An investor and author explains the ‘founder effect.’
Hi, and welcome to The Long View. I’m Dan Lefkovitz, strategist for Morningstar Indexes. Our guest this week is Lawrence Lam. Lawrence is managing director and founder of Lumenary Investment Management based in Melbourne, Australia, a firm that specializes in founder-led companies globally. Lawrence is also the author of a new book called The Founder Effect. Lawrence has also been an investment banker, a derivatives consultant, and a financial regulator. He holds degrees from the University of Melbourne and is a lifetime basketball player.
Lumenary Investment Management
“Four Signs a Founder-Led Company Isn’t Worth the Hype,” by Lawrence Lam, afr.com, May 2, 2025.
“Lessons From the Rise and Fall of Founder-Led Companies,” by Lawrence Lam, firstlinks.com, March 26, 2025.
“Yvon Chouinard: The Founder of Patagonia,” by Charlie King, sustainabilitymag.com, Oct. 4, 2024.
“Chemist Warehouse Founder Reveals His Success Secrets,” by Lawrence Lam, Morningstar.com.au, May 30, 2023.
“Social Loafing in Psychology: Definition, Examples & Theory,” by Riley Hoffman, simplypsychology.org, Sept. 7, 2023.
(Please stay tuned for important disclosure information at the conclusion of this episode.)
Dan Lefkovitz: Hi, and welcome to The Long View. I’m Dan Lefkovitz, strategist for Morningstar Indexes. Our guest this week is Lawrence Lam. Lawrence is managing director and founder of Lumenary Investment Management based in Melbourne, Australia, a firm that specializes in founder-led companies globally. Lawrence is also the author of a new book called The Founder Effect. Lawrence has also been an investment banker, a derivatives consultant, and a financial regulator. He holds degrees from the University of Melbourne and is a lifetime basketball player.
Lawrence, thanks so much for joining us on The Long View.
Lawrence Lam: Really looking forward to the chat.
Lefkovitz: Likewise. Well, first I thought it would be good to start off by asking you how you became so interested in founder-led businesses in the first place. What was the genesis of this specialty?
Lam: Yeah, it’s a good question. I put it down to my father, really. He started his own mortgage-broking network quite late in life. I think it was in his late 40s or early 50s. And he started with one telephone and a laptop whilst I was in high school. And just watching him do that from scratch at the time as a young fellow you don’t really pay too much attention to what your parents are doing. But in retrospect now, all those annoying times that he used to have in the house, like he’d block out the dial-up modem to make a call, or he’d have meetings on the backyard porch with clients when he got started. All those annoying things kind of wash through and you think, hey, he actually did a fantastic job. And that sort of subliminally, I think, shaped my mindset on founder-led companies, watching it actually happen in front of me.
But you put that aside as you go through university, and you forget about that. But as I’ll mention later on, it kind of kept becoming a recurring theme through my life. So, when I left university with an actuarial science degree, I got a job at the federal regulator, APRA, the Australian Prudential Regulation Authority. And effectively, they regulate the whole financial-services industry in Australia. And this was pre-GFC. So quite boring, but quite an important job because Australia came out of the GFC in quite a good fashion, and I think still to this day has not had a recession in something like 20-odd years. So, they’ve done a fantastic job.
And during my time there as a first job, one of the great things is that you get exposed to senior executives. You start dealing with them from Day One. You go and visit their companies and they’re presenting all these kind of strategic high-level, sometimes detailed stuff on operations, risk management, what their growth plans are. And that as an exposure to that level of seniority very early on was invaluable to me. But in the end, I felt it was a little bit boring because at the time it was still a government job. I felt like I learned a lot on the public side, and I wanted to develop on the business side, the private side.
And so, I joined Deloitte. At Deloitte, I got exposed to a whole range of companies—private, public. And one particular company stood out to me. It was in country New South Wales, which is a state in Australia, and they did wine, they’re a winemaker. And what stood out to me was the numbers. Because in a place like Deloitte when you’re giving financial advice, you’re looking through the financials a lot. And they had very little debt. They were expanding when others were contracting from the GFC. They were looking globally, but yet very conservatively managed. And importantly, the logo, the name of the company still had the surname of, I think it was the grandfather who founded the company. And so, I thought, hey, what’s this company? It’s a private company. It’s doing quite well despite quite a competitive industry here in Australia in winemaking. But they’ve cracked this kind of formula to scale, and they were acquiring businesses when others were stepping back.
