Collection: Li Lu - #20 'Timberland Co. Part 2, Investigate Like a Journalist'



[Transcript]

LI LU 00:00

So next you check sort of a why this whole thing sort of fall apart at that point – (BROKEN AUDIO) – sort of a missing – and I mean whenever you see something like that you say, wow that is not a bad, you know, if I own a whole business – remember you always sort of think yourself as the business owner – if I own this business, if I had to buy the whole business at this price, you know, you probably want to own it.


And it’s actually not a bad name right? Most people recognize Timberland as the brand. Right? So what is the reason at that time?


What turned out that was the height of the Asian financial crisis that all their competitors, especially Nike and Reebok – (BROKEN AUDIO) – see their sales especially in Asia, falling out of the cliff. And so the whole contingency is sort of all the apparels and all the retailers of shoes and international brands, anything that has exposure to Asia, all fall apart.


But what else is going on? So you try to check, you know, what other people are thinking about this? You know, you may not really listen to the advice but you want to really know what other people are looking at. So you check and see whether there’s any analyst report, turns out there’s no analyst report. Nobody cover this.


Well, for a company that is doing about a billion dollar sales is, you know, is a reasonable company, is a big brand, so why nobody kind of covers about this? Any possible reasons you can speculate? Yes?


AUDIENCE MEMBER 01:32

They don't have a lot of debt on balance sheet, maybe the company has no need from the capital market and as a result no analyst from the sell side is covering them.


LI LU 01:39

Which is good or bad for you?


AUDIENCE MEMBER 01:41

For investor is good.


LI LU 01:43

Fabulous for you, fabulous for you. And you go back to see 10-15 years – the good thing about Value Line is you go back to 10-15 years and you see whether they ever really need to that money, what did you find in the business over the last whatever years.


It’s been growing, the profitability has improved dramatically over the recent years, but has always been pretty profitable and therefore, their need for financial market is very limited. Any other reasons? What's the ownership structure? Yes?


AUDIENCE MEMBER 02:17

It's a family-owned business.


LI LU 02:19

Yes. What do you mean by family owned? They own 40% of it, how much will they control? They have a hundred percent vote basically, 98%, right?


So immediately that turned off a whole bunch of people and then you see what, you know, how the investor has been basically reacting to them in the past?


You can do a quick kind of a data search and this is really why, you know, I say that a investor should really – (BROKEN AUDIO) – investigate like a journalist, because we have a journalist here, I’m sure if I ask the journalist look at this question, you know, the first thing you would say, you would go through all of this questions that I just asked and pretty easily you can find all the answers and very quickly. And so you got to have a very active, very curious mind and you just can't really satisfy with any bogus answers, otherwise you can't really be in this business.


So you go and find that there’s actually a whole bunch of different shareholder lawsuit, now you have owner owns a 40% percent (shares) owns almost 100% of the vote and most of the shareholder doesn't have a vote and you have no analyst cover them and there are a whole bunch of shareholder lawsuit.


So immediately that if you don't know anything about the business, if you’re the 95% of the other investor, what conclusion you would have draw? What would be your conclusion? If you were the kind of, you know, a normal mutual fund or a hedge fund trading oriented – (BROKEN AUDIO) – investment manager, what would you say to this situation now that you find all this information? Please.


AUDIENCE MEMBER 04:04

There is not enough information to even touch the stock –


LI LU 04:08

Yeah.


AUDIENCE MEMBER 04:08

– so therefore, it’s not worth owning and it is too risky.


LI LU 04:12

Right. Anything else? Yes?


AUDIENCE MEMBER 04:14

I probably think, I mean the problem is temporary.


LI LU 04:17

Right.


AUDIENCE MEMBER 04:18

And the stock is small case, not liquid. I may not put my money.


LI LU 04:23

Right. Anything else? Yes?


AUDIENCE MEMBER 04:27

People (inaudible) about the liquidity.


LI LU 04:29

Yes. Anything else? You guys are not skeptical enough. Would you really worried about that management might be milking money from the company? Might be manipulating their books? Because they control everything there is virtually no constraints on what they do.


And the fact that there are a whole bunch of lawsuit, it tells you that they’re complaining about something right? So what do you do next? What do you do next?


AUDIENCE MEMBER 05:01

(Inaudible).


LI LU 05:02

Well, yes, that's one thing. Anything else? What?


AUDIENCE MEMBER 05:07

Check the court records.


LI LU 05:08

Absolutely, you download every single piece of the document of the court cases, every single case and read them from page – (BROKEN AUDIO).


