‘I’m seeing good companies, but prices are toppy,’ he said, wincing before continuing. ‘More than I’d like to pay. But we’ve recently deployed more anyway.’ He shrugged his shoulders, ‘Momentum in the market is strong – the fed is decreasing rates. Despite the high prices, we wouldn’t want to miss this momentum.’

I nodded as we both acknowledged this unique investment environment of decreasing rates and high stock valuations. Yet stock prices have continued to climb steadily.

Walking back to my office I reflected, and asked myself: ‘Is now a good time to be a momentum investor, or is it time to go against the herd?’

Look at a market cycle to assess how much is left in the tank

Momentum investors have much to gain if the wave of popularity is caught early. However, be the last one to the party and you will be left with all the cleaning up. The real question is: how much more of the wave is left to catch? The solution to this contradiction can be found by understanding the long-term context.

The ratio of a company’s stock price-to-intrinsic value tells us how much the market is willing to pay for the company. It’s a useful measurement of sentiment at one point in time. There’s a clear link between sentiment (the stock price) versus fundamental value (intrinsic value).

But it doesn’t give us the full picture. To understand this contradiction, we need to see how sentiment for the stock has changed over a significant period of time – over entire market cycles. Extend the ratio of stock price-to-intrinsic value over a 15-year horizon and you’ll now gain a multi-dimensional view of just how manic-depressive Mr Market is.

As an example, here is the change in sentiment for the founder-led aerospace electronics company HEICO Corporation.

During the GFC, Mr Market was very pessimistic. He was only willing to pay 1.8x the intrinsic value of HEICO. But alas Mr Market is as fickle as they come. More recently, he has been very bullish. He’s willing to pay 4.8x intrinsic value. A large proportion of the returns have been driven solely by the company’s increasing popularity with investors.

Now we have a better view of the context. Understanding the stock price and intrinsic value over a long time period equips us to answer the following question…

The worst time to join a party

There’s an interesting observation about parties. When do they end?

Answer? They end when the alcohol runs out. Rarely do they end immediately though; good times roll on for a while longer before the sudden realisation hits the sobering crowd.

So when is the worst time to join a party?

As you’re pondering the answer, here is another view of HEICO to illustrate the point.

Although the intrinsic value of HEICO’s business has consistently increased over time, the increase in its price has far outpaced the fundamental growth of the company. HEICO is a solid and growing company, but its impressive performance has been driven primarily by sentiment and price, rather than actual business value. The price-to-intrinsic value ratio shows this.

Risk is heightened when a company’s stock price outpaces its intrinsic value for significant periods of time. As crazy as Mr Market is, one thing is certain – his enthusiasm and pessimism never last forever. The gravitational pull of a company’s fundamental value is unrelenting.

The best time to join a party is when there’s plenty of alcohol and not too many people. But tread carefully when the crowd is pumping and booze is running low. Whilst the fun may continue for a while longer yet, the risk of an abrupt ending is heightened.

A ‘reasonable’ price

Pure momentum investing focuses predominantly on the historical price movement and pays little attention to actual fundamental value. But if you want to understand if a trend is justified, the fundamentals are critical.

Armed with this insight, we can make a judgement call on what a ‘reasonable’ price would be and whether we should join the party. Some sectors run hot. Today, technology is a classic example. But a strong trend shouldn’t be a deterrent. Prices may seem exorbitant, but in the context of the company’s historical sentiment, sometimes the high price is worth paying. What may seem expensive on an absolute basis may be reasonable in the context of history. For example, the price-to-intrinsic value of Facebook was high on an absolute basis in late 2018, but was reasonable when compared to its history. It has proven to be a good entry point so far.

But there’s more for enterprising investors – the picture is still not yet complete.

A deeper level of analysis

Competition

You may have noticed my focus on individual company analysis rather than broad-based economic generalisations. We are buying slices of companies after all. Whilst we can understand the sentiment in our target company, it is also important to have context across other comparable companies. The same price-to-intrinsic value historical ratio across a few companies will give us a sense of sentiment across the sector. We’ll be able to see if there are any other reasonably priced companies.

Potential growth

So far the focus has been on gaining historical context. Sometimes the momentum is justified if there are tangible growth prospects. In other words, intrinsic value is expected to grow significantly with price. In those situations, the trend may be your friend. For those that heard me speak at the AIA National Conference, I outlined my framework to assess the potential growth of a company.

Intrinsic value

Speculators focus on stock price movements only. Investors focus on the underlying true worth of a company.

As Warren Buffett says “Price is what you pay, value is what you get”.