I did my master’s degree during that time in finance, and I started investing personally. And those two dots, having the experience with my father and then watching this winemaking family, it really sort of made me think, hey, why don’t I start looking for more of these companies in the Australian market? And that’s what I started doing personally. I looked at companies that did forward-drive accessories. I looked at mortgage-broking companies, one of which was founder-led at the time. And then my interest grew in that area as I started to become successful on a personal level.
After Deloitte, I left to join RBS and MUFG, both very large global banks. And what it taught me was actually quite interesting. It wasn’t so much the technical side, which I spent most of my career in investment banking—I learned a lot about technical. But it was actually about human behavior. That was what I learned the most about during my time there. And it was the opposite of these founder-led companies I had been researching and studying.
In fact, it was very transactional. I still remember to this day, bonus season, where you had people in furtive conversations in rooms trying to adjust goalposts and KPIs, trying to meet their short-term incentives so they can take home a big paycheck at the end of the day. And it was such a stark contrast because the sort of transactional versus some of these companies that I’d been investing in and seeing earlier in my career and watching my dad’s business flourish was that they were the opposite. They were totally not about gaming the system. They were about actually producing real value over a long period of time. And eventually I left to start my own investment firm in 2017, Lumenary Investments. And our focus is on looking globally founder-led companies. And I’ve really honed in and expanded on my personal investing to take it to all markets and been doing it for about eight years now.
Lefkovitz: And do you invest exclusively in founder-led companies or is it companies that have founder-like managers?
Lam: Yeah, the flagship fund is exclusively in founder-led companies. I have a second strategy that is much more diversified and that one has an emphasis on founder-led but not exclusive. But certainly, the flagship that I started in 2017 is 20 to 30 stocks in the portfolio, very concentrated and only founder-led companies around the world. It’s probably about 20% in the US and the remaining 80% split evenly between Asia and Europe.
Lefkovitz: Well, you mentioned in the context of that winery company in New South Wales, low debt and obviously founder-led companies the founder knows the business inside and out. But maybe you can talk through the course of you observing so many of these types of companies, what you see as the common attributes for founder-led companies?
Lam: Yeah, I think what you’ve mentioned—intimate knowledge, close to customers, low debt, those are sort of the telltale signs. I guess there’s a level of vertical integration. A lot of these companies don’t like to outsource things. They want to do things themselves, and they want to solve the problems themselves and so they naturally evolve into doing the whole vertical chain. So, for example, if you look at company like Hermès, the luxury brand, they do everything in-house and it kind of evolves that way. They have IP over the whole process. They can quality-control a lot better.
One other thing I’d say is, obviously conservative balance sheet management. We’ve seen that with companies like Fortinet, which is a listed company in the States, a software company. They often take very calculated risks. So, it’s not about big risk, but very calculated. And in terms of that attention to detail, we’ve seen that time and time again it can manifest in different ways. You saw that with Yvon Chouinard at Patagonia, his obsessive pursuit of building a brand that is about sustainability and not harming the environment to the point where now he’s actually returning all that cash into not-for-profits.
And the other thing I guess is an ability to set up their organization in a unique way and to remain close to customers, but yet quite entrepreneurial still and fend off that natural inclination to become bureaucratic as you get larger. So, companies like I mentioned in the book, Flight Centre here in Australia, but there’s also one called Reply Spa, which is an IT consulting company in Italy, founder-led. They set their organizations up in smaller teams, more agile and encourage entrepreneurs and encourage that founder mindset.
So those are the key things that kind of manifest and show up for me time and time again as key traits. But from a practical perspective for investors, the end result is that it has to show up in the numbers, in the returns that you’re getting in the growth in earnings, the growth in revenue, and that level of compounding that you see over very long periods of time. So, if you look at fast retailing, Uniqlo, they’ve done phenomenally well, still led by the founder. There are heaps of other companies through the world, and I estimate there’s probably about a thousand plus of these founder-led companies.
Lefkovitz: Publicly listed companies?
