0002 Richard Cook - Cook & Bynum (Value Investor)

Investing in Depth

Today’s guest is Richard Cook, co-founder and portfolio manager at Cook & Bynum based in Birmingham, Alabama. Richard is a pure value investor. Both the depth and breadth of his thinking shined through in our conversation. We talked about Arca, a Mexican Coca-Cola bottler that Richard evaluated for the multi-decade durability of its business. We had a great conversation in which Richard detailed a high-level structural analysis of Arca’s business while at the same time deploying a unique brand of shoe leather research bumping along the roads of Mexico to visit local shops in order to understand the company’s execution and positioning. If you would like notes from today’s episode, please subscribe to our free newsletter. I hope you enjoy this conversation as much as I did. Feel free to email [e-mail] with feedback.

You can follow Cook & Bynum on their web site.

1:35 Path to becoming an investor: receiving 5 shares of 5 stocks as a third grade Christmas gift. Reading Roger Lowenstein’s, Buffett: The Making of An American Capitalist was a turning point.

6:00 Arca Continental is a Coca-Cola bottler based in Northern Mexico. Coca-Cola sells them syrup and they have an exclusive regional franchise to bottle and sell Coke.

8:00 How Arca Continental hit Richard’s radar screen.

10:25 Framework for evaluating businesses: circle of competence, business, people, and price.

10:30 Using old-fashioned shoe leather research. Richard drove from his home base in Birmingham, Alabama, to Mexico to visit small stores along back country dirt roads to evaluate the quality of Arca’s execution at its points of sale. “You want to understand why does the consumer choose your product and not someone else’s... and what does the company say those reasons are and do those match up.”

14:55 Identifying structural barriers to competition: Fragmentation of distribution.

22:18 Evaluating people — a critical aspect of emerging markets investing. “You usually have two sets of people. There’s management… there’s also the key shareholders, which is frequently a family or two or three and you have to triangulate on whether or not you want to be in business with this family.”

26:20 Investing in a less liquid name. “Most of the volume was going through a single broker … and we figured out that we needed to have a relationship with that broker…. You have to go find where the liquidity is.”

27:50 Monitoring areas of ongoing risk and uncertainty after making an initial investment: focusing on mega trends.

33:10 How Arca maintains its strength: investing in and strengthening the mom-and-pop store channel that distributes its Coke products.

38:24 Sizing the investment: Expected return divided by risk, which Richard defines as the how wide the range of outcomes relative to expectations may be. His write-up on avoiding losers captures Richard’s unique approach to thinking about risk. He also has a terrific write-up on the Kelly Criterion, which was originally used in information theory and has served as a guide for Richard’s focus on maximizing geometric means rather than arithmetic means in investment decisions. The original Kelly paper is here and William Poundstone’s Fortune’s Formula is a history of John Kelly and Claude Shannon’s efforts at Bell Labs in the 1950s developing his formula.

45:44 Recommended reading

• Robert Massie’s Peter the Great for providing perspective on emerging markets across history.
• CV Wedgwood’s The Thirty Years War for providing perspective on the impact that a major reduction in the cost of communication can have on society.
• Anything by Peter Kaufman (there are a lot of YouTube videos). One of his insights is that if a business optimizes toward win-win solutions, that goes a long way toward decreasing risk and increasing durability: “All the people that interact with this business, are they winning? If they are, then that’s a lot more durable. You can say a lot more about what the profitability and durability of that business is 10, 15, 30 years from now.“
• Richard was humble in not mentioning the Cook & Bynum web site. It contains a terrific Bookshelf section with recommended books as well as scores of fantastic “C&B Notes” covering a broad range of topics in investing and beyond.

Note: This podcast is for educational purposes only and nothing here constitutes a recommendation or offer.