The fundamentals of a company’s value is reflected in its Intrinsic value. Importantly, in determining a company’s intrinsic value, I’ve stripped out accounting distortions that may hide a company’s true worth.

So… Is the trend your friend?

If the fundamentals of a company are sound and the price is reasonable in the context of its history and other competitors, then the trend may indeed be an ally. Ride the wave and enjoy the party.

Price and intrinsic value may deviate for many years but price will eventually move towards intrinsic value over the long-term. Seeing the full picture is key to capturing sensible opportunities. In every party, everyone sobers eventually.

Happy compounding.

Note: HEICO has been used here as an example only, this article is not a buy or sell recommendation for any of the stocks listed.

About me

Lawrence Lam is the Managing Director & Founder of Lumenary, a fund that uncovers the best founder-led companies in the world. We invest in unique, overlooked companies in markets and industries beyond most managers’ reach. We are a different type of global fund – for more articles and information about us, visit www.lumenaryinvest.com

Lawrence Lam
Managing Director & Founder

When turnarounds work

This article was first published in Money Management, 15 August 2019: https://www.moneymanagement.com.au/features/expert-analysis/when-turnarounds-work
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Investing in corporate turnarounds is like buying a broken vintage car. Most will end up in decline, but a special few will be fixed and reward their owners handsomely. When corporate turnarounds work, they yield spectacular returns in the multiples. This is the model private equity firms employ. So can ordinary investors apply the same principles to profit from these special situations? What factors should be considered in the analysis?

Many investors shy away from turnarounds. After all, the company in consideration is usually experiencing historical decline. Think about Qantas ten years ago. From 2008 to 2010, Qantas revenues fell by $2 billion (13% decrease over the 2 years). Add to that an industrial dispute that lasted 2 years, Qantas was a very unpopular blue chip. It’s share price fell by 82% from 2007 to 2012. But we all know what has happened since then. It turned out to be the perfect window of opportunity to invest as Qantas has returned a multiple of 4x total shareholder return since then.

Corporate decline or multi bagger turnaround?

Most corporate turnarounds will not work. These companies have left it too late to adapt to changing business environment. For example, many retail companies reliant purely on foot traffic have realised too late they should have invested heavily in online sales (think J.C.  Penney).

But environmental challenges exist all the time. This is not the cause of failure. It is the inability to adapt and evolve that leads to erosion of a business model. For every J.C. Penney, there are companies like Home Depot that have continued to grow with the market.

As investors, we focus a lot on asking ourselves, “are we being too optimistic? Is this a bubble?” but we should equally consider the flipside, “are we being too pessimistic? Is the stock underpriced?” Opportunities reveal themselves only to those that investigate further.

This was why Warren Buffett invested a quarter of his assets in American Express when its share price halved in 1964. The company had been left with an immense financial obligation after being defrauded by one of its clients. The trust in the brand had been severely damaged and the company was in trouble. Despite this, the clue to the future growth of Amex was in the Oracle’s analysis. After delving deeper, Buffett concluded the fundamentals of the company were robust. Customers continued to use Amex cards and the brand was unlikely to be permanently impaired. The rest is history.

Just because a company’s share price is declining, shouldn’t mean it’s an automatic write off. The very essence of investing urges us to seek out the truth through analysis.

But most struggling companies aren’t like American Express. Many have weak underlying fundamentals. Everyday investors don’t have the ability to aggressively restructure companies like private equity firms. Does this exclude investors from participating in potentially lucrative turnarounds? What are the clues investors can use to determine if these companies will be future multi baggers?

Against the conventional wisdom of corporate boards

Clue 1:

Look for companies with a smaller-sized board with less external directors. Corporate turnarounds require rolling up of sleeves. The board’s role in getting their hands dirty has greater value than being a typical challenger/debater when crucial decisions are required. Executive directors are likely to add greater value in this respect than non-executive directors.

Conventional wisdom dictates that corporate boards should separate the role of CEO and Chair. External independent directors should be favoured. Textbooks say this governance model is how corporations maintain proper checks and balances.

This doesn’t work for turnaround situations. A core ingredient in any turnaround is the minimisation of bureaucracy. The company needs all hands on deck and all hands need to be fully aligned. Often hard decisions need to be made, and made with conviction. This is not the time for board politics; independent directors looking for their next board gig won’t help the situation. Conventional governance doesn’t work in this case because there are too many chefs in the kitchen.

 Surprising research

Clue 2:

Companies that implement ways to grow themselves out of decline are more likely to be multi bagger turnarounds, as opposed to those that reactively cost-cut when times get tough.