Lam: Yeah, that’s right. Publicly listed. And they interestingly appear probably—there are different types of founders, and they’re probably more dynastic in Europe and Asia. They tend to want to hold on to the company a lot longer than, for example, in the States where in the US a lot of founders have a mentality of growing market share quickly and then selling down. It’s rarer to find that true builder, a compounder stay in the United States, I find.
Lefkovitz: That’s interesting. And what did you have a policy on—what about companies where it’s passed down to the next generation?
Lam: Yeah, obviously, you want to hit the gold standard where you’re kind of capturing the essence of the founder effect, which is, you’ve got the hungry founder there with a very long runway. And all the other checkboxes that you look for as an investor tick off as well: great company, great business, market leadership, all that sort of stuff. But you may not be able to hit all those things. And so, sometimes, yeah, you do find yourself looking at companies with a second-generation owner. And the one that comes to mind is FUCHS Petrolub in Germany, and they’re now in their third generation and still very successful.
If the operating system, the guiding principles that the founder started with still exist in the company and still are very strong—for example, if you look at Apple, a very obvious, big example, then that culture should proliferate over many generations. A lot of European companies are up to their fourth or fifth generation, and then they convert their holdings into a holding company rather than an individual family trust, for example. And so, yeah, it is definitely possible to find these companies that continue the legacy if not grow it further. Samsung is another one that’s been able to do that phenomenally well.
Lefkovitz: That’s interesting. What do you make of the common criticism of founders that sometimes the visionary, the entrepreneur, isn’t the right person to manage the company or to take the company to the next level?
Lam: Yeah, I’d say it’s not about visionary or whether they can make an assumption between them being a visionary and them not being able to take it to the next level. It’s not so much about that. It’s more about motivation. It’s about distinguishing the different types of motivation, the ones that want to truly build a company for a very long period of time, or the ones that are interested in flipping the company. So, I call them flippers or the builders. And for investors, you need to stay vigilant—motivations can change over time because it’s human nature, and to watch very closely what’s happening with companies.
I would argue a good recent example is Elon Musk moving into government. One could look at that as a sign that, hey, he’s putting his personal ambitions ahead of the companies that he’s involved in, and that motivation has changed. No doubt that when he first joined DOGE that he would dedicate a significant effort to that and therefore take away the effort with his existing companies. The best founders can replicate their operating system, but they’re not so much of an app, but they’re actually the operating system and they design it. And that’s how they structure the organization. A lot of them have this flexibility to do things differently. They own a significant share, so they can problem-solve in a unique way.
There, of course, are red flags that you want to look for and in particular, large equity sell-downs, that’s a red flag. And all those Palantir investors out there, keep your eyes open and stay vigilant. And then looking at that changing person versus company motivation or one that has an org structure that is bottlenecked by the founder. All these considerations are red flags to look for. But of course, as investors you can mitigate against that. You can rotate companies; you can trim some profits and move capital to another company. Founders are good at hyping up their business, so you don’t want anything that’s too overhyped and maintain a deep bench of founder-led companies that you switch between. And then of course monitor—monitor the portfolio closely, monitor the equity movements closely.
Lefkovitz: So how do you look through hype? I imagine a lot of these guys are very charismatic. How do you avoid being lured by their charisma?
Lam: Yeah, they’ve started their business because of an ability to influence the market. And I outline some objective key things that investors can look for. I have a framework that’s based on three pillars that I’ve observed in a lot of successful founder-led companies and their objective. Because the question of things like motivation, cognitive biases, alignment with investors, those are very subjective type of topics. But if you have some objective things to look for, you can really solve that in a scientific way.
So, I think that in terms of looking for founders that are genuinely there to build for the long term, you really want to look at not just the hype, but all the underlying facts that even an outsider can see and identify. So, in the book, I identify three key pillars. One is judgment and decision-making and being able to make bold decisions. The second is being aligned with investors. Their motivations are in line with what investors want over the long term. And the third thing is to be able to influence internally their staff, the organization, and therefore influence externally media shareholders, customers to actually want their product. And the best of the best can do that.
Lefkovitz: And it’d be interesting to know—you mentioned some metrics earlier that you look for and how you quantify these things. But it’d be interesting to hear a little bit more about the types of indicators that you use to assess each of these pillars of the framework.
