Chapter 38 - Jimmy: An Autobiography

Today’s Chapter is based on the book “Jimmy: An Autobiography”, by Jim Pattison, the founder of the Jim Pattison Group, Canada’s second largest privately-held company.

Buy it on Amazon here:

https://www.amazon.com/Jimmy-Autobiography-Pattison/dp/0770421962

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Here’s what I have learned from the book:

How to Sell

“Learn to sell, learn to build, if you can do both, you will be unstoppable.”
— Naval Ravikant

Jim Pattison’s journey in business first started as a car salesman. His talent for selling could be seen at an early age. As a matter of fact, at the age of seven, Pattison sold garden seeds and learned his first lesson about sales: to be a good salesman, you need to consider what the customer wants.

“I would bring several packets of different seeds to a housewife's door and the first thing I'd ask her is: "What kind of vegetables do you like?" "I like beans," she might say. "Well," I'd reply, "I want to tell you, our particular beans may be different." The lady next door might be keen on carrots so I'd talk about the colour of our carrots. I wouldn't waste twenty minutes talking to someone about beans if she was crazy about carrots.”
— Jim Pattison

At the age of nine, Pattison was selling magazines door to door and did so well that he won a contest for the highest sales of The Saturday Evening Post. His sales skills were definitely influenced by his father who “was a people person, which made him a tremendous salesman as he canvassed door to door to find the fifty pianos in a town of three thousand people and convinced their owners that the felts needed de-mothing. Then there was his quiet strength, his integrity. His handshake was his promise; his word was always good.”

While working in direct selling and cold calling, he quickly discovered a couple of important things:

1. Whenever he whistled cheerfully when going up the stairs, householders would open the door to his knocks significantly more often than if he didn’t.

2. He learned the percentages of the business: if he made thirty calls a night, he would be able to make three demonstrations of the products, and he’d make one sale.

3. In friendlier rural areas, he could get a higher demonstrations per call ratio than in the city.

As such, at a young age of twelve, Pattison had already worked in various odd jobs such as delivering newspapers and groceries, but he knew what he wanted to do in life: to be a salesman. His experience as a car salesman started when Pattison was in College:

“During college I'd look for a used car in the classified ads every night, buy the junker for maybe $200, drive it out to the campus, sell it for $250 to a fellow student, and take the bus home that evening. Or I'd advertise the car in the student paper, The Ubyssey. It's what car dealers call curbing-literally, selling from the street curb instead of a lot. I'd always have two or three cars in my yard, one of them for my own use.”
— Jim Pattison

In Pattison’ opinion, his success as a car salesman is due to his simple approach: hard work, sincerity and honesty. In fact, Pattison believed that the most important thing was to gain the customers’ trust and to do so, you always need to point out what’s wrong as well as what is right with the car. In fact, Pattison would often tell his customers when the car wasn’t the best for them, even if it would cost him a sale.

This is eerily similar to what we have learned from Akio Morita, the founder of Sony. Morita wrongly believed that selling would be easy if Sony focuses on building innovative products with unique technology. However, when Sony first started producing tape recorders, he realized that their products couldn’t sell because people did not know what it was and how it could be of use for them.

As such, he learned quickly that he needed to educate the market; he needed to sell their products to the potential buyer by explaining to him the value he was getting.

“I then realized that having unique technology and being able to make unique products are not enough to keep a business going. You have to sell the products, and to do that you have to show the potential buyer the real value of what you are selling. I was struck with the realization that I was going to have to be the merchandiser of our small company. We were fortunate in having a genius like Ibuka who could concentrate totally on innovative product design and production while I learned the merchandising end of the business.”
— Akio Morita

Chapter 28 - Made in Japan

When Pattison started his own car dealership, he had to learn how to motivate salesmen. He engineered a few ways to keep his troops in the right mindset to sell. He would often gather his salesmen in the morning and have a contest: the first one to sell a car would get a $100 bonus. He would also award trophy cups every month to the top salesmen.

But more importantly, Pattison was well-known for letting go the worse salesman every month. While it seems cruel, Pattison saw it as a favour for both the company and the individual:

“I was seeing nice guys come to work for me as car salesmen. They would struggle along in the business for three or four months, maybe as long as a year, just getting by. They didn't have that born drive of the true salesman. Keeping them on would not be doing the company a favour: they were holding down positions that could be better filled by others. But just as important, keeping them wouldn't be any great favour to them: they were never going to be successful at selling cars, so why shouldn't they cut their losses and become mechanics or teachers or something they'd be good at? I don't think anyone wins by staying at the bottom of the totem pole, by being mediocre. So sure, I would fire the low man at the end of every month. You sold the fewest cars? You were gone.”
— Jim Pattison

This reminds me of the evaluating potential hiring candidates process we’ve learned from Danny Meyer, the founder of Shake Shack, in order to avoid mediocrity. Meyer would requests all of his managers to ask themselves one final question before hiring someone: “Do they believe the candidate has the capacity to become one of the top three performers on our team in his or her job category? If people cannot ever develop into one of our top three cooks, servers, managers, or maître d’s, why would we hire them? How will they help us improve and become champions?”

This helps to weed out mediocrity as it is extremely dangerous for a company to hire a “whelming” candidate because it can cause an organisation a long-lasting harm.

“Overwhelmers earn you raves. Underwhelmers either leave on their own or are terminated. Whelmers, sadly, are like a stubborn stain you can’t get out of the carpet. They infuse an organization and its staff with mediocrity; they’re comfortable, and so they never leave; and, frustratingly, they never do anything that rises to the level of getting them promoted or sinks to the level of getting them fired. And because you either can’t or don’t fire them, you and they conspire to send a dangerous message to your staff and guests that “average” is acceptable.”
— Danny Meyer

Chapter 33 - Setting the Table: The Transforming Power of Hospitality in Business

Company’s Metrics

"Over the long term, it is hard for a stock to earn a much better return than the business which underlies it earns…If a business earns 18 percent on capital over 20 or 30 years, even if you pay an expensive-looking price, you'll end up with a good result.”
— Charlie Munger

Jim Pattison, once vowed that he would become a millionaire by the age of forty. And to do so, running small car dealerships was not going to cut it. As such, he started to acquire companies with the goal of owning a Canadian conglomerate. To do so, Pattison used a concept called “pooling of interests”.

He explains that, “in essence, the original concept was that, through an exchange of common shares, you'd merge your public company with another company of about the same size and in a similar business; you'd then re-state the past year's economic performance of your company based on the performance of the company you'd bought. And the balance sheets of the two companies would be added together, item by item. If you had chosen the right company to merge with, this accounting tactic could help increase your earnings per share - because you didn't have to increase the book value of your assets and so increase the depreciation charges.”

Considering the fact that investors would value companies’ based on a multiple of their earnings per shares (“EPS”), Pattison was able to use his company’s shares to purchase even more companies at an essentially cheaper price due to the raise in value of his company’s stock.

“The magic of this game is that because we were out there doing deals, the market began to anticipate our earnings growth and investors were prepared to pay multiples of fifteen to twenty. A multiple is another name for price/ earnings ratio — the price of a stock divided by its earnings per share. The higher the multiple, the more investors pay and the more growth in earnings they're anticipating. With the kind of investor support we were getting, it essentially became cheaper and cheaper for us to buy more companies.”
— Jim Pattison

However, growing through acquisitions can be dangerous. As Charlie Munger once said, “I think the history of acquisitions is that it’s not an enormous way to wealth.” As a matter of fact, it is too often for companies to dilute their intrinsic value through acquisitions. Why is that the case? It can be explained by the simple fact that not all earnings are equal.

In fact, the key metric to evaluate a company should be it’s return on invested capital (“ROIC”) rather than it’s EPS. As Chris Davis mentions, “If you’re going to own a company for a long time, the earnings it generates today will be a small component of the eventual return.  Much more important will be how those earnings can be reinvested over time to build value.”

In his book “The Little Book That Beats the Market”, Joel Greenblatt explains why companies that earn a high return on capital are very valuable and why a high ROIC can contribute to a high rate of earnings growth. Here’s how he explains it:

“For example, if Jason’s Gum Shops earned $200,000 last year, Jason has a few options. He can distribute that money to the shareholders of the business. If the business doesn’t change much this coming year, Jason’s Gum Shops will earn $200,000 again. That may be a fine outcome.

