What Value Investors & Entrepreneurs Can Learn from the Inspiring Buckminster Fuller: The Compounding Power of the “PE” – Bamboo Innovator Weekly Insight

“Bamboo Innovators bend, not break, even in the most terrifying storm that would snap the mighty resisting oak tree. It survives, therefore it conquers.”
BAMBOO LETTER UPDATE | October 27, 2015
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Dear Friends,

What Value Investors & Entrepreneurs Can Learn from the Inspiring Buckminster Fuller: The Compounding Power of the “PE”

“Integrity is the essence of everything successful.”

“The significance of you will forever remain obscure to you, but you may assume that you are fulfilling your significance if you apply yourself to the highest advantage of others.”

– Buckminster Fuller (1895-1983), inventor, philosopher and author

When George Lucas and Gary Kurtz produced Star Wars in 1977, they believed it would make around $8m in ticket sales to science fiction fans. And if the filmmakers were lucky, they believe they could make maybe $12m.

Since the first film’s release in 1977, Star Wars conquered our culture to beat out a surprising number of rivals to gain a diehard, multigenerational fan base, and “Jediism” has become a religion in its own right. Kids went wild for the Star Wars hero, pestering parents to buy toy guns, sheets, watches, etc and Star Wars–related products outnumber human beings. After its 1977 release, the Star Wars franchise went on to generate a staggering total of $42bn, the bulk coming from the $32bn in merchandising sales which is increasing by at least $1.5bn a year; the six main Star Wars movies made $4.5bn, plus the $6.6bn in video games, home video, DVD and Blu-Ray sales. No other entertainment franchise – not even James Bond and Harry Potter combined – reaches the level of success of Star Wars; Potter’s total revenue from books, movies and toys has been estimated at $25bn; Bond’s estimate is $8 bn.)

However, had Gary Kurtz not attended a unique 3-1/2 day experiential leadership Program, both George Lucas and Gary Kurtz would probably not have benefited proportionately from the massive success of their creation as they were remunerated based on a fixed compensation. This transformational Program that was started in 1978 by Marshall Thurber and based on the philosophy and teachings of inventor, philosopher and author of the late Buckminster Fuller (1895-1983), who was described as the Benjamin Franklin and Thomas Edison of his era and fondly called “Bucky” by everyone whose lives he has touched.

After participating in the Bucky-inspired leadership Program, the Star Wars producers invented modern licensing: The film producers went on to re-negotiate their fixed-remunerated contract to having an exclusive significant stake in the merchandising rights. By trading short term cash for longer term potential, they increased the appeal of the deal to the other party whilst opening up the opportunity to realise the compounding potential of the future upside.

The leadership Program also inspired a long list of entrepreneurs and professionals to make win-win decisions in a win-lose world with creative, lateral ideas that leverages off their talent, and to design their life instead of spending their life earning a living. In the process of adding value to others through the Work they crafted and in applying their inventory of experiences to the solving of real-world problems, they experienced what Bucky coined profoundly as “precession”, or the effect of bodies in motion on other bodies in motion.

As Bucky illuminates philosophically, precession is a transformative experience in that “things you have never understood before, you would begin to understand when you experience precession personally”. The Law of Precession simply states that for every action we take there will be a side effect arising at 90 degrees to the line of our action. There are two mental pictures to describe this. First, think about what happens when we drop a stone into water. Ripples go out. The ripples are the side effect to the main action, which is the stone dropping into the water. Second, think about honey bees. They spend their lives flying from flower to flower to collect nectar to make honey. They “think” that’s their purpose but their true (and much larger) purpose is to pollinate the flowers, contributing to the growth of crops and the sustaining of life for humans and animals.

Thus, when anyone sets out to achieve a goal, there is always a precessional effect (PE), mostly unpredicted by the original action. Therefore, if we want to achieve something, we can go for the goal and get the PE, or we can choose to go for the effect and get the goal. The PE is something other than the money or profit. It could be learning smarter, more innovative ways to add value to customers. In Bucky’s language, he assumed that what humanity rated as “side effects” are nature’s main effects. He therefore adopted the PE side effects as his prime objective. He used this model as part of his self-disciplines, resolving to only ever do the greatest good for the greatest number of people, to demonstrate that if he did so, there would be money to finance him. Just as the honey bee did not need to earn a living, humans working at adding value to the healthy survival of humanity, doing what they were uniquely designed to do with integrity, would not need to earn and living. The Universe would provide for them. Thus, much like bumblebee inadvertently pollinizes the vegetation when it goes after its honey, we create and discover your own indescribable and invaluable Purpose when we add value to others, meet unfulfilled needs in the marketplace and solve real-world problems.