Lam: Yeah. The evolution of my process has always started with the quantitative side of things first. I’m always looking for companies that produce those continual growth in earnings, the conservative balance sheet, all those traits that we mentioned that are prevalent with founder-led companies that show up actually in the financial statements. And then once you identify those, and you may have thousands of those companies, you can very quickly see through the share register if they are founder-led quite quickly. And from the couple of thousand that you see, you narrow down quickly. For me, I narrow down to thousands, 2,000 stocks very quickly on a global level out of say 40,000 to 50,000 global companies. And then next comes a qualitative analysis that any investor would do and have their own checklist and process for monitoring.
For me, what’s important for me is the founder and the management team definitely need to follow the framework that I’ve written about in the book and score very highly in that. I want them to have a strong market position, very diversified customer base and supply base. And to really capture that essence of the founder effect to really be involved in new products and services. What I’ve seen in the past happen is some companies that I’ve invested in are fantastic companies growing, but then they’re in some old-generation businesses like producing caliper brakes for cars, producing petrochemical products and producing fertilizers. And that can be a trap too, because then some of these companies are just content with doing what they’ve always been doing and almost a bit too stagnant. So that’s why you want the new products and the new services and trying to find the companies with that pricing power and that opportunity where they can compound and fully achieve their potential under the founder.
Lefkovitz: Yeah, I’m reminded of that famous Peter Lynch quote that, “You should invest in a company that’s so good, even an idiot could run it because sooner or later one will.” I think Warren Buffett has quoted it as well. So, the idea is you should look at the structural features of the company and maybe its competitive advantage. We use the economic moat framework here at Morningstar. What do you make of that, that it’s less about the people and more about these structural features of the company?
Lam: Yeah, I love Peter Lynch’s quotes, especially the one about not watering the weeds and pulling out your flowers. Love that.
Lefkovitz: I don’t know that one.
Lam: For me, it’s about these businesses—get them before an idiot starts running them. Someone started that business. Someone founded that company. Get in at that time while they’re still running it before the idiot gets in and invest early when they’re still running it. That is the essence of The Founder Effect and really spotting when that motivation changes, if it does, then get out and then let the idiots take over.
Lefkovitz: So, you mentioned some red flags earlier, insider selling. You mentioned bottlenecks. Can you talk a little bit more about the things you look for that put you off?
Lam: It’s exactly those red flags where you’re really identifying a change in motivation or an inability. As you mentioned in that early question, where a founder cannot operationalize and scale their company. So, for example, motivation changes if there’s equity sell-down—a large stake, not a small stake, a large one That is obviously influenced by something, some sort of decision-making that they’ve had. Looking at their involvement in other things. So, Elon Musk is a good example. There’s also an example here in Australia recently of a founder, the founder of WiseTech, who was embroiled in some allegations by various women about sexual misconduct and over-leveraging of his power as a billionaire. Things like they’re unable to harness the true potential of their company and their personnel. So maybe the organization structure isn’t right. They can’t scale, everything still goes through them and they’re the key decision-maker and they control everything. And that becomes a problem.
So, there are objective things that I run through more of these in the book as well, because ultimately, it’s about—we want founders to be able to have an influence over the company but not be the main person of the company. And so, that naturally involves some level of handoff and naturally involves a level of group decision-making, which if done well, can be optimal because it can scale the company; if not done well, can dilute that founder effect and it can become more bureaucratic and more, shall I say, more like a non-founder-led normal company.
Lefkovitz: Well, it’d be great to hear a couple of case studies. Chemist Warehouse is one that you wrote about in the book, which I thought was really interesting, and you’ve actually published an interview of its founder on Morningstar’s website in Australia. What is it about that company and its founder that you find so compelling?
Lam: Yeah, I’ll just give a bit of background on the company. Chemist Warehouse is probably the largest pharmacy retailer here in Australia. And they only started in 2000, so very recent. The pharmacy business here in Australia is extremely challenging, very regulated. So, you have to have a pharmacist in every store. They have to operate a certain time. There are restrictions on how many shops, how many pharmacies a pharmacist can own. So that inhibits scaling. But Jack Gance, who’s a co-founder with his brother, Sam Gance. Jack Gance, I interviewed, the main guy behind the business, the front-facing side of the business, he started with three stores, and today, they’re producing about $2 billion worth of revenue, profit of $300 million every year, 650 stores in Australia, New Zealand, Ireland, China, Middle East. And they were privately held for the first 24 years from 2000 to 2024, and then they listed last year via a backdoor listing. And so, hugely successful. That’s the backdrop in which they operated. So, their achievement has been huge in itself.
