I recently had a conversation with a long time friend and client that got me thinking. A successful CEO, he told me that sound business is not about increasing returns, but about reducing risk. “The more I reduce risk,” he said, “the easier my life gets.”
The more I study Canada’s most successful companies I couldn’t agree more. When I see sustained track records of positive growth, I don’t see companies that are making high risk, high return investments. In fact it’s the opposite. I see Canada’s most successful business minds are the ones reducing risk, making low risk, high return investments. They’re spending their corporate dollars not on make-it-or-break-it moonshots, but on investments that have reasonably sustainable and known cash flows.
Not many people know that the total amount of capital that went into Microsoft before its IPO was a little under $100,000 (valued in today’s money). It’s almost unbelievable to think that such a successful company was grown from such a small amount of capital. Picture yourself there… while making an investment into a kid in a garage seems risky, the capital involved was so small that any investor could walk away relatively unscathed if things didn’t work out. Keep in mind that while there was much uncertainty around Microsoft’s future in the 1970s, there wasn’t much risk. The company was already generating large amounts of organic cash flow. Those are the types of opportunities North America’s most successful CEOs see best: low risk input, high potential output. The uncertainty of an investment is a different feature than its risk.
Although it’s hard to prove, I believe most CEOs think of themselves as “company operator” – someone to keep the lights on, keep the business operating, and manage the people. However, I believe the best CEOs take on one additional role: capital allocator. It’s one thing to keep the lights on and the money flowing in, it’s quite another to allocate that money into something that keeps the business growing. It turns out most operators aren’t too good at allocating, and most allocators aren’t too good at operating. So while being an operator means sustaining a business, being an allocator is necessary to grow it.
Finding these dual-breed CEOs that understand the operator/allocator identity is not easy. But when we do find them, we know we’re close to finding a low risk, high return investment that will really start to shine.
Ben Kizemchuk is a Portfolio Manager & Investment Advisor with Altus Securities Inc. in Toronto. He offers financial planning and investment management for high net worth Canadian investors. Ben focuses on high quality investments, the Growth and Income Portfolios, low risk investing, and reducing tax.