But if, instead, Jason’s Gum Shops takes its $200,000 in profits and invests them in government bonds paying 6 percent, Jason’s business will earn $207,200 this coming year ($200,000 from the store and $7,200 in after tax-profits from interest on the bond). Though earnings would be higher than last year, the growth rate in earnings would not be very high.

But here’s where the big bucks roll in. If Jason takes the same $200,000 in profits and can invest it in a new store that earns a 50 percent annual return, the earnings for Jason’s Gum Shops will grow to $300,00 in the coming year ($200,000 from the original store and an additional $100,000 from the investment in the new store). Going from $200,000 in earnings last year to $300,000 in the coming year would represent a 50 percent earnings growth rate in one year!”
— Joel Greenblatt

In Pattison’s case, due to an economic downturn, he realized that growing through acquisitions was a mistake and that it was much better for the company to grow organically at a slower pace rather than acquiring growth in sales at any cost just for the sake of it.

“We're not interested in doubling the size of the company for the sake of having more sales. We're not interested in doubling the earnings of the company for the sake of doubling the earnings. We're only interested in what it's gonna do for the share growth of this company. Now that's the policy, that's the philosophy, and I personally am totally dedicated to it.”
— Jim Pattison

As a matter of fact, ROIC became one of the three main principles that Pattison would use to run his company, Jim Pattison Group. As a matter of fact, for each division, he would set a reasonable return on investment that would be used as a hurdle rate to evaluate their performance. This is eerily similar to what we have learned from Alfred Sloan, who implemented a decentralization policy at General Motors.

One of the advantage was that he was able to evaluate the rate of return of all divisions within the company. Sloan mentions that “I imagine, every businessman evaluates profits in terms of his total investment. It is a rule of the game, so to speak. There are other measures for the running of a business; for example, profit on sales, and penetration of the market, but they do not supersede return on investment.”

Chapter 23 - My Years with General Motors

Quality

“If you create a great product, it's basically like selling itself. The marketing is built into the product.”
— Elon Musk

Pattison established three core principles in running Jim Pattison Group. The first one, as mentioned above, is to evaluate his company’s divisions based on a ROIC metric. The second principle is to seek to increase the market share of each of their divisions. In fact, Pattison mentions that “we believe that if we can serve our customers better, everything else will follow. And we don't know how well we're serving them unless we know how many customers are buying our products and services. Market Share is a measurement of how much of the market you're capturing from competitors. A satisfactory and growing share of the market should ensure the long-term health and prosperity of a division.”

The third principle is to maintain exemplary Quality which includes Quality products and services, Quality working conditions and Quality people. Pattison, during a trip to Japan, realized how Japanese companies had mastered manufacturing quality products. When he visited Toyota’s corporate office in Nagoya, he learned about Quality Circles which inspired the implementation of his third business principle. Quality circles were small group of employees that would meet on a regular basis to identify, analyse and solve quality concerns in the company.

This concept of Quality Circle influenced Pattison in making meetings where his management team had to give a chance to their employees to suggest ideas on how the company can improve. But more importantly, he had to convince his executives to embrace their suggestions rather than taking them as criticism.

Pattison would tell his executives that “Gone are the days of management blaming employees or labour when things go wrong. If there's a problem, we've got to solve it together. As part of this process, we're encouraging our senior management to listen to what's happening. To listen to the people who are making it happen. And to enlist their help in solving problems where they should be solved.”

“The theory is sound: it makes sense that the workers actually doing the job should know the best ways to analyse a process and correct any defects. And most employees have ideas about improving their workplace, and enjoy the recognition and personal satisfaction they get from seeing even the smallest of their good ideas bear fruit. Most people are motivated by more than just satisfying their basic needs. The psychologists call it "the desire for self-actualization”, which is just a fancy way of saying we want to be all we can be.”
— Jim Pattison

This concept of listening to employees for improvement reminds me of how Alain Bouchard ran Couche-Tard. By spending most of his time visiting his convenience stores, Bouchard noticed that the best insights came from the bottom rather than the top. By consequence, compared to other big corporations, he would encourage his employees to have an entrepreneurial attitude and to make decisions. Alain Bouchard once said, “Make decisions, take initiative and you’ll see where it can lead.”