But how they got there was quite interesting, because Jack Gance actually started another brand before Chemist Warehouse. He started Le Specs, which is a sunglass company now. It’s a global company. And he started selling those as a qualified pharmacist. He was selling those to other pharmacists. And as he describes, just driving around Melbourne hustling, demonstrating the sunglasses, driving and delivering the stock out of the back of his car. So, there’s a level of resourcefulness that they have and a level of grit that they show. And that led eventually to an advertising deal, quite creative. So back then—this was in the late 70s—TV stations were quite disparate here in Australia. They weren’t national channels. And so, he was able to find an agency that could tap into a local TV station. But he didn’t have money to pay upfront for all the advertising, all the content creation, filming and the branding, and actually coming up with the name Le Specs—he didn’t have that. So, he actually approached them and said, hey, I’ll give you a share of my sales effectively as a partner. And back then, it was quite exciting for these advertising agencies. Now no one would do that. But back then it was quite unique. And he managed to scale that business, get on TV, build the brand. without much initial outlay. And I mentioned before about taking calculated risk. This is one key example where very calculated risk, very mitigated downside, but huge upside. And it paid off, Le Specs is now—he sold it eventually, but it’s still a global brand. And with that money, he built up this chemist pharmacy empire.
And the way he did that was he flipped the script. So usually for a pharmacy, before Chemist Warehouse came along, about 70% of all revenues were behind the counter, meaning drugs and prescription medicines and things, 30% in front of the counter. So, health sanitary products, Band-Aids, first aid, all that sort of stuff was only 30%. Now they have totally flipped the model. They’ve become more of a retailer than a pharmacist. So, for Jack and his team, they have started challenging supermarkets. They have put in a wide selection of vitamins, a wide selection of fragrances. So actually, high-end fragrances they sell at very competitive prices, in fact, better than department stores. And so, this model has really taken off and he’s been able to find a clever way to scale that despite the restriction in number of pharmacies. So, he does that sort of franchise model. It wasn’t done in Australia before, but in 25 years he’s come from three stores to really dominate the whole industry in Australia and now expanding overseas.
So, there’s a level of resourcefulness. There’s calculated risk-taking and there’s this long-term builder mentality, and I would say also attention to detail. To this day, as I was interviewing him, he still brings up the weekly sales reports of every store and he looks through them line by line. So, there’s that care that he has. I’ve told this story in other interviews about him where he’s telling me a story about vitamin CEO that he’s talking to, and this vitamin CEO supplies Chemist Warehouse. So, they stock a lot of things from this vitamin company. In other words, there’s some buyers in Jack’s team that select particular vitamin products and decide to stock it in Chemist Warehouse stores. And he’s talking to the CEO and saying, “Hey, do you know my buyers? You just started, you should go speak with my buyers.” And the vitamin CEO, who’s a non-founder, says, “Well, Jack, that’s not my level. I kind of liaise with other CEOs and other executives. I don’t really talk to the buyers.” And Jack says, look, that mindset, he doesn’t really understand. It’s not how he would run his business because he’s saying it’s a person-to-person thing, not a numbers or ranking sort of thing. So that sort of exemplifies his mindset.
Lefkovitz: Interesting. Well, you mentioned the company was private for a very long time. Did you cover it while it was private or did you only get to know it when it came to market?
Lam: Yeah, I actually interviewed him right at the cusp. So, going to his house I would see business cards from bankers trying to win that deal to help enlist. And yeah, I obviously had known of the brand for many years being a customer as well because they’re everywhere, literally everywhere. So, if you come to Australia, you can’t not see a Chemist Warehouse. I’ll also say that I’m not an investor post-IPO. They’ve done, again, a unique solution with their listing. They didn’t end up doing an IPO. They did a backdoor listing. They had a reverse takeover from a supplier to them. So, a medicine supplier called Sigma, technically acquired Chemist Warehouse. But that’s how they became listed.
Lefkovitz: I did want to ask about private markets, which have expanded so much. There’s so much VC, private equity, capital, and a lot of companies are choosing to stay private when they would have gone public 15, 20 years ago. Do you still feel like there’s an ample supply of publicly listed companies? Do you start paying attention to companies when they’re private?
