This memo was written by TDM Co-founder, Hamish Corlett, to educate and align our team on a common framework for making investment decisions. These 10 principles were crafted meticulously over several years by our entire investment team.
In the early days of TDM, Ben, Tom and I, all made decisions together. That is, to make any investment decision, we all needed to agree. The fundamental principle was that we are in the business of making high-conviction investments – investments that could return at least 3-5x our money over five years. We figured that these investments should be so compelling that the decision to deploy capital would be obvious to all three of us.
This decision rule worked very well for the first 12 or so years, but we started encountering challenges as the team grew. In 2018 our investment team was six people. By 2023, it had grown to 15. It was during this growth that we noticed that making clear, effective decisions as a team was becoming more difficult.
TDM has always been a team sport. Unlike most other investors, we make investment decisions wholly as a team. Every team member has a voice, whether you joined yesterday or you have been here for 18 years. When executed well, the team approach works, at least for us. We were getting the benefit of more capable, passionate people contributing to discussions and decisions. But it was getting harder ‘to land the plane’ so to speak.
Our once clearcut rule was no longer enough to govern our decisions. More people, more points of view, differing levels of conviction – these dynamics made it harder to achieve a firm consensus.
Were some voices weighted more than others or was it more of a ‘one person, one vote’ democracy? Should one person or a subset of the team be ultimately responsible for investment decisions?
To combat these challenges, we realised that we needed to do two things:
We set out to create two definitive artifacts that would clearly answer both questions.
The first was our Investment Tenets. This is who we are as investors.
The second is our Investment Decision-Making Principles. These ten principles codify how we make investment decisions as a team.
Inspired by Theodore Roosevelt, being in ‘the arena’ is an explicit acknowledgment that if you are responsible for being part of a decision-making process, you are expected to ‘show up’ in every sense of the term. You are prepared. Being on time for a team meeting is late. You are 100% focused on the meeting from start to finish. There are no laptops unless you are presenting to the team. Phones are face down on the table.
You are not on the sidelines. If you express an opinion, be prepared to back it up with an argument or facts. You come with the willingness to be vulnerable, to change your mind or dig your heels in with conviction. You are ready and willing to challenge, to say the difficult thing or ask the hard question.
A core TDM value is ’hunt as a pack’ and no more is this present than when we are making investment decisions – we make them together and we own them together.
We are in the business of assigning probabilities to uncertain future outcomes and making bets where the risk-reward is heavily in our favour. We have made many mistakes in the past and will inevitably make many in the future. There is no certainty in what we do. Outcomes are largely out of our control.
What we can control is the quality of our decision-making process. The integrity of this process is the foundation for our investing success. The quality of the decision-making process doesn’t guarantee the best outcome on an individual decision basis, but it ensures better portfolio outcomes over time. It has evolved and improved over the years, and it will continue to do so.
Ultimately any investment decision we make relies on two variables:
To contribute to a team decision as an individual, you must be crystal clear on both these variables and communicate them to your teammates effectively.
We know biases can have a significant impact on decision-making. Self-awareness about potential biases is important. But as the world’s most recognised expert in biases, Daniel Kahneman admits ‘I certainly do not claim to be immune from [biases]. I suffer from all of them.’ There is even evidence to suggest that the ‘smarter’ you are, the more problematic biases become.
This is why we need to help each other manage our biases. This requires thoughtfulness around the blind spots of others and a willingness to hold each other accountable for the potential biases that might be showing up. For example, to help control for confirmation bias and the endowment effect, we will assign a sub-team (a.k.a. the ‘red team’) whose only task is to make the case for not making an investment or to sell an existing investment.
There are three critically important concepts in this seemingly obvious statement:
Good debates are built on the back of rigour and humility. The difference between good and great debate is empathy. This is a high-order skill. Understanding not just your teammates’ views but also how they feel is the path to both great decision-making and great teams.
To achieve our target returns, we have to make decisions under uncertainty. One of our Investment Tenets is that many of our best investments were based on capital allocation decisions that didn’t feel ‘warm and fuzzy’ at the time.
We are constantly making judgement calls about the quantity and quality of the information required to make a decision. Not enough information and we will make mistakes; wait too long for more information and the opportunity could be gone.
Making investment decisions in the midst of uncertainty is challenging intellectually. We have found that it can be even more challenging emotionally.
Access to information is rarely, if ever, our issue. If anything, we are faced with information overload. Perhaps the most challenging aspect for us when making investment decisions is weighting information appropriately.
As long-term investors, we have to see the wood from the trees. Our returns are rarely driven by an information edge. They are driven by being clear on what information we care about and how that information impacts our investment thesis.
The framing of information factored into our decisions needs to be ‘How does this impact the long-term value of the business? How does this impact our investment thesis?’ Our Four Pillars framework was designed to help us organise and appropriately weight information.
Look no further than John Maynard Keynes: ’I would rather be vaguely right, than precisely wrong’.
Do we have sufficient margin of safety? Does the business have the right CEO? How wide is the moat? Is the size of the position broadly appropriate for the risk-reward trade-off? These are just some of the ‘big things’ we focus on.
We strive to know the businesses we invest in and the people who run them in depth and detail. But we are acutely aware of the risk of ‘analysis paralysis’. We will never ‘complete’ the analysis of a business. We need to know when we have done enough on the ’big things’ that matter.
We end where we started: We hunt as a pack. We make decisions together and we own them together.
We won’t always share the exact same points of view or level of conviction. We embrace and value disagreement. We are clear with each other about the points of disagreement.
Regardless of the extent to which we agree or disagree, we always align and commit to an agreed path forward. The path forward may mean we do more work before making an investment decision. It may mean we make the investment decision and monitor vigilantly the key points of contention.
Tom, Ben and I are responsible for taking all the views expressed and putting forward the ‘Align and Commit’ statement. We are completely open and transparent with how we arrive at the given recommendation. If significant divergence in views remains amongst the team (which rarely happens), as team co-captains, the three of us will decide the way forward.
But once the decision is made, we all commit to the decision and the path forward. No individual blame if it’s wrong. No individual accolades if it’s right.
TDM has compounded capital at 25% p.a. for the last 18 years . The goal is to compound capital at this rate for the next two decades. There is nothing more important for achieving this goal than how we make decisions. We must truly be a world-class decision-making investment team.
We agreed on the above decision-making principles around 18 months ago and have since refined them over the last 12 months. Together with our Investment Tenets, it has without doubt made a marked positive difference to the quality of investment team discussions. Both the tenets and the principles are permanently displayed in our investment team meeting room as a visual reminder.
The language in the principles is often used. A meeting will kick off reminding everyone in the team to ‘get in the arena’. We ensure each team member is explicitly clear on their view and level of conviction. We always define a decision using an ‘align and commit’ statement that everyone agrees to.
It is too early to say if these principles will help us make better investment decisions, though we have high conviction that they will. Time will tell.
If you are wondering how these are actually used at TDM, here’s a view of one of our boardrooms.