Virtual Assistants; Buying the Dip; Compensation at Berkshire; Scaling to $100M #109

Reflecting on a few interesting reads and listens over the past week

Virtual Assistants 

This is a fairly prescriptive blog post by Rohan Jauhar on how to get started with hiring and managing your own virtual assistant. For many of us, this may seem like a luxury that you don't necessarily need. However, I truly believe that, if managed appropriately, they can help boost productivity and keep you focused on tasks that truly matter. 

Having managed a large team of offshore workers in the past, I will warn you that the upfront effort to train them and get them up to your personal style is fairly significant. 

Rohan's post does a great job of getting into the detail of why and how you can hire a virtual assistant - providing a number of useful templates for each part of the process. Personally, I am considering how to utilize a virtual assistant to help support M&A/origination activities as a number of tasks (e.g. following up with people) can be outsourced in theory.

Buying the Dip

This is a great post by Nick Maggiulli, who writes a popular finance newsletter called Dollars and Data, on the case against Buying the Dip (vs. using a simpler method like Dollar Cost Averaging). Psychologically, the idea of buying the dip feels rationale. If a stock was a good deal when it was up, it should be an even better deal when it goes down in price as well. The dopamine effect you get from seeing the bounce back up and earning an easy 5-10% is quite rewarding. 

The challenge, as Nick points out, is not the fact that you're buying when the stock goes down but rather you're not buying as the stock goes up. Ultimately, stocks (or more broadly, the market) tends to go up vs. down and you miss out on the benefit of investing more as valuations go up. 

The idea of taking a simple approach of doubling down on your winners using a dollar-cost approach for a long period of time sounds like a boring approach. It doesn't require a lot more effort apart from maybe doing research into your winners to see if anything will materially change. Personally, the simplicity of this approach is what makes it so hard for me to follow. It sounds too good to be true (despite the obvious merit behind it). 

Compensation at Berkshire 

This was an interesting read (found through LibertyRPF's Newsletter and written by Adam Mead) on how Warren buffet rewards managers for making investments with high returns. For an investing/compounding machine, the incentive structure for key managers on the operating and investing side can make/break the group's success. 

Here's a breakdown: 

"Base case:

Let's say a BRK subsidiary uses $100m of capital. Buffett perhaps sets a base salary for the person and then incentivizes them by giving them 10% of any profits over a 15% return on capital. 

 The business earns 20% or $20m and the manager gets a bonus of $500k ($20m minus $15m bogey = $5m x 10% = $500k).

Use of Additional Capital:

If that manager wants an additional $100m, say, they're going to want to be very sure they can earn at least 15% on that capital. If they can't then their bonus could be in jeopardy. If profits went from $20m to $30m but they employed $200m capital, then earnings would just meet the threshold and the manager wouldn't get a bonus. Still with me?

Returning Capital:

Now let's say that manager is working under the original scenario with $100m in capital but finds a way to do business with $90m. So they've sent $10m back to Omaha but still earn $20m. Well, that's just another way of saying return on capital increased from 20% to 22.2% ($20m / $90m). What does the manager earn for a bonus?

A 15% return would be $13.5m. So $20m - $13.5m = $6.5m. The bonus, at 10%, is $650k. So that manager has earned an additional $150k by figuring out how to earn the same amount of money with less capital. The manager gets $150k more and Berkshire gets $10m to allocate elsewhere."

The structure isn't significantly different from how Constellation Software incentivizes its M&A and operating managers to deploy capital with a high ROIC. 

Scaling to $100M ARR

This is a great resource put together by Bessemer Venture Partners for businesses aiming to scale to $100M. I will add the caveat that I've seen and spoke to a number of founders who have achieved incredible outcomes without having to meet the standards below. Nonetheless, they do serve as a benchmark for what high-performing software businesses are valued at today.