Lam: Yeah, absolutely. The types of companies that attract me are founder-led companies that are profitable. And if you look at the VC market, I would say the large majority of ones that are pre-IPO aren’t profitable yet. And because of this sort of delay in listing, I think it’s actually a good thing. I think in this market environment people are more conscious of running their businesses in a profitable way and being able to demonstrate a profit and not just being able to sell a vision of a company. And so, once they do list, hopefully they’re more mature.
And I have seen that globally. Since probably two, three years ago, we see many companies switch from market share maximization mode into more of a mode of, hey, I just want to really cut the OpEx and deliver that profit that I’ve been promising investors for so many years. And that’s a good thing, especially for my universe. I think that there’s over 1,000 of these founder-led companies, high-quality. On my radar as a shortlist there’s 200. And I keep a deep bench where I can say, hey, this company is overhyped, but this one is undervalued. So, let’s trim that one and buy the undervalued and have that Peter Lynch mentality of rotating the portfolio.
Lefkovitz: There’s another company I wanted to ask you about, a US company called Arista Networks that a lot of our listeners will be familiar with. I was surprised to learn from your book that wasn’t the original name, but I thought this was a really interesting story. Can you talk about it?
Lam: You’ve stolen my thunder, Dan. Arista, yeah, that’s an interesting fact. Arista is—obviously, many listeners in the US would be very familiar with what they do now. But not many know that Jayshree Ullal, who is the current CEO, she left Cisco to join that business. And it was under the call of Andy Bechtolsheim, who she’d previously worked with at Cisco. And it’s a really interesting case study because Jayshree isn’t a founder technically, but she knew Andy way back, even before when she joined Arista. And she’s run it like a founder. She’s got the founder effect. She has accumulated about 3% ownership of the company over time, and they’ve just been running a very, very calculated, sensible, and conservative way. They have very minimal long-term debt. They’ve controlled their marketing spend, and they’ve really got this compounding mentality and building over the long term.
So, you see that sometimes. For example, Arne Sorenson at Marriott. He wasn’t the founder, but he was the first externally brought-in CEO at Marriott. And he did a phenomenal job with that kind of mindset of being guided by the founder. So, it’s possible. Arista absolutely considers Jayshree as an outlier in the industry and with 3% holding she holds more of the company as a percentage than some other founder-led companies that are looking to sell down their holding. So that R&D focus that she has put in exemplifies that short-term pain for long-term gain mentality. And that’s what Arista have built over many decades, and it’s worked well for them.
Lefkovitz: You talk in the book about group cognitive biases as something to look out for. Maybe you could talk a little bit about what they are and what some indicators are.
Lam: Yeah, I touched on that before when I said that we want founders to be able to scale their business. Scaling requires you to infuse an operating system in the company and not have to run it as a sole person and be a bottleneck. And so therefore you need to rely and influence other people to continue the philosophy that you’ve started. And therefore, you need people, and you need a group of people, executive management team to make decisions. And the process for decision-making is extremely important for founder-led companies because it’s make or break. Are you able to continue the philosophy or are you not? And with any groups of people, you have cognitive biases and in particular, group cognitive biases, because cognitive biases by themselves—we all know them when it’s all in our own head. But imagine having a team of people. And so, I point out in the book, these cognitive biases are weaknesses in decision-making. They lead to errors.
And so, for investors, how can we spot teams that are prone to error? What are some objective things we can look for? I kind of outline those things scientifically in the book. But let’s give some examples. So, the very common one is avoidance bias. In a group scenario—I’ve been involved in boards where you see it, and someone has a very good idea. They say, “Yeah, look, why don’t we do this? It’s actually going to put the company forward, progress us.” We agree with management, for example. But then the avoidance bias is where the group—and it only takes one person to say, well, what about this? What about if we miss this? And they start as a group, you kind of gravitate toward the lowest common denominator. You become very risk-averse. And founder-led companies are great because they have fought off that risk aversion by being calculated risk takers through the whole history. But if you start introducing this bureaucratic mindset of risk aversion, then you start diluting that effect.
