The Manual of Ideas: The Proven Framework for Finding the Best Value Investments

CHAPTER 5

Jockey Stocks

Making Money alongside Great Managers

Commoditization is correlated with management impact. If you're the manager of a retailer, an insurance company, a commodity company, a miner, or a bank, you can have a huge impact on whether your business is great or good. If you're managing a business that already has a wide moat, you're more of a caretaker. Your job is to not screw up. Your job is not to roll out New Coke.¹

—Pat Dorsey

When we talk about jockey stocks, it seems impossible to ignore the words and experience of Warren Buffett. He took control of Berkshire Hathaway in the mid-1960s at a time when Berkshire could only be regarded as a highly deficient horse. Through shrewd capital allocation, Buffett turned Berkshire into a winner. Along the way, he invested successfully in many other horses and jockeys. He refined his strategy throughout the process, arriving at a somewhat surprising conclusion, given his strikingly positive personal experience at Berkshire.

Buffett is widely known for seeking out good management teams, but investors sometimes fail to appreciate the nuances of his attitude toward corporate managers. For Buffett, the goal first and foremost is not to invest in great managements but in great businesses. Were this not so, he might never have uttered these famous words: “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.” Pat ...