Avid market watchers know that the last two months have been devastating to fast-growth Internet stocks. Twitter has lost 34 percent of its value, which comes to $8.6 billion of shareholder money. Facebook is down 16 percent and $24 billion. And Netflix has hit rough waters as well, having lost 27 percent of its value. It’s clear that the population isn’t giving up its selfies, online oversharing, and TV and movie streaming anytime soon, so what accounts for these stock drops? Rich Karlgaard says it’s the fact that investors have abandoned buzz in favor of long-term value.
“Investor sentiment has shifted away from growth stocks with high price/earnings multiples,” says Karlgaard, author of the new book The Soft Edge : Where Great Companies Find Lasting Success ( www.richkarlgaard.com) and publisher and columnist for Forbes magazine. “Money is moving back into value stocks.”
Two factors determine a value stock, he explains. One is an attractive price. The other is the quality of the company.
“Value means the stock is priced modestly compared to the strength of its balance sheet and cash flow,” says Karlgaard. “These are easy calculations to make with the availability of cheap or even free stock analytics tools available on the web. You don’t have to be Warren Buffett.”
The other component, quality, is a little harder to determine, he admits.
“Warren Buffett didn’t become the world’s greatest investor by just buying cheap stocks,” says Karlgaard. “He bought and buys great companies when their stock prices are cheap compared to the underlying value of the company. Or as he put it in a letter to shareholders in 2008, ‘Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.’ Then he waits. He knows the stock will rise eventually because he buys only stocks of companies built for enduring success.”
In fact, Buffett has said his favorite holding period for stocks of outstanding companies is “forever.” A Berkshire Hathaway Chairman’s Letter from 1996 underlines that point. In the letter, Buffett advised, “Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio’s market value.” As Karlgaard notes, Buffett doesn’t care about the latest buzz. He cares about longevity. And that’s what investors should look for in companies.
But, if you don’t have Buffett’s intuition and market intelligence, how can you separate the companies built for enduring success from those that aren’t?
Karlgaard, who writes the “Innovation Rules” column at Forbes magazine, figured out some indicators, and he’s written about them in The Soft Edge. As he explains in his book, a company built for enduring success is recognizable if you know where to look. Such companies do three things exceptionally well, forming a structure that Karlgaard calls the triangle of lasting success.
Great strategy makes up the base of the triangle.
Masterful execution makes up one of the triangle’s two vertical sides. (Karlgaard calls this the “hard edge.”)
The third side of the triangle is the oft-neglected, misunderstood, and underfunded soft edge. It’s much tougher to quantify but might be summed up as “the expression of your deepest values” or “the heart and soul of your company.” Karlgaard describes the soft edge culture in terms of five pillars—Trust, Smarts, Teamwork, Taste, and Story—and the book, packed with real-world examples, unfolds around them.
One of those real-world examples is FedEx, the Memphis-based delivery company. Karlgaard hails FedEx for being strong on all three sides of his triangle of lasting success.
To get a better idea of what enduring success looks like, let’s take a closer look at the triangle, using FedEx as an example:
Strategy—Great companies know what business they are in. They are close to the desires and needs of their customers. They know how they measure up against their competitors. They know the effect of pricing. They can see and react to technology changes, market upheavals, and new competitors.
How important is getting your company’s strategy right?
“When I visited Fred Smith, chairman and CEO of FedEx, at his Memphis headquarters, he said strategy was his company’s top priority,” says Karlgaard. “He told me, ‘The number one thing that every organization has to get right is strategy. You can have the best operations. You can be the most adept at whatever it is that you’re doing. But if you have a bad strategy, it’s all for naught. Think Digital Equipment. Think Wang. Think Lockheed in the commercial airplane business. There were forks in the road where these companies chose the wrong strategy. Absent a viable strategy, you’re in the process of going out of business.’”
Execution—Great companies do not waste time or money. They constantly seek what Karlgaard calls “marginal gains.” If you cut 1 percent in cost or time, that’s not much. Yet when you do it repeatedly for months and years, it adds up. Great companies are fanatical about measuring. They are always seeking new efficiencies. They are big users of data and analytics to reveal new areas for improvement.
“Obviously, if FedEx couldn’t be successful at execution, they wouldn’t be in business very long,” notes Karlgaard. “They are a delivery company, after all. When FedEx promises overnight delivery, they have to make it happen or their brand will suffer.”
The Soft Edge (Cultural Values)—Great companies look beyond financial numbers to find endurance from cultural values—or what Karlgaard calls the soft edge. Soft-edged excellent companies put a high premium on the aforementioned five pillars. They value Trust, both internal (employees) and external (customers and shareholders). They invest in employee learning (Smarts). They have a preference for small teams of 2 to 12 people, and they embrace diversity in thinking style (Teamwork). They signal their intelligence by putting great emphasis on the design of their products and services (Taste). They know how to tell their company story in ways that are both authentic and compelling (Story).
“FedEx rarely makes a strategic mistake,” says Karlgaard. “They are fanatics about execution. But this hard-nosed company also excels at the soft edge. They’ve built high levels of employee and customer trust. They are always learning. They use lean teams. Their packaging and services are distinctly designed. They know how to tell the story, which CEO Smith calls ‘the purpose promise.’”
“Has a focus on enduring value benefitted FedEx and its shareholders?” asks Karlgaard. “Absolutely. Its stock has outperformed the U.S. stock market for the last one-, three-, five-, and ten-year periods. The point is, buzz-worthy stocks will come and go. They’ll make money for investors and then they won’t. But you’ll never go wrong when you look for companies that are strong on all sides of the triangle. They’ll always have staying power.”
Rich Karlgaard is author of The Soft Edge : Where Great Companies Find Lasting Success (Jossey-Bass/A Wiley Imprint, 2014, ISBN: 978-1-118-82942-4, $28.00, www.richkarlgaard.com). He is also the publisher of Forbes magazine, where he writes a column, Innovation Rules, known for its witty assessment of business and leadership issues. He has been a regular panelist on television’s Forbes on FOX since the show’s inception in 2001. Karlgaard is also a serial entrepreneur, having co-founded Upside magazine, Garage Technology Partners, and Silicon Valley’s premier public business forum, the 7,500-member Churchill Club. He is a past winner of Ernst & Young’s “Entrepreneur of the Year” award. Karlgaard’s 2004 book, Life 2.0, was a Wall Street Journal business bestseller. A graduate of Stanford University, Karlgaard and his family live in Silicon Valley.