Fixing a broken vintage car isn’t easy. It requires correct diagnosis of the issues and then applying the right actions. Most of the time CEOs aren’t focused on the correct areas. Research has shown that turnaround strategies focused on building and growing are significantly more effective than those on cost-cutting[1]. It requires greater courage to launch new products or increase research and development spend in the face of decline. Most CEOs are reluctant to take career risk with this approach when conventional cost-cutting exercises like downsizing can yield immediate short-term improvements.

The right person to lead the turnaround

Clue 3:

Founders are more likely to lead a successful turnaround of their companies.

Crucial to any successful turnaround is a CEO who is resourceful, creative and an adept capital allocator. There’s a certain type that fit this mold well, those founders our fund is very familiar with.

The benefits of investing in founder-led companies are well-known. This is our fund’s specialty. It also happens to be underestimated by many investors. Founders who remain long-term managers and owners of their companies are the best candidates to lead a successful turnaround. Captains of their own leaking boat are highly motivated to repair it permanently rather than jump ship. The Corporate Governance International Review found there to be historically a 24% greater likelihood of success when founders led a corporate turnaround[2].

There are many examples of these types of leaders, the well-known ones are of course Steve Jobs and Howard Schultz. The resurrection of Apple and Starbucks can only be attributed to the brilliant impact of these founders and the heart they had in their business.

A little-known Belgian with the midas touch

Clue 4:

Look for close alignment between board, management and ownership. This is often represented by economic interest or voting rights. Being joined at the hip pocket is a wonderful thing. Strong leaders who stand to gain as much as owners is a strong clue for the likely success of a turnaround.

One media-shy businessman has had an incredible track record of rebuilding companies. Luc Tack hails from a small country town in Belgium called Deinze. I confess that our admiration for Luc’s abilities is biased. Our fund is invested alongside him and we stand to benefit from his nous.

The son of an operator of a small flax factory, it was 1979 when young Luc saw an opportunity in the growing Belgian furniture market. But it wasn’t selling furniture itself, that was far too competitive for Luc. The real opportunity was in supplying the wood instead. So the 21-year old flew to the United States, secured a wood supplier and founded a company called Oostrowood.

As he later recalls, his long-term business mindset came from his mother who always said to him, “do not cackle, lay eggs”, and laying eggs he did.

By the nineties, Oostrowood had transformed itself into a wooden flooring company and Luc began moving into an equally unsexy industry – textiles. Weaving mill companies Ter Molst and Oostrotex were eggs laid in the nineties that would later prove crucial to Luc’s future success.

On the back of the success of his diverse businesses, in the early 2000s Luc took majority control of a struggling weaving loom manufacturer called Picanol. It was 2009 and the quiet entrepreneur pumped 15 million euro into the then-ailing company that was on the verge of bankruptcy. No one else believed in the company at the time. It was a neglected manufacturing business riddled with internal division and hadn’t adapted to the changing market.

His first objective as CEO was to turn a profit. He announced that for as long as the company made losses, he would not pay himself a salary. He suffered for only one year. Since his tenure, the company has increased its revenues by 2.5x and almost tripled its net profit.

To this day, Luc Tack sets himself a measly salary of 100,000 euro each year. His focus remains firmly on laying eggs.

In closing

Investors can make a lot of money from corporate turnarounds and have lower risk as prices are depressed. The clues above help you to see whether a company has the heart, stomach and brains necessary to change their fortunes. Sometimes things aren’t as dire as we think.

Happy compounding.

About me

Lawrence Lam is the Managing Director & Founder of Lumenary, a fund that uncovers the best founder-led companies in the world. We invest in unique, overlooked companies in markets and industries beyond most managers’ reach. We are a different type of global fund – for more articles and information about us, visit www.lumenaryinvest.com

[1] Abebe MA, Tangpong C. Founder‐CEOs and corporate turnaround among declining firms. Corp Govern Int Rev. 2018;26:45–57. https://doi.org/10.1111/corg.12216

[2] Abebe MA, Tangpong C. Founder‐CEOs and corporate turnaround among declining firms. Corp Govern Int Rev. 2018;26:45–57. https://doi.org/10.1111/corg.12216

Lawrence Lam
Managing Director & Founder

Investing like Howard Marks during the GFC

This article was first published in Livewire, 29 April 2019: https://www.livewiremarkets.com/wires/investing-like-howard-marks-during-the-gfc
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Great investors have an uncanny ability to find attractive investment opportunities in any market. During the depths of the GFC when fear of the unknown paralysed most investors, Howard Marks, co-founder of Oaktree Capital Management, invested an average of USD $625 million per week during 2008-2009. A shrewd (and profitable) decision in retrospect, it was far from an easy decision at the time. Headlines from the Wall Street Journal read ‘Worst Crisis Since ‘30’s, With No End Yet in Sight’. Yet through those dark days, investors that found opportunity in that moment have been rewarded in multiples.

