Why the best companies defy conventional wisdom

Eminent investor Sir John Templeton famously said: “If you want to have a better performance than the crowd, you must do things differently from the crowd.”

The same is true in business. 

But departing from the crowd is difficult, especially for leaders of publicly listed companies. It’s much safer to follow the conventional path than risk standing out for the wrong reasons.

Which is a shame because ‘conventional business wisdom’ can, at times, be seriously flawed in my opinion. In these cases, companies willing to turn left when most others are turning right can forge big advantages.

Important: The information on individual company shares represents the view of Charlie as portfolio manager but it is not a personal recommendation to buy, sell or hold shares in any company. Experienced investors should form their own considered view or seek advice if unsure. Charlie personally holds shares in Next. This article is original Wealth Club content.

Five examples of ‘flawed’ conventional wisdom

1. A focus on ‘strategy’ over culture

Setting business strategy is considered one of the most important jobs of a CEO, at least judging by the army of consultants and ‘Chief Strategy Officers’ many public companies employ.

But too much focus on strategy can be counter-productive, in my opinion.

For a start, a lot of strategies are overly complicated and confusing. They are high on buzzwords and grandiose targets, and light on operational details. This means they are typically of little use to those on the front line.

Then there’s the problem that the world changes. This means a strategy can quickly become irrelevant. The more detailed and complicated it is, the shorter its likely sell-by date. And the more time and money spent formulating it, the harder it usually is to change.

Even if the strategy is flawless, it will fail if it isn’t executed properly. Success depends on having the right people in the right places, with the right tools, systems and incentives to do their jobs. 

This is why the best companies tend to prioritise culture and broad principles over elaborate strategies. 

Amazon’s strategy can be summarised in one line: ‘low prices, broad choice and fast delivery’. This works because it is simple, easy to follow, and timeless. But mostly it succeeded because Amazon’s founder, Jeff Bezos, fostered an innovative culture of empowering staff and getting things done. 

The reason Netflix thrived and Blockbuster went bankrupt wasn’t Netflix’s superior strategy. It’s because Netflix had an adaptive culture that enabled it to pivot quickly to online streaming, once it realised the world was changing.

I see this all the time. Most companies focus on strategy because it’s the conventional thing to do. But culture is the foundation upon which any strategy is built. The best companies know if they get the culture right, everything else tends to look after itself. 

2. A belief that more resources is always better 

A company with more people, more funding, bigger research and development budgets and higher capital investment is likely to outperform one with fewer resources, all else equal; or so conventional business wisdom goes. 

But in fact, when I look at the best businesses, they’ve invariably found a way to do more with less. They are ruthless in minimising unnecessary costs, letting them focus their resources and R&D where they can deliver the best results.

Frugality is one of the biggest competitive advantages I’m aware of, because it enables one of two things (sometimes both): 

  • Higher margins 
  • Lower prices 

Sam Walton, Walmart’s founder, realised this early on.

Walton was famously frugal and no expense was too small to escape his attention. But rather than keep these margin gains, he reinvested them into lowering prices. This led to an unassailable cost and pricing advantage that less frugal competitors couldn’t match. 

Aldi and Lidl’s success stems from much the same principle – keep costs to a bare minimum with no-frill stores in cheap locations, and use the savings to fund lower prices. Rinse and repeat.

Establishing a culture of frugality is harder than it seems. Every expense, large and small, must be constantly scrutinised. And every person within the business, including the executives, must treat company money like it’s their own. No surprise then that most companies aren’t especially frugal. 

By contrast, the best business operators invariably make frugality a core part of their DNA. It’s why they are so difficult to compete with. 

The easiest way to save money is to stop losing it.

Sam Walton

3. A failure to appreciate that cash is king

In recent years many businesses, especially in the technology sector, have measured their success by growth in revenue or customer numbers. The common belief has been that a business can sustain losses almost indefinitely, raising prices only once market dominance has been achieved.

The merits of this were debatable even in a near-zero percent interest world (how can you be sure you’ll be able to raise prices later?). But with rates above 5%, it makes even less sense. 

Thankfully, there is a greater acknowledgement today that profit actually matters. But profit as a measure of success also has its limitations.  

For a start, profit takes no account of things like capital expenditure and working capital (investments in inventories and debtors). This means it’s quite possible to generate profits, but little or no cash. 

Profit is also easy to manipulate. Many businesses report ‘adjusted’ profits which allows them to ignore things like share-based payments and ‘one-off’ restructuring costs (that usually prove anything but). Conveniently, many management teams are remunerated based on these ‘adjusted’ figures. No wonder they are more focused on profit than cash. 

