On a plane back from a painful loss to the Miami Dolphins, San Francisco 49ers head coach, Bill Walsh broke down crying. His assistant coaches shielded him so that his players didn’t see him. His record after that loss was 5 wins and 22 losses over two seasons, the worst in the National Football League.
But what the record didn’t show was the substantial changes being made throughout the 49ers organization. Sixteen short months later, his San Francisco 49ers won their first of four Super Bowls. And now Walsh is considered one of the best football coaches of all time, and someone who literally changed the way the game of football is played.
I recently read his wonderful book: The Score Takes Care of Itself, and I think it might be one of the best business and investment books ever written, and while this book was written in 2009, it is probably more important now than ever before.
The title of the book and Bill Walsh’s guiding philosophy is that if you focus on doing the little things right and focus on getting your process right, that the result or score will eventually take care of itself.
Just like football games, investors love to focus on the “score” or the day-to-day movements in the stock market to see who is winning and who is losing. The problem is short-term events and market reactions don’t really show whether an investment philosophy is working or if an investment process is the right one.
Luck plays a big role in football, from injuries to penalties to weather and other factors. In the stock market, you can’t always control for events that come out of the blue like a pandemic or European war. And further, short-term events and market movements can often disguise long-term powerful trends that have not changed.
In 2012, no one wanted to buy single-family homes in areas overwhelmed by foreclosures. But thirty years of demographics and population inflows into southern cities like Charlotte, NC or Atlanta, GA actually led me to believe that something had to change, homes could not be priced below construction cost for very long.
An overemphasis on short-term price movements can often disguise and mislead about what is important in the long run and can hurt your ability to earn excellent long-term risk-adjusted returns. And isn’t that all that matters?
My investment philosophy and process is to research and invest in undervalued, misunderstood, or unfollowed stocks that offer limited downside over the long-term, but also have an uncertain upside. My portfolios consist of investments that offer a “heads I win, tails I don’t lose” strategic approach to investing.
Through his book, Bill Walsh is telling me to focus on every single aspect of my process from research to my focus on valuation to making sure my portfolio is filled with companies where I don’t lose in the long-term. The more I focus on making sure my research and analysis are the best, the more the score will take care of itself.
But here is my greatest takeaway from the book. In investing, not only can you focus on your own process, but you can also invest in other people’s superior processes and strategies. In other words, you can invest in the business world’s versions of Bill Walsh.
Consider the Chairman of Nelnet (NYSE: NNI), Mike Dunlap, who I wrote up a year and a half ago.
In my opinion, he is the business version of Bill Walsh. Nelnet has amassed an incredible record of 17.2% annual growth in book value since 2004 and has had positive net income every year despite the great financial crisis and the pandemic.
Nelnet’s process is to forgo quarterly conference calls and managing short-term earnings, and instead focus on building long-term cash flow streams and investments that earn outsized risk-adjusted returns. I have called the company the Quiet Technology Compounder because they are taking cash flows from student loans and reinvesting it in technology companies and renewable energy and creating enormous value for shareholders.
And what is Nelnet doing right now? They are accelerating their buyback of their undervalued stock. The company is currently buying approximately 0.4% of their stock every month and as a shareholder I love it. Management knows that the stock is undervalued at 1.1 times book and below a net asset value of at least $130 per share.
Another executive who is focused on the process over short-term results is Rick Hermanns, the CEO of HireQuest (NASDAQ: HQI). I interviewed Rick a year ago.
Rick and his management team have their heads down focused on growing their franchise model and converting vertically integrated mom and pop staffing companies into franchises. HireQuest has built a company that has near 60% operating margins and a 27% unlevered return on equity. And yet, this stock incredibly sells for 13 times my estimate for 2022 earnings and 10 times my estimate for 2023! Do I mind that this illiquid stock can be weak from time to time while Rick and his team execute on a strategy that has been honed by three decades of experience? I think you can guess the answer.
And finally, the same goes for my investments in the cannabis industry. Most investors are so hyper focused on legislative headlines and short-term price movements, that they are discounting the massive tailwinds of normalization, the organic growth of adoption of cannabis, and that the demand from the illicit market is slowly converting to legal sales. Short-term oversupply in some markets and the slow pace of regulatory changes frustrates and infuriates many who want to look at that scoreboard and see the score change right now.
Will I underperform sometimes? Absolutely, but in the long-term I expect that my attention to process and focus on investing with the business world’s examples of Bill Walsh will enable my portfolio to earn fabulous returns.
P.S. Another idea I loved from the book was Bill Walsh’s scripting plays the day before the game. He got worried that during the game he would be too emotional, so he planned out his plays in advance. I have started doing the same and try to map out the day before what I want to do, so that market movements don’t distract me. I may write more on this in the future.