The ecosystem and nature are fascinating to me. What I find so interesting is how systematic and interconnected it is and how species and ecosystems evolve. I naturally (pun intended) wanted to see if there were any lessons that could be applied to investment firms like CWS (and ourselves individually) from the characteristics of healthy ecosystems. After doing some research I came across the following simple characteristics that made a lot of sense to me.
They are as follows:
- Maintains its organization and autonomy over time
- Substantial vigor to quickly recover or utilize stress in a positive manner
- Reaches full life expectancy
“The young man knows the rules, but the old man knows the exceptions.” - Oliver Wendell HolmesClick To Tweet
As I reflected on these I found that these are also great principles by which to help manage CWS. It is cliche but firms need a sense of vitality and creative energy ever-present or stagnation and dull thinking can take over.Bob Dylan said that “he not busy being born is busy dying”Click To Tweet
and in many ways, I think this is true for investment management firms. This doesn’t mean they should be growing in terms of always focused on acquiring more assets when market conditions are not right. In fact, a form of growth is looking at the world from a very rational point of view and determining what the right course of action is. When the risks outweigh the rewards then it is time to hit the brakes and when rewards far exceed the risks then go like a bat out of hell.
I also believe it is important that the key members of the firm are keen on personal growth. Mastery requires deep domain knowledge and an ever-growing understanding of small nuances that can help one spot anomalies and develop a keen intuition for risks and opportunities that others may not be cognizant of. In addition, because most people cannot be nourished only from work, it is good if the firm encourages personal growth by supporting education and hiring people with interests beyond their jobs that can help recharge their batteries. In short, we believe that meaningful results and organizational improvement can only occur through people who are:
- Highly motivated
- Grounded by a strong set of values
- Working in a healthy team environment with people-centered leadership driven by a magnetic pull in a compelling direction.
With it’s important to have a balance between fresh blood and more seasoned leadership principally for the reasons cited in the quotation above, I think Schopenhauer explains it pretty well when he wrote the following in his usual somewhat blunt, crumudgery, negative tone:
“If the chief feature of the earlier half of life is a never-satisfied longing after happiness, the later half is characterized by the dread of misfortune. For, as we advance in years, it becomes in a greater or less degree clear that all happiness is chimerical in its nature, and that pain alone is real. Accordingly, in later years, we, or, at least, the more prudent amongst us, are more intent upon eliminating what is painful from our lives and making our position secure, than on the pursuit of positive pleasure. I may observe, by the way, that in old age, we are better able to prevent misfortunes from coming, and in youth better able to bear them when they come.”
Maintains its Organization and Autonomy over Time
One of the great fortunes of CWS has been our ability to remain independent for over 51 years despite experiencing a tremendous amount of growth. It is very typical for real estate firms to access outside capital for individual projects or funds to fund portfolio growth. Oftentimes, however, the principals of the firm are required to co-invest with their partners in these projects and funds. Many principals come to the point where the growth exceeds their ability to meet the co-investment requirements and they either have to slow down or bring in partners who buy into the firm in exchange for this growth capital. Our experience has been that many principals often regret selling a portion of their firm. They miss the ability to act much more independently, diverging interests can arise, and cultural differences can reveal themselves and lead to more time dealing with clashes than building the business. Our autonomy has allowed us to maintain and build a very strong culture infused with a consistent set of values and operating principles. It has also allowed us to build a very strong and cohesive team comprised of many long-term employees (average corporate tenure is over 9 years) matched with very talented younger people who bring tremendous energy and fresh ideas to keep us old fogies on our toes and challenged.
The long-term orientation that has resulted from remaining autonomous has allowed us to attract and retain great people as we make every effort to invest in the systems, training, and support staff to allow them to excel at their jobs. On the surface buying, building, and managing apartments and reporting to investors seems easy, yet it is far more complicated as one gets a deeper understanding of the business. It is now very technology-centric and requires a number of powerful systems that need to be integrated and coordinated. We have been able to maintain an organization “The CWS Way” that we believe has given us great advantages to react quickly when problems arise and see opportunities materializing earlier than otherwise would be the case.