And thats why I was saying that if you don't have a curious mind, if you just want to do it because you want to make money out of it, the chances are, you’re not going to do this. You have to really figure that I just, you know, I’m just so curious as to what's happening? This doesn't add up.


And you have to dig every single thing. As you read everything, as I did, the first part it takes less than, you know, a couple of minutes, you look at that one and you say that’s really what – (BROKEN AUDIO) – I mean all the question you read, it leads you to all of that.


So upon – (BROKEN AUDIO) – I can possibly find all the cases, I can find. You know, all the cases really come down to really one thing. Actually there’s basically one complaint, it's just multiple fillings that, you know, somebody really say, "Well, they used to provide some guidance and they didn't deliver and the investor get pissed off."


And so the owner also get pissed off, you can, you know, vividly see his defense. You can get a sense of his personality by reading those documents, he said, you know what? I’m not gonna do this anymore, I’m not gonna talk to the street, I'm not gonna give any guidance, I don't need a damn dollar from anybody else. The business is wonderful.


Okay, so that removes a big cloud. So the next thing, what do you do? Well, if they really run this way then the next question is, okay, maybe they’re not crooks, but are they good managers? How do we know that they are decent people? How do we know about that? How do we go about to find that? What do you do?


AUDIENCE MEMBER 07:02

You look at the margins like, you know, you’re not sure the numbers are correct because they are managing the company, but they’re making a profit and if they are audited.


LI LU 07:16

Sure. Anything else you can do? How do you know his personality? Yes?


AUDIENCE MEMBER 07:22

You try to call his neighbours. (Laughter)


LI LU 07:26

Good idea.


AUDIENCE MEMBER 07:27

(Inaudible) Directory will give you their names and phone numbers.


LI LU 07:31

Great. What do you call – what do you tell the neighbours? (Laughter)


AUDIENCE MEMBER 07:34

I tell them the truth that I'm an investor –


LI LU 07:35

How, yeah –


AUDIENCE MEMBER 07:36

– I’m concerned – well, one of the markets concerns maybe – is that management may not be honest and I would like your opinion on them. (Laughter)


LI LU 07:44

Well, what if they just say go to hell. You hang up?


AUDIENCE MEMBER 07:48

Well, I'll try –


LI LU 07:51

most people will tell you "go to hell, I'm busy." (Laughs) But it's nice try. Anything else? Yeah?


AUDIENCE MEMBER 07:59

You just Google their names to see.


LI LU 08:01

That's right but there was no Google back then. But that's a good idea. Now, you want to – the point is you got to really go – (BROKEN AUDIO) – As I say again and again, you know – just happened to have a journalist here – but I always view this job as investigative journalist.


Most people who have build businesses also have a big personality, have a history you can go to audit, have leave a trail of evidence of what kind of person they are and what they have done, how they deal with different situations.


It is not that difficult but you have to – (BROKEN AUDIO). Most professional managers wouldn't really consider that as a part of the business, but I'm telling you that you’re the 5%, if you end up to be the 5%, maybe you’re not. But if you try to be that 5%, then that’s what you’ll do.


You go to see their community, you go to the church or synagogues, and you go, you know, you go visit everybody, you sort of get yourself to be a part of that. And you introduce yourself to all their friends and families and neighbours, don't just call them, go there, spend a few weeks there. It’s worth it.


Just spend as much time you can possibly be to try to find him, find what he had done to his community, what does neighbours and friends tell about – I mean, say about him. That tells you more about his personality.


And you want to find the family dynamics, this fellow actually only graduated high school, never really went to college, relatively simple guy. But a nice decent guy, has been very philanthropic, go to synagogues, but not terribly devoted.


But more interesting thing, he has a son who actually went to business school as well, was actually my age at the time. He was in the mid 30s, early to mid 30s and as the time already assumed to be a COO of the company. So I did all the things that I suggest to all of you, I did it further and I find that what this son – all the board of the father and son on.


And I find one of the board the son was on actually run by a friend of mine. So I invite myself to be on the board, so I join on the board along with the son and would become very close friend and then I really know what's going on in that family. It turned out this is one of the most admiring family I’ve ever met. There are people of the highest integrity, they’re wonderful and they also happen to be brilliant businessman.


So after all of that, the stock actually still trading right around 30s. And so that's sort of you kind of answered – you sort of know, you know, did I miss anything? You sort of say, probably not, I didn't miss anything. The other 95% just don't know or their industry imperative does not allow them to do anything about it.


(Source: https://youtu.be/y3c2PKupiu8)

 

[YAPSS Takeaway]

Have an extremely curious and active mind if you want to be in the top 5%.