The climate today is one of uncertainty and hesitation. Market commentators have been referring to the current cycle as ‘it’s currently three quarter time’, implying we are 75% through the market cycle, with one quarter remaining before an impending downturn awaits. I don’t ascribe to this view. The issues with this mindset are two-fold. First, investing is not a football game – there is no guarantee of four precise quarters. Second, profitable companies exist in all market cycles, even in recessions. In fact, exceptional companies expand market share from competitors during downturns. Adversity is the friend of great companies but the enemy of the mediocre. In investing, many players can continue kicking goals even after the final siren.

The opportunity to invest like the 2008 Howard Marks exists today. As Mario Gabelli (founder of GAMCO Investors) says ‘If you don’t look, you won’t find’. So how does one find the hidden opportunities that others are blind to?

As Mario Gabelli (founder of GAMCO Investors) says ‘If you don’t look, you won’t find’.

Trade wars, Brexits, slowdowns and other red herrings

To find the diamond in the rough, you must first be open to looking for them. It is a great temptation to many investors to abandon the search for opportunity when faced with today’s latest headlines. But the more investors that abandon the search, the greater the reward for those that continue. The only relevance that headlines might have, is their effect on pricing, not on the value of the opportunity itself.

I’ll illustrate what I mean by way of example. We’re an investor in an advanced manufacturer domiciled in Hong Kong with a market capitalisation of USD $500m. On the face of it, an advanced manufacturer with plants in China and customers in the US doesn’t have a bright outlook. The ongoing US-China trade war would be a concern to most investors. However for opportunistic investors, the hidden opportunities present themselves when you look beyond the macroeconomic red herrings and delve deeper into actual business-related facts. After all, we are investing in companies, not economies.

This lesson was reinforced for me when I spoke to to the CFO of the company. It turns out the newly-imposed 25% tariff only applied to 7% of total revenues. Actual business impact was minimal. In addition, he told me one of their largest customers, Google, had instructed them to ship their finished products to Taiwan instead of the US. By doing this, Google would be able to bypass the impact of the tariff. Importantly, it is easier for Google to change the delivery supplier than to change the manufacturing supplier.

So what does this example highlight? We invest in businesses. Not economies. Therefore investment decisions should be based on business-related facts, not high-level economic facts. You won’t find the hidden opportunities if you’re distracted by the red herrings. For most investors who choose to wait until the macroeconomic dust settles, the hidden opportunities won’t exist anymore.

But don’t complain the next time you hear someone provide a macroeconomic reason to justify their decisions. It is their approach that provides us with the mispricing and the very existence of that limited edition piece that no one even knew about.

Mining for gems

Silent opportunities can often be found in the detail that others overlook or don’t take the time to see. This was one of the free kicks our fund benefited from when we invested in a Belgium-based weaving loom manufacturer with a market capitalisation of EUR $1.5 billion. On a standalone basis, I was already more than satisfied with the success of the weaving loom business. Tick. The company is led by a motivated and intelligent entrepreneur. Second tick. This company also owns 38% of a EUR $1.5 billion chemicals company. On my continued mining, I discovered that this 38% holding was recorded at book value. This is a crucial detail. It means that the assets of the weaving loom manufacturer reflect the price it paid when it acquired the chemicals company years ago, not the current market value. It is akin to buying a house, then discovering upon moving in there is treasure hidden in the backyard. Triple tick. Following further investigations, I was pleased that the hidden treasure was real and it was undervalued by the vendor. A bonus sweetener for an already quality house.

But don’t complain the next time you hear someone provide a macroeconomic reason to justify their decisions. It is their approach that provides us with the mispricing and the very existence of that limited edition piece that no one even knew about.

Closing remarks

Rare stones exist everywhere. In order to find them, investors must ignore the red herrings and remain open minded even when situations seem most dire. Opportunities are most plentiful during uncertain markets but if you wait until the dust settles, everyone is looking at the same thing with 20/20 vision.

Adversity is the friend of quality companies and an enemy of the mediocre. The experiences I’ve seen demonstrate why it pays to keep searching for facts that relate to the company, not the economy. The more you focus and seek out opportunities, the greater the odds stack in your favour.

