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Getting Out There: Investing in Firsthand Knowledge

January 4, 2024 Print

Picturing the world of investing tends to conjure scenes of professionals engrossed in data and spreadsheets, meticulously dissecting reams of information on stocks and companies. While such activities are undoubtedly a crucial part of the investment process, there's another important aspect that frequently goes unnoticed: the value of firsthand experience.

At Mawer, we call firsthand experience “getting out there.” Our team is always looking for the next opportunity to visit the companies we invest in to further our understanding of them beyond just balance sheets and income statements. Ultimately, we believe deepening our understanding of a company can help us make smarter investment decisions. So, while those enticing financial reports offer valuable insights, there's something highly worthwhile in seeing a company's operations with our own eyes.

As a recent example, in one of our internal meetings, Dominic (“Dom”) Drzazga, a member of our Canadian small cap team, shared an insightful experience from a trip to a Stella-Jones utility pole facility near Vancouver. Although he already had a good grasp of the utility pole manufacturing process, watching the transformation of raw logs into the final product and observing every step in the production instilled in him a stronger appreciation for the intricacies of the process. He explained that “getting out there” reinforced his understanding of the strength of Stella-Jones' business model and allowed him to better comprehend the investments the company was making to expand utility pole manufacturing and meet rising demand for the company’s products.

Dom also reaffirmed the benefits of meeting the people behind the scenes in the organization. When we talk about a company having a great management team, we mean more than just the CEO and CFO, because it’s the entire team that contributes to the company’s success. Getting to observe these teams in action, hearing them discuss their business with pride, and witnessing their commitment to the company’s success can offer a more nuanced understanding of the company's potential. It's not solely about having an exceptional leader at the top (although that can certainly help!); it's about the collective excellence within the organization.

Perhaps the best example of this occurred almost an hour north of Calgary, in Crossfield, Alberta. There, TerraVest’s subsidiary Maxfield manufactures propane tanks for industrial applications. Meeting with the manager of the plant and propane tank division as well as the employees that work to produce these tanks revealed a strong commitment by TerraVest/Maxfield to finding incremental efficiencies for the facility. Among other things, these included insourcing the paint used for propane tanks, as well as installing a water recycling system for use in safety testing. Where 200 thousand gallons of water would have been used once per tank for pressure testing prior to shipping, that water would now be recycled and used in many tanks over the course of a year. All in all, the team’s commitment to reducing costs and increasing efficiency resulted in increased throughput at the facility, as well as reduced financial and environmental costs for Maxfield as a whole.

Pattern recognition is yet another benefit to getting firsthand exposure to company sites and operations. Although visiting every competitor in an industry might not always be feasible, evaluating multiple facilities can highlight clear differences in operating standards and cultures. This can involve factors such as the cleanliness of the facility, production workflow, and interactions between employees. Even when making comparisons across industries, the similarities or differences can reveal patterns not readily apparent from numbers on a page, which can lead to a differentiated investment insight.

There is also more potential for gathering signals that aren’t easily quantifiable. For instance, during site visits and conversations with employees, we can uncover insights into whether the company and its employees are embracing new technologies and striving to enhance their operations. This sort of information can be pivotal when assessing a company's prospects for growth and profitability. It's not just about reading a press release; we want to know how the company will adapt to inevitable changes in the future.

Manar Hassan-Agha, co-manager of our Global equity strategy, also added his perspective to the conversation, emphasizing the behavioural benefits of these visits, especially when travelling internationally. By connecting with people from different cultures in less familiar environments, investors can better expand their frames of reference and improve their practice at staying curious and open minded.

Informal meetings held outside of a corporate boardroom and on the management team’s own turf also tend to facilitate more natural, unscripted discussions and help build rapport between investors and management. Management teams often value the effort and interest displayed by investors who visit them in person. As a result, they are typically willing to reward these investors with more candid insights.

While financial analysis is crucial in the world of investments, there's real value in experiencing investments firsthand. On-site interactions go beyond the numbers, offering a deeper understanding of the business, its people, and its operating environment. When we build investment portfolios for our clients, we see more than just tickers and prices; we see the people, processes, and cultures behind wealth-creating businesses.

This blog and its contents, including references to specific securities,  are for informational purposes only. Information relating to investment approaches or individual investments should not be construed as advice or endorsement. Any views expressed in this blog were prepared based upon the information available at the time and are subject to change. All information is subject to possible correction. In no event shall Mawer Investment Management Ltd. be liable for any damages arising out of, or in any way connected with, the use or inability to use this blog appropriately.

References to specific securities are presented for informational purposes only, and should not be considered recommendations to buy or sell any security, neither is it implied that they have been or will be profitable.