Substantial Vigor To Quickly Recover or Utilize Stress in a Positive Manner
It’s quite remarkable to think how well the United States bounced back from Pearl Harbor and September 11, just to cite two examples of national catastrophes. Investment firms will almost always face very challenging times at some point in their life cycle. Virtually every great investor has experienced terrible downturns. This has happened to the likes of George Soros, Julian Robertson, Michael Steinhardt, Stanley Druckenmiller, John Paulson, and even Warren Buffett going through a period of underperformance. Some of the questions that must be addressed are:
- How do you handle it when your investments are not performing well?
- How do you manage your investor communications?
- Were the errors due to systematic weakness or failure, poor judgment, bad luck?
- What do you do to try to learn from the situation?
Most great investors come back very strongly after stumbling and they take a hard look at what mistakes they made in order to minimize the chances they arise again in the future.
We have had our share of challenges at CWS. We purchased properties in technology-oriented cities between 1999 and 2001 when the dot-com bubble burst and massive job losses ensued. To compound the problem we financed many of our properties with long-term, fixed-rate debt at high-interest rates that could not be refinanced for many years due to cost-prohibitive pre-payment penalties. We dealt with the problems head-on, informed our investors of the challenges we were facing, quantified the amount of additional capital we estimated the properties would need until the high-cost loans could be refinanced or the properties sold, came up with plans to monitor our performance, and communicated regularly with our investors so they knew what was happening.“Out of the hottest fire, the strongest steel is formed.”Click To Tweet
As one of our founders, Bill Williams likes to say, “out of the hottest fire the strongest steel is formed.” And this was very true for us at CWS. Our willingness to deal with the problems in a professional, straightforward manner and our successful resolution of each and everyone in ways that not only returned the additional capital plus a competitive rate of return but also the original capital plus a profit, earned us tremendous goodwill from our investors. They concluded that we were the type of organization they would want to be in the foxhole with if times got tough again and we feel the very same about them. We are convinced we are stronger and wiser for the challenges we have faced. It’s inevitable we’ll experience more but it’s our job to have the wherewithal and margin of safety to make sure we can recover quickly from it and ultimately be stronger as a result of it.
Reach Full Life Expectancy
There is not much to say here other than this tends to contradict some of the old rock and roll notions of “Hope I die before I get old” and “It’s better to burn out than to fade away.” Apparently, CWS is quite an anomaly having been in business for 45 years. According to the Bureau of Labor Statistics, 65% of small businesses make it to two years while only 44% make it to five years. Yet as an economy, all of this creative destruction serves to create a pretty vibrant and dynamic economic ecosystem that has lasted over 230 years while producing incredible amounts of wealth and dramatically improved living standards. Of course, our system is not perfect, and far too many people are barely making it, yet it does remain the envy of the world and generally seems to have all of the characteristics of a healthy ecosystem.
At CWS we have been very fortunate to have survived and prospered heading towards our sixth decade of being in business. We have tried to focus on areas where we can analyze and take advantage of opportunities that others may miss or dismiss while constantly questioning ourselves to make sure we are assessing threats and opportunities with a clear head, our people are being supported in the ways necessary for them to excel at their jobs and provide excellent service to our customers, and our investors are being served in ways that help them meet their financial goals, gives them confidence about investing with CWS, and they receive information that is timely, relevant, and accurate.
As you think about your life, do you find that you have the characteristics of a healthy ecosystem?
- Do you feel in control of your own destiny?
- Are you operating from a clear purpose?
- Do you feel proactive or reactive?
- Do you exercise?
- Do you have healthy ways of releasing stress and tension?
- Do you have a set of values to help guide your actions
- How do you handle stress?
- Do you see challenges as potential opportunities or can they subsume you?
These are just a few basic questions to stimulate some provocative thought. Presumably, if the answers are generally favorable, then the end result will be that you’ll have dramatically increased the odds of living to one’s full life expectancy adjusted for the genes we’ve inherited and for the environment in which we have lived.
Since I’m wrapping up with the topic of living a full life, I’ll end with a quotation from Virginia Woolf on the longevity of words:
“Since the only test of truth is length of life, and since words survive the chops and changes of time longer than any other substance, therefore they are the truest. Buildings fall; even the earth perishes. What was yesterday a cornfield is to-day a bungalow. But words, if properly used, seem able to live for ever.”
Perhaps this blog post will last far beyond my life, the life of our buildings, and perhaps even CWS :).