I’m writing this quick note from NYC—I’m here for a conference. My brother Alex and I went to see a chamber musical, Reunions, at New York City Center (right next to Carnegie Hall). The book and lyrics were written by my friend Jeffrey Scharf (who, believe it or not, is also a value investor). I went to see it because of Jeffrey—I had no idea what to expect.
We absolutely loved it!
If you’re in NYC, you need to see it. It’s been a long time since I’ve watched something that touched me this much. Everything about this play was great—the venue is small and intimate, the dialogue, the story, the acting—all terrific.
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In Part 2, we shift from the streets of London and the economic lessons gleaned from black cabs and tax policies to a deeper dive into the essence of excellence in business and investing. I’ll break it up into two parts (you can read the full essay here).
You can also listen to a narration of this article on iTunes & online.
Surrounding Yourself with Greatness - Part 2
Fever-Tree
Before I explain why I love Fever-Tree as a product and an investment, here’s the story of how tonic water became a British obsession—it’ll make more sense after.
Picture this: it’s the 19th century, and malaria is wiping out British troops in hot, mosquito-infested colonies in India and West Africa. Scientists extract quinine from South American cinchona bark—voila, an anti-malaria miracle drug. The problem? Quinine dissolved in water tastes absolutely horrendous.
Enter the resourceful British officer class. They already have plenty of gin in their rations (because, well, they’re British). So they start mixing the daily quinine dose with water, sugar, lime, and a generous pour of gin. Suddenly the medicine doesn’t just go down; it goes down delightfully. The gin and tonic is born—not in a fancy London bar, but in a sweaty colonial outpost as a life-saving cocktail.
This is precisely why the G&T became a national institution in Britain and remains far more popular there than in the US. We Americans never had to choke down quinine to survive our nonexistent tropical empire.
Fast-forward to 2005. Two English guys, Charles Rolls and Tim Warrillow, frustrated that every tonic water tastes like chemical-laden sugar water, decide to go back to basics: real quinine from cinchona trees, natural botanicals, no artificial junk. They name their premium tonic Fever-Tree—a perfect nod to the tree that started it all.
I’ve been consuming so much G&T lately (more T than G to be honest) that I can travel to malaria-infested parts of Africa without a malaria vaccine.
Now, back to investing.
Fever-Tree keeps amazing me. I absolutely love the company’s obsession with quality. The company isn’t much different from Coke—it develops, sources, and markets the product but doesn’t manufacture it or own factories.
Schweppes, its biggest competitor in tonics and mixers, doesn’t have a single owner. The brand has different distributors with rights in different countries. Nobody is truly obsessed with it or cares about it the way Fever-Tree does. Like any other beverage company, Schweppes’s owners are just trying to figure out how to squeeze an extra penny out of production costs.
I heard a story about Schweppes ginger beer. One distributor wanted to reduce the cost of ginger, so they added chili sauce to give it a bite. But the lower ginger content reduced the murkiness of the water—a defining feature of ginger beer—so they added another chemical to restore it.
Fever-Tree, by contrast, has been importing three types of ginger from day one. It’s also been importing quinine—a core ingredient in tonic—from the same place in the Congo for over twenty years. In the deal Fever-Tree signed with Molson Coors, Molson Coors will distribute and manufacture the product, but it cannot touch the recipe. Fever-Tree maintains control. I respect that.
A friend told me he bought some good gin and stopped at Tesco to get Fever-Tree. The store was out of it, though they usually carry it. He couldn’t bring himself to buy Schweppes, so he went to a different store. That’s brand loyalty.
In Search of Excellence
I also had a chance to spend some time with Wise. I am a huge fan of the company. In the past I wrote that I admire management that has the ability to suffer. Wise management is the definition of this.
Wise has built a very innovative cross-border money transfer product. They provide great service, customers love the product and the prices, thus Wise spends almost no money on acquiring customers (they come through word of mouth, while competitors have to spend a good chunk of their revenue on customer acquisition, which puts competitors at a substantial cost disadvantage). In fact, the company’s product is so good that banks—who are supposed to be their competitors—are white-labeling Wise’s platform, using it for cross-border transfers while slapping their own name on it. Wise’s long-term goal is to become a platform for global money transfers.
But here is where it gets fascinating: Wise keeps lowering prices. As they grow—it’s a fixed-cost business—their margins expand. But instead of pocketing these expanding profits, Wise passes cost savings on to the customer by lowering transaction costs. This is why customers love Wise. This of course reduces the rate of the company’s earnings growth. And the management is fine with it. Two co-founders still own a big chunk of the company. Just to clarify, this is not altruism (though consumers definitely benefit from this), but cold logic and long-term thinking. By continually lowering prices they’re destroying their current and future competition, making it very difficult to get to scale —they are building an insurmountable moat. I really respect that.
We may or may not buy the stock—it’s on our watch list (we are looking for a better price). But, whether we buy it or not, I have benefited tremendously from studying this company. It showed me what excellent management looks like. Once you study companies like Wise, your tolerance for mediocre management declines.
I have a good friend who used to fish for stocks at the bottom of the barrel of quality and corporate management (he was seduced by statistical cheapness), and I think his latest returns have suffered for it. He recently bought Wise stock. I don’t know if he’ll make much money on the stock (I hope he does), as today’s stock price demands fairly high growth persisting for a long time. But I know the management quality of his future investments is going to be higher. I am very happy for him.
I’ve heard a saying that you are the average of your five closest friends. If you want to improve, you want to surround yourself with people who are better than you in certain parts of their lives, and spend less time with people who pull you down.
Avoiding bad influences is probably even more important because bad influence is more pervasive than good influence. If you spend a lot of time with heavy drinkers, you’ll likely drink more, etc.
Something similar happens in investing. If you spend a lot of time studying excellence, you’ll become a bit more allergic to mediocrity and the average caliber of your portfolio will go up.
However!!! This point is important: Investing, like life, is nuanced.
That means you can’t necessarily buy great companies run by terrific management at any price. The price (valuation) you pay is an important component of future returns. So buying quality at any price is foolish.
Today I am a different (hopefully better) investor than I was five, ten, twenty years ago. It would be sad if I were not. As I look at the biggest changes, it is my focus on quality. But not just business and balance sheet quality; no, the quality of the people who run the business. As I look at our portfolio today, the caliber of companies we own has risen.
The mantra I keep repeating to myself is: There are tens of thousands of stocks out there; I only need twenty-five. We can be extremely selective and uncompromising, especially when it comes to quality. Thus, when the market is going bananas over the latest obsession, we keep studying and building our watch list, filling it with exceptional companies that may not be undervalued today.
If you keep looking for new friends at dive bars, you’ll likely surround yourself with drunks. The same logic applies to portfolio construction—if you keep spending your time building a watch list of great businesses run by great people, eventually your portfolio will skew toward greatness.
Rachmaninoff’s Piano Concerto No. 1 – 2nd Movement
We are continuing our exploration of 2nd movements of romantic piano concertos with Rachmaninoff’s Piano Concerto No. 1. #PianoAdagios
Rachmaninoff composed this piano concerto at the age of 18. It’s less well-known than his 2nd and 3rd concertos. I tend to agree with the listening public, but I love this 2nd movement.
Let’s start with the version performed by Rachmaninoff himself: