The Story of Capital

Capital Group is one of the most successful investment firms that few people have ever heard of.

Founded in 1931 by Jonathan Bell Lovelace, Capital has grown from a Los Angelos firm managing a single fund to a global organization with 7,000 associates investing $1 trillion in assets.

After reading Charles Ellis’ book about the firm, I came away with a few thoughts:

Core

Capital had a simple goal: to be the best in the investment business and serve three key stakeholders — clients, associates, and owners.

While many corporations have well-stated goals, few have been able to serve those goals consistently through good and bad times. The “secret” of Capital’s success is not figuring out what to do well — there are many great organizations who have done that for a period — but instead to never (in 83 years) make a big mistake that would seriously hurt the pursuit of their core goals.

There were a few straight-forward, but contrarian, things that Capital focuses on that enables them to consistently serve the long-term interest of the overall organization rather than that of talented individuals, of which there are many at the firm.

Capital has consistently followed a simple playbook over the many decades:

Rule #1 serve your core purposes well.

Rule #2 don’t forget Rule #1.

Contrarian

The Capital Group does a number of things that are contrary to the standard practice of the investment industry, which has made all the difference:

Ego — for an industry that focuses heavily on individual contribution and so called “superstars”, Capital is extremely anti-egotistical. The leaders serve as servant leaders, putting the needs of the organization ahead of their own interests. Being anti-ego is not only contrarian to the investment industry, but perhaps to human nature itself.

Trends—Capital cares about trends, not trendy ideas. The firm rarely jumps into “hot” opportunities which has helped it avoid products that are overhyped at the peak of a cycle. On the flip side, Capital invests significant time and resources on ideas that may lose money short-term, but make long-term strategic sense. For the first 20 years of the firm, Capital was a breakeven business. The first 20 years of its international business ran at a loss, but Capital persisted and when the trend shifted towards globalization, it became one of the largest manager globally.

Recessions—during tough periods, Capital invests more not just in assets but in talented people. While other firms run for the hills, Capital always held resources in reserve and took advantage of tough times to recruit talented people departing from other troubled firms.

Greed—even long-term greed is considered bad at Capital. JBL, its founder, sold his stock, at a discount, to younger associates long before he had to. That created a precedent for the leadership generation (senior, experienced associates) to share in the wealth creation with the future generation (young associates). Many of the employees at Capital make a conscious decision to “leave money on the table” when they sell their ownership stake to younger associates at values significantly below market value.

Talent—For a cautious and expense-conscious firm, it spends lavishly on developing talent. The firm cares little about gaining operating leverage and optimizing profit. It almost always uses extra capital to continue to develop talent.

Effectiveness—Capital also cares little about efficiency in decision-making. Instead it is much more fluid and spends a lot of time inefficiently deliberate ideas. The decision making powers are diffused and making the right decision is emphasized over making decisions quickly and efficiently. Capital happily trades off being efficient because it wants to be right for the long-term.

Result—at its core, Capital cares about long-term results rather than performance over a short period. It compensates people based on a four year moving average rather than a single year’s results.

In many ways, Capital doesn’t just act contrarian to the investment business. It acts contrarian to business or society in general in terms of its attention to low profile, low efficiency, low emphasis on individual success, low greed and so on.

To do something extraordinary, you have to deviate from the mean.

Ultimately

The story of Capital is one of figuring out contrarian methods that works and then persistently practicing those ideas for 83 years and counting.

I encourage anyone intensely interested in building an organization that stands the test of time to read Charles Ellis’ book on The Capital Group.

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