In the early spring of 1872, President Ulysses S. Grant signed the Yellowstone National Park Protection Act which created Yellowstone National Park. Yellowstone was likely the first national park in the entire world and is still one of the largest national parks in the United States.
If you haven’t been to Yellowstone, you should go. Make sure to spend time in the remote areas of the park, away from Old Faithful and the Kevin Costner wannabes. The game is big and plentiful in the remote areas of the park, the rivers run deep and clear. Spend a night outdoors along Slough Creek in the park’s northeast corner where the grizzlies forage by day and the wolves howl at night.
Wolves run free in Yellowstone today, thanks to a group of biologists that reintroduced 31 grey wolves into the park in 1995 and 1996. Today, about 100 wolves roam Yellowstone, which according to biologists is about the carrying capacity of the park.
At the time of the reintroduction, biologists were concerned wolves might overpopulate the park. Wolves have no natural predator in Yellowstone and lots of potential food in the form of big game like elk and bison. Biologists were particularly concerned about the elk population since elk represent about 90% of a wolf’s diet in the park.
What biologists found instead was a wolf population that regulated its own numbers. The strong wolves and the leaders of strong wolf packs - which are interestingly nearly all female – actually kill the weak. Wolf packs kill rival wolves and seek out the dens of rival packs in order to kill their young. Wolves instinctively know that other wolves represent competition for food. Each pack has a well-defined territory within the park that it protects at all costs. Wolves even kill coyotes, not for food but to eliminate competition for food. The coyote population at Yellowstone has suffered far more than the elk. Wolves are obsessed with dominating and eliminating competition for food.
We believe Yellowstone wolves instinctively know what many asset managers have failed to grasp: success and survival is a competition. Wolves compete with one another for food. Asset managers compete with one another for relative performance. Each is a zero-sum game. When one wolf pack kills an elk for food, one less elk exists for the other packs. When one asset manager outperforms the broader market indices, another must underperform. It is just the way the numbers work.
Dominating the competition is a critical and often ignored element of good relative performance in the asset management business.
We don’t have to take on the persona of the Wolf of Wall Street to outperform. We do, however, need to condition ourselves to take advantage of the weak, the ignorant, the ill-prepared. Every trade made on all public exchanges involves a buyer and seller. Many trades are done at fair value. No harm. No foul. Not much value changes hands. Some trades are done outside the range of fair value. That is when value moves from the weak and unprepared to the prepared and strong. The genesis of relative performance – both good and bad – is at the time of trade. One party sets itself up for outperformance. The other for underperformance.
Our mission - because we choose to accept it - is to not only identify those trades that change hands outside the range of fair value, but to make sure we are on the right side of the trade and to create an organization free of the barriers that might prevent us from actually making the trade.
We believe, in short, that many asset managers fail to fully appreciate the competitive nature of the business. Unlike the weak wolves in Yellowstone, many weak asset managers can hang around for years, even decades, despite routinely being on the wrong side of trades one year after another. Many so-called long-term investors have lousy 5-, 10-, and 15-year records, yet continue to manage billions of dollars, mostly because they have marketing departments adept at covering their tracks or engaging leaders with good pedigrees and witty phrases.
We of course love deadbeat managers with lousy records. They will supply fresh kill to sustain us for years to come.
At KP7 we don’t cover our tracks or have witty phrases. We are built for performance. We don’t make sacrifices when it comes to performance. We work every day to make sure we are on the right side of our trades and importantly, we have created an organization conditioned to exploit and outperform the weak.
