Summary of Ensemble Capital's favorite investment patterns
I came across an article from Todd Wenning of Ensemble Capital who writes about his firm’s 15 favorite investment patterns.
This article reminded me of a model, or pattern, that led Nicholas Sleep to invest in Costco and Amazon in the mid-2000’s.
I wrote more about this model here that Nicholas Sleep referred to as economies of scale shared.
Both economies of scale shared and the investment patterns that Todd recognizes below are recurring themes that can lead to successful investing if applied correctly.
History doesn’t always repeat but there are certain characteristics that repeat for a reason, like when a company goes above and beyond to treat their customers and clients with the greatest customer service they can provide.
This pattern of behavior is much more likely to lead to better results than treating them badly, and treating them very well is exactly what Costco, Amazon, and, as you will soon see, First Republic did.
Todd starts his article off so nicely by mentioning that the most popular guitar chord progression, C-G-AM-F, is used by these very popular songs - Let It Be by The Beatles, With or Without You by U2 and No Woman No Cry by Bob Marley.
This is a good segue into his article because it shows that there aren’t just successful patterns in investing that can repeat themselves, but there are patterns in other activities as well.
Todd just uses music as a metaphor to better demonstrate his point but successful patterns can repeat in many other activities as well like sports and drawing as well.
But that’s a whole different topic.
Below are 11 out of the 15 investment patterns that Todd says are Ensemble Capital’s favorite.
Idiosyncratic Businesses – business that have uncommon characteristics or are in two or more different industries, though it may be hard to realize.
Example: Ferrari - it's both an auto company and a luxury brand.
Predator and Prey Cultural Advantage - a business that has a great culture in an industry where all their competitors have lousy cultures.
Example: First Republic Bank - they are a customer-service-first business and a bank second, meanwhile, their competitors have awful customer service ratings and are too big to change their culture.
Passionate Fans Base - a business that has such a passionate group of followers that these cult-like followers give you free marketing.
The example Todd gives here is Costco since their customers quickly share the bargains they found with their friends or their social media networks but you could probably put Tesla in this group as well.
No-Brainer Products - when the utility from a company's product is very obvious.
Example: Masimo’s pulse oximetry sensors based on clinical data.
Playing a Different Game than Competitors – businesses that have a strategy that is much different than all of their competitors.
Example: Homebuilder NVR who stays within the regions of the U.S. that they know very well instead of the really popular regions. They also don’t own land like their competitors do. They have options on land which they will only use if there is a lot of demand.
Products You Can’t Live Without – businesses that sell products (or services) that are exactly what this name says.
Example: Google's search business and their YouTube products.
Surviving A Moat Attack - businesses that have survived an attack on their moat in the past are more likely to retain their resilience and continue to earn high returns on capital.
Example: Chipotle who survived the bad press they received from their food illness outbreaks in 2016.
Founder’s Pedigree – companies that have CEO’s, or more particularly founders, who instilled a special culture at their companies that will last beyond their tenure.
Example: Masimo’s founder/CEO Joe Kiani who instilled a culture that employees appear to follow that involves a love for solving tough problems, creating win-win products and reducing the cost of healthcare.
Mission Critical Businesses - businesses that supply some type of software or service that are so entrenched in the business of their customer that they are hard to switch away from.
Examples: Broadridge and Service Now for their software and Fastenal for their supply process.
Sacrificing the Present for The Future - this applies to companies that don’t focus on this quarter's or next quarter's earnings but instead are focused on increasing long-term intrinsic value.
Example: Old Dominion Freight Lines who, according to Todd, invests aggressively in their less-than-truckload (LTL) network capacity rather than spending less money in the short-term to increase quarterly earnings.
Self-Disruptors - these are companies who aren’t afraid to disrupt themselves.
Example: Netflix who developed a video streaming platform despite having a short-term successful DVD-by-mail business. (As I’m writing this, they just added video games to their platform)