Last week we had a sendoff for one of our colleagues, Ong, an equity analyst originally from Thailand, who is relocating to our Singapore office. Ong received a gift bag of “Canadiana” gear which included a hockey jersey and a hockey puck.
When he pulled the hockey puck from the bag he examined it closely and turned it over in his hands for several seconds, as if looking for a clue. While the hockey jersey was obviously something he was supposed to wear, the strange black disk of vulcanized rubber was clearly a mystery. The rest of the staff reacted as you might expect a group of hockey saturated Canadians to react—with laughter, dismay and plenty of good-natured teasing. Ong took it all in stride and appreciated the gift…once he learned what it was.
But given that hockey barely makes it into the world’s top ten most popular sports, it’s not surprising that someone who didn’t grow up in Canada failed to recognize the first puck he’d ever held. How many Westerners would know a prajioud (a traditional armband used in Muay Thai martial arts) upon first glance?
The most insightful aspect of this is not that Ong happens to be onside with approximately 80-90% of the planet’s population who wouldn’t know a hockey puck from a paper weight—it was everyone else’s reaction.
Our astonishment represents a shared assumption that everyone should know what a hockey puck is. It illustrates a collective cultural bias that suggests, if you’re here (in Canada), surely you know a puck when you see one. But if you’ve never played or even watched the sport, is this a reasonable assumption?
We tend to forget that nothing is obvious to those who have never seen, thought about, or experienced whatever the “it” may be. The same applies to investing in global markets, where the home team typically benefits from knowing the nuances and components of the game, while visiting players must constantly adapt and learn in order to play “away” effectively.
We make investment decisions involving “hockey pucks” all the time. Global investing is a wide open arena and we’re constantly facing things we don’t know and have never seen before. That incredulity we felt towards Ong is exactly how the rest of the world reacts when we travel to foreign countries and ask them about their tax code, capital allocation preferences, management compensation, why a business exists, what we might view as socialist employment laws, and so on.
Western investors are often surprised when dealing with foreign companies that are not as focused on efficiency of capital. While the North American mindset is to make money for the shareholders, in other parts of the world corporate culture is more concerned about creating jobs and good products for the betterment of society. This way of thinking has paved the way for cooperatives to thrive in both rural areas and retail sectors. For instance, while cooperatives or co-ops—businesses that are owned and run jointly by their members who set the prices and share the benefits—have a modest presence in North America, they are a mainstay in Japan. According to Cooperative Grocer Network, nearly every farmer and fisherman is a member of a co-op and there are close to 24 million members of consumer co-ops in Japan, representing about 30% of Japanese families.
So when Westerners go to other countries and ask them about allocating capital differently or paying more dividends, that’s like showing up at their baseball game with our hockey puck. That’s not what they want to do with their companies, so that approach is a non-starter.
Management compensation is another hockey puck. Unlike North American CEOs, many worldwide CEOs do not make up to 300 times a regular employee’s salary. If a CEO in a more egalitarian society, Scandinavia for example, makes $250,000, North American investors might draw the conclusion that those management personnel are not properly incentivized. In reality, their corporate culture might simply presume that everyone, at all levels, should be intrinsically motivated to do their job.
Employment protection can be another mysterious chunk of vulcanized rubber for Canadian/U.S. investors. In North America there is generally less employment protection than elsewhere—we fire people relatively easily here. We may look unfavourably towards countries like Germany where, due to assertive employment protection standards, it’s often far more difficult to fire someone. In Canada, we have unions that help protect limited sectors of the workforce, but German supervisory boards (at least in the larger companies) are comprised of half owners and half employees. This completely changes the dynamic of a board and corporate decision making as we understand it.
Investing always favours those who have an edge or additional insight. If we don’t know the facts, social conventions, or cultural nuances around important elements of a foreign market, we will inevitably make mistakes. When competing globally, we can’t always apply the mental models we know from home. To be nimble and flexible it’s important to remember that we’re joining a conversation that has been taking place long before we arrived, often in another language, both literally and figuratively.
So what can we do to hone our edge?
We’re conscious of the differences without being deterred. By recognizing our deficiencies in understanding cultural thought patterns and reference points that might not exist for the topic at hand, we can exercise a certain degree of hockey puck diplomacy in our communications and allow for a generous learning curve.
Regardless of where our investing dollar takes us, we start with the fundamentals: we look for wealth-creating companies that are trading at a discount to their intrinsic value and are run by excellent management teams. Then, like any good traveler hoping for a positive experience abroad, we keep an open mind. When we make an effort to take the time to learn some of the key business and cultural touchstones that exist in our host country, we expect to be better poised to recognize and play the pucks as they appear.