In addition, we simply must be in motion, continuously and actively engaging ourselves in serving and caring to add value to others. If we are not in motion, if we are paralyzed by fear, depression or illness, then precession will have a much smaller, or even insignificant effect. In times of crisis and panic, it is easy to be rendered petrified. Simply getting up, into motion, doing something, will create a precessional effect. And the act of getting into motion will break the paralysis.

It is a privilege and joy to be able to attend and graduate from this Program together with like-minded folks and my colleagues at ASX-listed 8I Holdings Limited on 22-25th October. Some of the Program graduates also include Mark Victor Hansen, co-author of the Chicken Soup for the Soul Series, One-Minute Millionaire; Robert Kiyosaki, best-selling author of the Rich Dad/Poor Dad Series; Spencer Johnson, co-author of The One-Minute Manager and Who Moved My Cheese?; Anthony Robbins; Steve McDowall, legendary New Zealand All-Black Rugby star; Mark Tonelli, 5-Time Olympic Gold Medal winner in swimming; Ben Cohen, co-founder of Ben & Jerry’s Ice Cream; Nyhl Henson, co-founder of MTV Cable Television, and so on.

M&Y

Amongst the illustrious graduates of the Program is Ian McMullin, founder of the Spotless Group (ASX: SPO, MV US$1.69bn). McMullin built the billion-dollar business with over 47,000 employees in 20 countries from a single dry-cleaning shopSpotless, which he opened in the Melbourne suburb of Fitzroy in September 1946. In Australia, Spotless is perhaps the largest services group in the country. Outside Australia, Spotless is the world’s largest supplier of coat hangers to retail chains such as Wal-Mart and Target.

Having absorbed the basics from his former dry cleaner employer Len Grey, Ian decided to start on his own to attain mastery. When the US Army was selling up as it left Australia after World War II, McMullin snapped up a trailer-mounted dry-cleaning outfit. “Most garments back then were woollen. Dry-cleaning took off after the war, so I bought this primitive piece of equipment, opened a shop in Fitzroy and put this equipment in the tin shed behind the shop. Len Grey thought I was mad,” Ian recalled, “and when we had no customers for the first two hours I was inclined to agree.”

But word soon spread that this new enterprise was different. Dry cleaning had been staid and complacent – prices uniform, competition minimal. Ian was determined to shake things up. Numerous fresh initiatives ensured that Spotless was quicker, cheaper and more enterprising than its rivals. He pitched his prices just below the market leader, Brown Gouge, and offered faster service, but when he turned to advertising on radio, things started to take off. Customers poured in. Ian opened more shops. Business kept escalating.

Spotless (Red) vs ASX Index – Stock Price Performance, 2014-2015

Spotless2

By the 1960s, a converted old bakery in Northcote became the central plant for all cleaning operations. Spotless vans full of garments scurried around the suburbs. But a fire took out the Northcote plant for three months and Spotless nearly went bankrupt. It had to farm out its work to other dry cleaners. “I always found it surprising that they did it for us,” Ian said.

A lifelong learner, Ian’s admiration for America led to regular visits and numerous insights. When Ian visited Kansas City in 1960, he returned with a transformative idea – coupons. Spotless coupons entitling customers to significant discounts were inserted prominently in Melbourne newspapers, and proved so successful that they boosted the papers’ circulation.

Ian listed his dry-cleaning chain in 1961. But Ian was not satisfied. The rise of synthetic fabrics and domestic washing machines “sent shivers down my spine”, McMullin said. Sensing that demand for dry cleaning would decline due to changed clothes fabrics, he decided to diversify into industrial cleaning, plastics, linen hire and catering. Some of the key insights that Ian learnt and applied after the Program is a focus on getting services contracts that are generally long term (typically 10 years), creating a high component of recurring income. In addition, Ian acquired the patently profitable area of the manufacture of primarily plastic coathangers and Spotless grew to become the world’s largest supplier of coat hangers to retail chains such as Wal-Mart and Target, including the first implementation of a re-use/recycling program in that nation, with factories across Asia and major customers in the US, Europe and Asia. An admired low-profile leader who inspired loyalty – Spotless had many longstanding employees.

After Ian’s knowledgeable and prudent accountant brother and business partner Bruce passed away in Jan 2012 at the age of 89, Spotless was acquired in August 2012 by private equity group Pacific Equity Partners for $723m. Under the new ownership, Bruce Dixon was appointed as CEO and the business restructured. This involved tailoring the organisations services to market sectors ensuring clients could have one Spotless management contact. Spotless was re-listed in 2014 and has since outperformed the broader market.

