Please connect with us to read Third Period Capital quarterly letters. Excerpts below:
From our Introductory Letter, October 2019
I am building my own firm because I see an opportunity to create an even more successful global investment strategy that speaks to and builds trust with the next generation.
Culture is not a buzzword for millennials; it is the hallmark of community. My emphasis on culture not only makes sound investment sense. It is a deliberate attempt to create a community of young investors that cares about how wealth is created. My role is to identify the companies that can benefit everyone around me, compounding wealth for our Third Period Capital community in the process.
We create a proprietary culture “mosaic” for each portfolio company whereby we measure a company’s culture and its likely impact on strategy. By speaking with a firm’s current and former employees, as well as customers, suppliers and competitors, we are able to ascertain whether the culture is strong and growing; whether the firm can attract and retain talent; and whether the culture can help or hinder the firm’s growth. We ascribe tremendous weight to culture in my underwriting process because culture can be a costless source of employee motivation; it cannot be replicated by competitors; and is often overlooked by the market.
We agree with George F. Baker’s observation that to make money in stocks, you must have “the vision to see them, the courage to buy them and the patience to hold them.”
2020 Letters
We must also remember that this crisis, like any challenge, holds within it an opportunity for learning. Crises often catalyze new behaviors or accelerate disruptive trends already in place. Indeed, the tailwinds we initially identified to inform our investments in technology, healthcare and consumer sectors not only remain intact; they are accelerated by COVID-19.
The pandemic, we believe, has intensified the necessity for companies to prove culture adaptability to their employees and to customers. Our hypothesis, developed with Adam Grant’s counsel, is that companies that best adapt will share three characteristics: a history of virtual collaboration, a proven ability to galvanize employees in a digital manner to their mission, and a distributed structure allowing employees to do independent work. This is a high bar that all Third Period Capital portfolio companies must exceed.
We believe that our ability to collect, synthesize and apply culture data to underwriting decisions is a growing competitive advantage for Third Period, and that the ongoing democratization of information access is a tailwind at our backs. For the last four decades, regulation and technology have lowered research costs and we believe the pandemic accelerated this trend. We believe that the investment decisions made in 2020 were grounded in real-time culture feedback and research that would have taken years to amass before the pandemic nudged us all into a more virtual life. This democratization trend is unlikely to reverse and should continue to reward us with improving access to research insights, the lifeblood of long-term investment outperformance.
“One of the best ways to build resilience is to create a culture of voice rather than silence. When people can raise problems and ideas, organizations are better poised to prevent errors and promote innovation. We know that people are most likely to speak up when leaders establish psychological safety (we can take risks without being punished), justice (we are treated respectfully and fairly), and control (we can shape our destiny and have an impact here). Of course, the ultimate test of these principles is whether leaders maintain them even when times are tough. I can’t think of a better time for Third Period Capital to identify resilient cultures – or a better way to identify exciting long-term investment opportunities.” – Adam Grant
2021 Letters
Empirical evidence shows that stock market returns are not normally distributed, that mean reversion does not exist in investing, and that special companies are profoundly important for clients to own for the long term. Recent academic research supports this view and admonishes such “locking-in gains” trading activity. In 2019, Hendrik Bessembinder, Professor at Arizona State University’s W.P. Carey School of Business, evaluated lifetime returns to every US stock traded on the NYSE, Nasdaq and American stock exchanges since 1926. Bessembinder found that a mere 1% of companies accounted for all net wealth creation. The other 99% were, it turns out, largely a distraction to building wealth.
Investing is an endless journey of questioning, discovery, and reflection. We firmly believe that the more we learn, the better our decision-making process becomes, and the better our long-term performance will be. We endeavor to maximize our learning by building an internal culture of humility and grit. After all, what we ask of our companies is what we must ourselves do.
“Some industries are known for high reliability: from airlines to hospitals to power plants, the ability to detect, correct, and prevent errors is vital. In an increasingly turbulent world, the reliability practices that have promoted rethinking and resilience have become relevant to every organization. I am excited to see Third Period Capital vetting companies based on their capacity for high reliability.” - Adam Grant
With respect to new idea generation, our work reveals that the most exciting companies expand their economic moats by anticipating customer needs. Staying ahead of the need can bring these companies significant recurring demand, rising profitability and a premium valuation for many years.
2022 Letters
Stock market declines are inevitably met with rebounds, sometimes as early as six months post-decline, because human resourcefulness and imagination create the innovation that accelerates per-capita GDP growth over the long term. Innovation occurs, on a global scale, despite world wars, depressions, recessions, and pandemics, because human ingenuity is in our genetic code.
‘Stay the course’ may sound like Pollyannaish advice, but it is nonetheless wise. History tells us that downturns like these are normal and occur every five years, on average. While the magnitude and duration of this downtown remain uncertain, we know the market will fully recover to new highs in the years ahead. Strange as it may sound, the best investment decisions – including the decision to simply hold our current portfolio companies – are made in times like these. We will hold steady through the current turbulence, focused on the growth ahead.
We are unlikely to outperform over the long term if we sell a company when its industry tailwinds subside, when a recession occurs, or even when it makes a mistake. Being patient means committing to optimism and tolerating some volatility and some disappointment, despite concerns that feel heavy at times. We expect that over the very long term, we will be rewarded for our efforts to build ever more patience into our investment process.
2023 Letters
From a corporate culture perspective, we will favor companies that show evidence of a “learning culture” to firms with “performance culture.” Tremendous wealth has been created by companies following historical best practices, firms we define as having “performance cultures.” While we agree that accountability for results is vital, Adam Grant’s research shows that employees in “learning cultures” are accountable for improvements to both outcome and process. When leaders show a willingness to experiment and to re-think their best practices, they signal to the company that it is safe to raise problems as well as ideas. As Adam explains: “In performance cultures, people are determined to prove themselves. But in learning cultures, people are more interested in improving themselves – and the organization around them. Create a learning culture by acknowledging what you don’t know, challenging best practices, and rewarding people who test new ideas, even if they don’t work. Evidence shows those in learning cultures innovate more and make fewer mistakes.”
The stock market grows when innovation is delivered, not when risks abate, because the risks (real or perceived) are always present.