The best companies know that cash is king. They structure their business model to produce as much cash as possible, even at the expense of lower revenue or profit growth. And because their focus is on cash, rather than the income statement, they tend to be less inclined to perform accounting gimmickry.

4. Short-termism, especially during downturns 

The remuneration policies of most public companies are heavily skewed to short-term profit and shareholder returns (one to three years). This tends to encourage a short-term mindset.

Short-termism is especially prevalent in recessions, when conventional business wisdom suggests costs and investments should be aggressively cut. But it’s usually when the going gets tough that the best investment opportunities present themselves. At times like these, companies willing to take a long-term view can forge huge advantages.

A prime example is the UK housebuilder, Berkeley Group. In the years leading up to the 2008/09 financial crash, it didn’t chase short-term profits (unlike other builders). Instead, it hoarded cash and strengthened its balance sheet. When the crisis struck, and the rest of the industry battened down the hatches, Berkeley pushed down on the accelerator, snapping up land at rock-bottom prices. When the housing market recovered, Berkeley’s profits boomed.

By defying conventional wisdom, and taking the long-term view, Berkeley not only weathered the worst crisis since the Great Depression, but emerged stronger, significantly outperforming its peers.

Source: Morningstar (31/01/2007 to 31/01/2024). The graph shows total return with dividends reinvested, in GBP. Peer group is an equally weighted composite index of Barratt Developments, Persimmon, Taylor Wimpey, Bellway, Vistry and Redrow. Past performance isn’t a guide to future returns.

5. A muddled approach to ‘ESG’ 

Harming the environment and treating stakeholders badly can hardly be a route to long-term business success and nowadays every business must take these Environmental, Social and Governance (ESG) issues seriously.

But ‘ESG’ has become a political pressure cooker, providing a ripe environment for muddled, conventional thinking. 

The best companies tend to adopt a common-sense and proportionate approach to ESG, tailored to their own business and industry. They realise that blanket policies and ESG agendas are rarely the best solution. They tend to be more concerned with reality than perception. 

Warren Buffett’s investment vehicle Berkshire Hathaway is a rare example of a company that has resisted pressure to adopt ESG reporting, seeing it as an unnecessary waste of time and money. 

Buffett’s approach to ESG has always been rooted in common sense – treat all stakeholders how you would wish to be treated, employ conservative accounting, rather than milking short-term profits, and never trade reputation for money. Above all, Buffett trusts the operating managers of Berkshire’s businesses to behave in an ethical and sustainable manner. 

I think this model has worked brilliantly for six decades and counting. If that isn’t a mark of sustainability, I don’t know what is.  

The antidote to conventional thinking

One of the best antidotes I’ve found to conventional thinking is to look for companies with an ‘ownership mentality’. It’s why one of the questions on my 60-point investment checklist asks: “Do the executives think like owners?”.

Most publicly listed businesses are run by ‘agents’. They typically oversee the business for a few years (at most), have modest personal shareholdings and thrive at politics, self-promotion and building consensus. This often leads them down the ‘conventional’ path.

‘Owners’ are the opposite. They are mainly concerned with building long-term business value. If that means going against the status quo then so be it.

An ownership mentality might stem from a strong, iconoclastic founder (all the company examples above fall into this category). But this doesn’t have to be the case. Even when the founders have long since departed, a company’s management can still possess ‘ownership’ traits. Usually this is because they have:

  • Worked at the same company for decades, developing a strong psychological attachment
  • Amassed a significant shareholding, which far outweighs any remuneration they receive
  • An iconoclastic temperament and personality

A good example is Simon Wolfson who, at 33, became CEO of retailer Next and has led the company with aplomb for more than two decades.

Never one to mince his words, Wolfson has succeeded by sticking to his convictions, even if they flew in the face of conventional wisdom. This includes embracing online well before other traditional retailers, only buying back shares when he believed they were undervalued (rather than at ‘any’ price), and pursuing brand partnerships, even at the risk of cannibalising own-brand sales.

The bottom line

Defying conventional business wisdom is no guarantee of success. But an unwillingness to ever do so tends to assure, at best, mediocre outcomes. At worst it can be downright dangerous.

The willingness to zig when others are zagging is relatively uncommon in publicly listed businesses overseen by ‘agents’. But when paired with good judgement and strong execution, it can be enormously powerful.

See five-year performance of the shares listed above:

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