In a group, there’s something called the Ringelmann effect, which is quite interesting. Actually, it’s about a group cognitive bias called social loafing, where an experiment was done ages ago by a scientist called Ringelmann. He asked people to pull on a rope via tug of war, and then he asked the person to join a group. And he found that the force exhibited per person was a lot less when you’re in a group, meaning that you think you’re in a group and you don’t need to push as hard because you’ve got the backing of everyone else and someone else has got your back. And so, there’s this social loafing happening, and you see that in the corporate world as well, where people will say, well, that’s not my remit as an executive, someone else has got that. That’s not my remit. Whereas, say, for a founder, it would be the total opposite. The example I gave before of the vitamin CEO, you would absolutely want to have everything covered, cover all the cracks.
And I know this firsthand, there’s commitment and momentum bias in a group. I know from my time in global banking that these large banks have a very bureaucratic way of decision-making, especially in MUFG, one of the world’s largest banks, but also one of Japan’s largest banks. And Japanese decision-making is all about momentum because once you start getting those sign-offs up the line, there’s no going back, there’s no changing of that decision, even though sometimes it may be a poor choice for the company. And so, you get this suboptimal decision-making because of the process, because of what’s involved. And so, for investors, it’s about how can we deduce these weaknesses, the likelihood of weaknesses, and are there better structured teams that we can observe that are less likely to make these mistakes? So, for all those details and the scientific approach behind that, I’ve outlined that in the framework of the book.
Lefkovitz: Yeah, interesting. I wanted to ask you about capital allocation. One of the key roles of a manager is to strike the right balance between reinvestment in the business and acquisitions and then returning cash to shareholders in forms of dividends or share buybacks. I wonder if there’s anything that you’ve noticed that’s different about the way founders allocate capital in their businesses or the things you look for in that regard.
Lam: Yeah, it certainly goes hand in hand with that conservative approach to managing the balance sheet. And an interesting fact, what I came across just recently is, in cities, so the global urbanization trend is happening, and in cities when the population doubles, productivity per employee increases by 15%. But when we double the number of people in a company, that doesn’t work. And so why is that? A lot of companies have tried to solve this issue of how do I scale and grow my team but maintain productivity if not increase it just like a city. What is the difference between a city and a company? Well, a big part of that is around decision-making around capital. How do you allocate capital within the company?
If you look at cities, when they reinvest capital, they grow. So, you invest in things that give off a higher ROI. So, for cities, it’d be infrastructure, roads, transportation. It would be things like education. The equivalent thing for a company, what could they do with their capital that could lead to more productivity gains? They could look at how they structure their organization. What can they do to improve the company infrastructure to make things more efficient? We’re seeing that now with implementation of things like AI and things through almost all companies. And so, that is the optimal way to allocate capital is to reinvest it at a higher ROI. And what you don’t want is low ROI reinvestment such as large M&A deals that are highly speculative and require a lot of time and cost¸ things like very nice offices that don’t really add any ROI. Just like in a city, you don’t need to overspend on art and all those nice—not to say that you don’t have a nice-looking city, but you don’t need to overspend on it.
The next thing is the acquisition side of the equation when you have excess cash that you just acquire companies. And what I’ve seen with founder-led companies as I mentioned earlier is that they rarely bet the farm. They always have control over how much they allocate to an acquisition.
And then lastly, returning cash is not their primary focus. In fact, you see a lot of founders with very low base salaries. And we all know of Warren Buffett, the most famous one. There’s Atlassian. Even Jeff Bezos, I think, has a very low base salary. And in terms of returning cash, that’s not the top-tier way to return cash to investors. But if they do buybacks—founders know when their stock is generally undervalued, and they’ll do buybacks. But for other, call it non-founder-led companies where there’s a different incentive, and say the incentive may be to pump up your EPS, your earnings per share, well, then maybe you implement buybacks consistently and that will increase your earnings per share.
Other ways that I’ve seen, for example, at Tencent, for example, which is a founder-led company listed in Hong Kong, they’ve been shrinking their share base over time. They’ve been buying back consistently at fair prices, reasonable prices. And then, are there other higher-return options? But obviously, in order, you prefer reinvestment than acquisitions with a sensible allocation and then lastly, the financial way of returning cash. But you want to do it in a smart way.
Lefkovitz: Do you always interview founders before making an investment?
