Time to Judgment
Something we struggle with over and over again at Permanent Equity is how long to wait and watch before declaring that something is going well or poorly. And then, relative to that, how strong to push to adapt to this new and unexpected set of circumstances.
I mention this now because it’s timely. We are almost three months – or one quarter – of the way through the year, which means there is two-plus months of financial and performance data from our portfolio companies to analyze and react to. If one of them is struggling to date, should we be concerned and, if so, how concerned should we be? If, on the other hand, another is outperforming, is now the time to celebrate?
In my experience, the answers to these questions depend on three variables: time, magnitude, and trust.
For example, I had the misfortune this past season to have a rooting interest in two of the most disappointing men’s college basketball teams in America: the Missouri Tigers and the Georgetown Hoyas. Missouri, you may remember, wildly outperformed expectations last year in Coach Dennis Gates’ first and made the NCAA tournament only to run it back and go winless in SEC play in 2023-24. The Hoyas, on the other hand, parted ways with alumnus Patrick Ewing to bring in the much-heralded coach Ed Cooley from Providence only to win two games in the Big East, both over lowly DePaul.
And while it would have been inconceivable for anyone to think Dennis Gates would be on the hot seat this time last year, the magnitude of the team’s recent underperformance means that there is chatter about his job security despite his only being in the role a short time and having previously built up a lot of trust. Ed Cooley, on the other hand, still has a lot of trust given his long-term track record, but if next year isn’t better than this past one in terms of wins and losses and recruits, his seat is going to heat up as well.
Look, we can all agree that bad days happen and that they are outside of our control. Bad weeks, too. But a bad month? A bad quarter? A bad year or two?
In the case of our businesses, we see a lot of bad months, and they tend to be more noise than signal. That, I think, is common in the lower middle market. After all, it’s impractical for businesses of such a size to have the attributes, such as hedging programs, employee redundancies, and revenue visibility, that underpin stable month-to-month performance.
But bad quarters, while not necessarily anything to panic about, more times than not put the nail in the coffin of the prospect of a truly great year. And if you have two bad years in a row that, more times than not, means that something is broken and needs fixing.
Yet a lot of time (21 months to be exact) elapses between a bad quarter and a bad two years, so we’re back to the question of when to intercede and how forcefully? Because change, if it’s real change, is destabilizing, and it might have the same (or better) odds of making things worse as it does to make them better.
Let’s go back to Dennis Gates. Sure, Missouri could replace him, but he by all accounts has put together a top 10 2024 recruiting class (watch your head, Annor Boateng). Get rid of him and those kids are likely gone, so Mizzou hoops would be back to square one. In other words, I’d have enough trust to give him more time given that the magnitude of the upside next year would make up for what has been a terrible, terrible one-year measurement period.
But I could also see someone taking the other side of that argument because a year is a long time and because the in-game adjustments haven’t been great. The challenge with a decision like this, of course, is that if you make it one way or the other, you will never know how the other decision would have worked out.
So when and how, in business, in sports, or wherever, do you feel confident about how things are going? Let me know because I’ll take all the help I can get.