Happy compounding.

About us

Specialists in uncovering the best founder-led companies in the world. We invest in unique, overlooked companies in markets and industries beyond most managers’ reach. Our portfolio is made up of stocks that sit outside typical index constituents.

Lawrence Lam
Managing Director & Founder

One of my best (but unfortunately shortest) investments

Count Financial (ASX:COU) is no longer a listed company on the ASX, but it was one of my best investments. I only wish that the investment could have lasted longer.


Until it was taken over by CBA in 2011, Count Financial was Australia’s largest independently-owned franchised network of financial planning/wealth accountants and advisors and had over $14 billion of client’s funds and loans under advice.

There were many great qualities about Count. First, it was a great franchise with consistently increasing revenues and profits combined with a long term track record of profitability stretching back to 1980. The below table from the 2010 annual report shows the EBIT and EPS trend over time. Earnings decreased in 2009 due to the effects of the global financial crisis (‘GFC’), however rebounded strongly 2010. By 2010, EPS was back to pre-GFC levels.

Second, the business had a passionate founder who started the business in 1980 and remained a key shareholder of the business almost 30 years later. The leadership of Barry Lambert has been nothing short of spectacular. Barry Lambert started Count as a side business whilst still working full-time and grew it from a small side business into a key player in the Australian financial services industry over 30 years. Barry’s outstanding impact on Count is a profound demonstration of how a founder can instill the heart required to consistently increase business profitability over the long term. Today, he remains a giant in the wealth management/advisory industry.

 

Barry Lambert, Founder of Count Financial

Third, Count had developed a strong brand and a unique way of connecting with its customers through technology that competitors found hard to challenge. Count provided software platforms for its franchisees to enable them to be more effective in servicing their clients. In addition, Count had a unique business model as it did not service the public directly. Instead, it established a network of franchisees consisting of accountants and financial advisors that serviced the public. Count provided background support to these franchisees. Count had a strong captive market – a network of accountants and financial advisors that used its software platforms to provide advice to a growing client base. Strong branding and its software platforms provided Count with robust barriers to entry to protect it from potential competitors.

Fourth, Count was operating in a growing and profitable wealth services industry. The wealth services industry was growing substantially as the wealth of Australians increased from the mining boom, the popularity of Self Managed Super Funds (SMSF) increased significantly, and the effect of the GFC was not yet widely felt. Australia’s economy came away relatively unscathed from the GFC and the stability of its financial industry was highly regarded globally.

Count’s share price had suffered a large decline during the GFC. From a high of $3.50 at the end of 2007, the market’s negative sentiment towards financial stocks saw Count’s price fall to under $1.50 by early 2010. Despite earnings rebounding strongly in 2010, Count’s share price did not rebound and instead continued to decline below $1.20. The market had a negative view of all financial stocks and the fear of other ‘skeletons in the closet’ had taken over.

In addition, there was growing uncertainty with its future financial planning revenues. The financial planning industry was under government scrutiny for its remuneration structure which some argued was against the best interests of the public. In response, the Rudd government proposed a series of legislated amendments known as the Future of Financial Advice (FOFA) which, if effective, would have been detrimental to the entire revenues of the financial planning industry.

As a result, the share price of Count continued to decrease. Despite the market’s view, it remained apparent to me that Count was a great business that was priced very reasonably and was overlooked out of fear. Whilst others feared financial stocks, I judged that Count had a robust business model and a strong market position to be able to adapt to legislative change. I subsequently purchased significant amounts of Count shares on 28 July 2011 for $1.02, which I thought was a fair price.

A week later, on 6 August 2011, S&P announced that it would downgrade the US credit rating from AAA down to AA+. This was an unprecedented move given that the US had held a AAA rating since 1917. The announcement sent shockwaves through the market and led to a further decrease to financial stocks, including Count. On 8 August 2011, I capitalised again by investing another significant amount of funds at an attractive price of $0.90.

A few months later, I was not the only one to see Count’s true value. On September 2011, CBA announced that it would buy all of Count’s shares for $1.40 each, a premium of 40% over the price at the time. Although a purchase premium was paid, I would have preferred Count to remain a going concern business. In my opinion, Count was a great business and would have brought its shareholders even greater long term profitability had it not been taken over. Nevertheless, over a period of 5 months, I had made a 52.3% return on Count Financial.

Through times of uncertainty, it is paramount to remain objective – great companies with great founders will remain great. Provided the independent conclusion is based on sound analysis, pundit opinions should be treated as exactly that.