Lam: Not always. Not always because sometimes you don’t have access to them. But definitely, you have access through their management teams. And I remember interviewing one manager who’d been with a founder in Japan. And I wrote the story actually in the book where he said, the founder is in his 70s, but he’s like a young kid. He has no family. He’s got no kids. All he does is he goes for a fishing trip in Wakayama for a week in a country, Japan, and then he’s recharged his batteries and he’s like a young kid. His first goal was to list the company. It’s now been listed for 10-plus years and now he wants to take it global. And so that’s what motivates him. That’s the intrinsic motivation that I discuss in detail.
Lefkovitz: I just wonder when you’re sitting down to interview, when you do have the chance to interview a founder, if you have certain questions that you always go to, or how you structure that interaction?
Lam: Yeah, absolutely. I always like to get beyond the spin, the marketing hype, but they’re always got the facade on because I’m an investor and they know that. And so, you always try to get past that. You get past that by asking very factual questions, very objective questions. How many people are on your board? What are their roles? How do you think about the product development cycle? What time frame? Very objective questions that are very factual. And put your legal hat on and imagine you’re sort of cross-examining someone and not allowing them to give you the corporate fluff.
Lefkovitz: Yeah. Interesting. Well, I wanted to wrap up, Lawrence, by asking you about basketball. I know you’re a very avid basketball player. You’ve been playing for a long time despite injuries. What is it about the game that has kept you playing into adulthood? And what kind of parallels do you see between basketball and business?
Lam: Yeah, I love playing the game. I love watching it, and I love playing it. It’s one of those sports—it’s high participation and high enjoyment. Some sports you’d never play, but you love watching, but basketball is not the case. And for me, I’ve evolved with the game as I’ve aged. I started playing at the age of eight. And when you’re younger, you have more—you rely more on your athleticism. When you’re older, you start recognizing more of the team game. And that’s what I love most about basketball is being in a team.
And in a way, if you talk about business, no better way to get to know someone than to play a sport with them. Because whether they’re good or bad, if it’s a team sport in particular, I believe that you really see their true personality. Are they a hog, a ball hog? Do they like to pass? How’s their awareness of teammates? What do they like to interact with on the court? So, it’s a great way to get to know people, the real person. I would love to be able to interview founders and play a sport with them, for example. That would be my optimal way.
But in terms of investing, I see parallels with basketball in the sense of the game has evolved so much since the ‘90s to the 2000s to now. And it used to be that shooting guards were shooting guards and centers were inside and big and didn’t dribble the ball. And now we see the opposite. We see a mixed bag of skills, crossing over of skills, which is very important in the game and in investments and in business. Very important to be able to cross over into a different language from the accounting side into the legal side into the commercial side. Not many people can do that if they haven’t had experience in a wide variety of areas. They can’t empathize with why it’s important and what additional skills and insights it gives you.
And so, investing naturally also evolves as well over time. We saw Warren Buffett very successful with value investing early on. And now, as technological advancements accelerate because of the availability of information that we share, we learn off each other a lot quicker, you could argue that markets are a lot more efficient. It’s much harder to adopt a value-investing mindset, particularly in large markets like the US. There are still pockets of opportunities, I think, globally across the world in Europe and Asia. And it’s important for investors to keep evolving both their selling framework, when to sell a company or trim a company and when they buy a company. So, I’ve got a framework I look for and I stick to that process, but that process gets updated and evolve as I observe new things in the world that’s happening.
Lefkovitz: I wonder, does founder-led investing naturally lead you to the kind of growth investing? Does it have a style bias?
Lam: I would say I used to invest in sort of the old European, old-gen companies because they were cheaper. I just gravitate toward more of a value slant. As I’ve evolved my style, as I mentioned, I focus now more on new products, new services, but importantly profitable. And so, that’s a big difference now is, yes, you probably could say there’s a bit more of that focus on growth because of the founder effect. You want to capture the essence of these hungry founders earlier on rather than wait until they’re older and just very comfortable. But at the same time, recognizing that there’s a sweet spot where they’re still profitable and you’re not just buying hype. That’s a very different proposition to a young company that’s profitable, growing, and if possible, I would consider a risk that one of those types of companies that are new products, new services, profitable, conservatively run and continually compounding and growing.
Lefkovitz: Well, Lawrence, thank you so much. This has been fascinating.
Lam: It’s been great chatting with you, Dan, and thanks for having me on the show.
Lefkovitz: Absolutely.
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