Weekly Thoughts: Playing Baseball
Here is something that caught our eye this week:
We recently participated in a small group “fireside chat” at a leading business school. We began the talk by explaining our belief that buying companies at reasonable valuations, employing conservative capital structures, taking a long-term approach to operational improvement, and reinvesting excess free cash in the existing franchises or in new acquisitions could lead to significant wealth creation if we are patient and we pay attention to detail. During the Q&A portion of the event, we were asked whether this approach, since it involves neither sophisticated financial engineering nor a drive to raise external capital at an ever growing valuation, implies that we are optimizing for lifestyle as opposed to financial performance.
While we do happen to think we enjoy a fairly high quality of life, we doubt anyone who works with us mistakes our fondness for Popham Beach in the summer for a lack of ambition regarding the trajectory of our portfolio companies or for Chenmark itself. On the contrary, we spend most of each day laser focused on how to help each company become more operationally efficient, more responsive to customers, more focused on the development of employees, and better positioned to capitalize on growth opportunities when they present themselves. In short, since we intend to own the companies we acquire indefinitely, we are looking to build ever more enduring franchises, but we do so by concentrating on business basics, an area which can sometimes be overshadowed by the flashier aspects of high finance.
Along these lines, this week we learned that there may be a broader trend away from core fundamentals when reading an article in The New York Times about youth baseball. The article noted that in the rush to generate recruiting interest from major collegiate baseball programs, youth clinics and camps have begun emphasizing power hitting and pitching (the skills that tend to make scouts sit up and take notice), at the expense of the basic tools required to the actually play the game. From The New York Times:
“‘They can’t play catch,’ said Thomson, a coach in California, one of the more fertile grounds for future major leaguers. ‘They’re bad at it. You’d be surprised how bad it looks. We have to teach them how to play catch.’ In modern youth baseball, where the culture has been transformed by the pursuit of the holy grail, a college athletic scholarship, the fundamentals are falling by the wayside in favor of flashier skills like big-league-style hitting and pitching….As a result, in the last decade or so, a generation of top ballplayers has, in most cases, spent little time learning how to accurately throw across the diamond; catch a fly ball; field a ground ball and turn a double play; run the bases effectively; make a tag at a base; or, God forbid, bunt.”
We completely acknowledge that closing a complicated LBO or using network effects to capture a massive addressable market are the modern finance equivalent of the 400ft homerun or the 95mph fastball. In baseball or in finance those are rare skills, and we understand why scouts and/or business schools emphasize them, and why players or executives who possess them are well compensated. Clearly, Mike Trout isn’t recognized as one of baseball’s best on account of this bunting ability. However, when the trend goes too far, and practitioners are so focused on elite skills that they either ignore or radically undervalue fundamentals, we believe a course correction is warranted.
In The New York Times article, a collegiate coach described what he sees in his current players, noting “They’ve been taught hitting skills, worked hard at it, and that’s all good… but the lost art is how to play baseball.” At Chenmark, while we maintain a healthy respect for high finance and will continue to develop our skills in that area, our primary emphasis is on selling a product or service with positive unit economics and exceeding customer expectations. In business, like in baseball, we never want to forget the value of simply playing the game.
Have a great week,
Your Chenmark Capital Team