This concept came to Bouchard while he was studying evening classes at HEC Montreal. One of his teacher, while talking about the principles of decision-making, told the students that the best way for employees to find out how high they can rise in a company is to make decisions that should technically come from their immediate boss; “Aiming high is the way to discover whether you've got what it takes. If you fail, at least you'll learn from your mistakes."

“To get there, Bouchard says, each individual has to find the zone in which they can make decisions, room to manoeuvre that fits their abilities and gives them a chance to show what they can do. "That's a basic need for all humans. We all want that: to reach the level of importance corresponding to our potential."”
— Guy Gendron

Chapter 15 - Daring to Succeed: How Alain Bouchard Built the Couche-Tard & Circle K Convenience Store Empire

Constant Persistence

“Success breeds complacency. Complacency breeds failure. Only the paranoid survive.”
— Andy Grove

Jim Pattison believes that nothing in the word can take away the importance of being persistent in life. No matter how talented you are or how educated you are, persistence and determination are the key to success in life. As a matter of fact, Pattison explains that one must never stay complacent and must always have the drive to succeed.

He mentions that “even though you may reach what some people think is the peak, I believe that you have to extend yourself and continue climbing. I've always set new targets for myself. Once, as a way of keeping score, my goal was to have the company make $25,000 a year. Then $50,000, $100,000 - and $1 million. I keep moving our objectives.”

“It was during my days at the car dealership that I realized that no matter how smart a salesman is, how good a family man, how hard-working-if he doesn't have the overwhelming desire to achieve, he won't be a good salesman. Obviously, if you're looking for a director of your company, you consider a person with judgement and wisdom. But if you're trying to build a company, you need someone at the top who also has that intangible drive that springs from deep down from the fire in the belly. You've gotta wanna succeed.”
— Jim Pattison

As such, when he raised his children, he only promised them two things when they grow up: no jobs and no money. He reiterates that in most families of wealth, the second generation loses the drive to succeed, as success breeds complacency. In Pattison’s experience, children born rich often do not have their values straight; they are arrogant and spoiled. Pattison didn’t want his children to experience the same thing:

“I wouldn't shower them with an excess of money. I would let them make their own way in the world and let them have the satisfaction of providing the roof over their heads themselves. And if they were any good, they would rise to the top like cream. If they had problems, I would always give them advice. I could probably solve their problems quickly by tossing money at them, but they wouldn't learn about adversity that way, they wouldn't grow and mature. I decided instead to throw them in the water of life and let them swim — and the sooner they knew no help would be offered, the better and stronger swimmers they'd become.”
— Jim Pattison

Similarly, in business, it is important for one to always seek for better ways to improve as an businessman. One way of doing it is to surround yourself with smart minds. In fact, Pattison joined the “Young Presidents’Organization” which turned his life around. In fact, the purpose of this organization was "to help its members become better presidents through education and idea exchange". As a matter of fact, this concept of ROIC that turned out to become a cornerstone principle at Jim Pattison Group came to him through a YPO meeting.

This reminds of Benjamin Franklin’s Junto. As a matter of fact, Franklin was a strong believer that sharing knowledge and information with a group of individuals, usually smarter than you, is a great way of learning things faster. In fact, various studies show that peer groups are super influential in your learning. The reasoning behind it can be easily understood by this famous saying: “you are the sum of the five people that you hang around with the most.” As such, Benjamin Franklin created a club for mutual improvement where he invited 12 members for mutual improvement called the Junto. During their exclusive meetings, the members of the Junto were asked to discuss about a few topics notably:

1. What they have read and learned in history, morality, poetry, physic, travels, mechanic arts or other parts of knowledge;

2. Stories of failed business/businessmen and the reasons why they failed;

“…every member, in his turn, should produce one or more queries on any point of morals, politics, or natural philosophy, to be discussed by the company; and once in three months produce and read an essay of his own writing, on any subject he pleased.”
— Benjamin Franklin

Chapter 22 - Benjamin Franklin, Volume 1

Beyond the Book

Read "Thinking About Return on Capital" by Investment Masters Class

Read "Mergers & Acquisitions" by Investment Masters Class