Volume 49 October 2019

3 ROE REPORTER | DKAM else couldn't even imagine their potential. The ability to transform a commodity business to a service-based business that customers are willing to pay a premium for is truly remarkable. Railroader provides a great example and opportunity for our investors to understand an important aspect of our investment philosophy. We estimate that we meet, either on location or in our office, 75-100 management teams per year. Some investors don’t share this focus and don’t take the time to speak with management but we have found that when you do meet a great CEO or management team, the business excellence and expert knowledge is palpable. We want a CEO who knows their specific business better than anyone else and, just like how we would like nothing more than to talk stocks and investing, they would like to talk for hours about Software as a Service (SaaS), real estate services, kids’ toys, or paper shredding. When we research a business, we are always asking ourselves whether the business has an edge. We look for management teams that “speak our language.” They have industry knowledge but are also numbers focused with a track record of execution. Both Donville Kent and excellent CEOs believe if you can’t measure it, you can’t manage it. You won't be surprised to hear, that a CEO with industry expertise who measures margins, return on capital, and return on equity (efficiency measures), is a great indicator of a company having an edge which is therefore most likely a great stock. What might be surprising is how infrequently one can find this combination. It is estimated that Harrison created a combined $50 billion in value for his shareholders. This is reason enough to believe in the value of having an edge. Our Edge We then have to consider if we, as investors, have an edge. We referenced this from a different point of view in the April 2019 newsletter when describing an efficient market with pockets of inefficiencies around the corners. A deep value fund may have an edge based on their knowledge of bankruptcy law or a quantitative fund may have an edge based on proprietary algorithms. Our edge stems from: 1. Focusing solely on businesses with high returns on equity (ROE). This metric is a great hurdle for companies to clear because a high ROE signifies efficiency, a competitive advantage or business moat, and a management team capable of recycling their capital at high rates of return. Note that we wouldn’t argue with someone who would rather use return on invested capital (ROIC), internal rate of return (IRR), or payback periods, but we feel ROE