The A, B, Cs of applying Warren Buffett’s recent wisdom to Triumph.
In the company of millions, I have been studying Warren Buffett’s 2013 shareholder letter since its release several weeks ago. When someone grows the book value of a company by 19% annually for over 40 years like Warren Buffett has, it makes sense to take heed. Buffett’s pithy insights can be applied to Triumph’s endeavors with the following three takeaway principles.
First, simplify complex topics into guiding principles. I love how Buffett distilled the insurance business down to four points, which captured the essence of managing the business for the long term. Borrowing from his line of thinking, if I were to capture how we endeavor to run our bank with a long-term view, I would say the following:
A. Understand all of the default risks to any given credit.
B. Accurately assess the severity of loss if there is a default.
C. Across your entire portfolio, charge enough so that you will be profitable after subtracting potential losses and operating expenses.
D. Be willing to walk away when the analysis of A and B leads to the conclusion that you can’t do C.
What appears simple is actually extremely difficult to do. It’s exciting to discuss being a contrarian, but it’s painful to watch a good client leave for an aggressive competitor. I remind our team regularly that almost all parties in a transaction in which we are the lender have an interest that is adverse to our shareholders. As a result, we have to be willing to walk away if the market gets too aggressive.
Second, Buffett “believe[s] in operating with many redundant layers of liquidity.” Liquidity is one of those things that most businesses take for granted until it becomes a problem, and by then, it’s usually too late to solve. The epitaph for many failed finance companies could be that their funding model worked great until it didn’t. And when it stopped working, it forced the liquidation of their assets at the worst possible time, which wiped out their shareholders.
Not many people worry about liquidity in today’s market, primarily because the Federal Reserve’s printing press is running at levels that have never been seen before. The market will not let that go on forever, even if politicians wish it would. Triumph intends to be prepared for that eventuality, so we:
A. Hold more capital than 90% of our competition.
B. Focus on secondary liquidity sources.
C. Pursue business acquisitions that ensure the stability of our funding no matter what the future brings.
It is often the case that abiding by the liquidity principles above will create downward pressure on our annual returns. It can be frustrating to watch others tout superior short term results because they have optimized their businesses for the economic conditions of the moment. History teaches us that economic conditions change; therefore, optimizing our business for the long term is the right call, even when it’s the more difficult path.
Third, Buffett focuses on “moat widening opportunities.” For Berkshire Hathaway, this means investing in infrastructure with a long, useful life—such as a power plant or railroad track—that is so costly and time intensive to replicate that it creates a large competitive gap in their favor. This requires some serious long-term vision and capital investment.
At Triumph, we cannot build a “moat” with financial assets. Our loans and other earning assets have a much shorter economic life than a power plant or railroad track and can be quickly replicated by our competition. While the Triumph “moat” we are building is different; however, the truth of the business principle holds. Triumph’s “moat” is based on talent and culture. We pursue top-shelf talent. To retain that talent, we are always working on the culture of our organization. As such, the following should always be true of Triumph’s team members:
A. I will never give you a reason to doubt what I say.
B. I am committed to the success of the enterprise over the success of an individual.
C. You don’t always have to like what I say as long as you believe A and B.
I close with my favorite line from Buffett’s letter: “Of course, the immediate future is uncertain; America has faced the unknown since 1776. It’s just that sometimes people focus on the myriad of uncertainties that always exist while at other times they ignore them.” Well said.