Spotless is one of those low-key companies that expand by dominating their market and by slowly broadening their activities base. With perhaps the exception of the so-far ill-fated venture into Stirling Properties, the company has determinedly stuck to its core areas of activity. The customer-focused culture fostered by McMullin endured at Spotless. McMullin says the essence of the business remains the same: “Your whole success depends on your service. If something goes wrong, you have to look at how you’re servicing the client. You have to have a close relationship with the client so you get immediate reactions to how they feel about the service. You can win a contract by making stupid promises, but the client is disappointed. There’s nothing worse.”

Indeed, the PE (Precessionary Effect) is experienced by the McMullins as they commit themselves to excellence to add value to their customers and employees, to serve with Courage, Joy, Trust, Integrity, Responsibility and Love. We believe that the essence of value investing is to invest in “PE entrepreneurs” like George Lucas-Gary Kurtz (Star Wars), Ben Cohen (Ben & Jerry’s Ice Cream) and the McMullins who commit themselves to the “pollination” of PE, rather than straining their eyes and heart on the “honey”, and value investors will be able to achieve compounding returns. Most importantly, Bucky illuminates that to unlock the power of PE, integrity is of essence:

“If you can do it, if it is spontaneously arousable in you to operate with integrity and really go along to love – to love comprehensibly. If you can do that, we will win.”

Bucky

PS1: While the 3-1/2 day leadership Program is highly intensive with no time to do anything else other than to be engaged and present – it starts at 9am in the morning and ends after midnight to 4am in the morning!! – I would recommend the Program to those who are seeking a positive change in managing their life, business, career and family.

PS2: We are away on an intense overseas business trip in Indonesia-Malaysia from 27 Oct till 5 November as we are involved in helping to conduct our value investing program in Chinese to a group of Chinese business owners who are flying in to Malaysia. Next week, we will be emailing our Members the investment strategy from the listed 8I Holdings Limited Interim Report that I wrote. Our Monthly Moat Report will be back in the week of 13 November. Thank you for your kind understanding and support.

PS3: We also like to share with you an article “Scouring Accounting Footnotes to Prevent Tunneling” which we penned for our local newspaper Business Times Singapore that was published on 19 Aug 2015: PDF article link on SMU website. We are honoured to be able to have the opportunity to present to the top management of the Monetary Authority of Singapore (MAS) about implementing the fact-based forward-looking fraud detection framework in a world’s first for Singapore.

Warm regards,

KB

The Moat Report Asia

www.moatreport.com

A new monthly issue of The Moat Report Asia is now available!

Access the in-depth idea presentation:

http://www.moatreport.com/members/

In the month of October, we investigate a listed Asian family business founded in 1975 that is now a leader in the foodservice industry with multiple brand format across several categories to capture a bigger chunk of the dining-out market where >12% of its local domestic population dine at one of their outlets every week, led by their flagship brand which dominates the market with a share of 57% which is 3x the value share of its next largest peer. The under-penetrated domestic market, where foodservice spending per capita is one of the lowest in Asia, paves the way for acceleration and long-term structural growth in outlet expansion, especially in the provincial areas where margins are potentially higher, as urbanization rise. Such market dominance and brand equity in generating consistent cashflow is underappreciated and deserves valuation premium.

We believe that the outstanding leadership provided by the inspiring visionary founder and his management esprit de corps team which has out-trumped the foreign and local rivals to dominate its domestic market, deserves a valuation premium. Most would have been contented to rest on their laurels but Mr. C has international ambitions, the “Maker’s” mentality to create value, by taking calculated risks to expand smartly with its own brands in selected countries and to acquire already-popular brands and work to improve their strength. The management has also fostered a powerful performance-based empowerment corporate culture and positive work environment where everyone has a sense of pride and emotional commitment in sustainably growing the company, which we believe is rare for an Asian company and is the underappreciated source of its wide-moat it enjoys in executing the scaling of the multi-brands, the product innovation, the support for franchise partners and identifying and integrating synergistic M&A targets. In essence, the company provides resilient growth with visible long run-way and upside surprise from outstanding execution track record in M&As.

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About bambooinnovator
KB Kee is the Managing Editor of the Moat Report Asia (www.moatreport.com), a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia; subscribers from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing. KB has been rooted in the principles of value investing for over a decade as an analyst in Asian capital markets. He was head of research and fund manager at a Singapore-based value investment firm. As a member of the investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value investing, macroeconomic and industry trends, and detecting accounting frauds in Singapore, HK and China. KB was a faculty (accounting) at SMU teaching accounting courses. KB is currently the Chief Investment Officer at an ASX-listed investment holdings company since September 2015, helping to manage the listed Asian equities investments in the Hidden Champions Fund. Disclaimer: This article is for discussion purposes only and does not constitute an offer, recommendation or solicitation to buy or sell any investments, securities, futures or options. All articles in the website reflect the personal opinions of the writer.

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