By Barbara Gray, CFA – March 28, 2012
Source: The Beckstrom Starfish Report
Brady Capital Research
Barbara Gray started Brady Capital Research in January 2011 after more than 10 years in her successful career as a sell-side equity analyst. She had decided to take some time off to focus on her personal life and start a family. She named her company after her baby boy, Brady, who is the model in the image above.
Here is Barbara’s story:
I still clearly remember going through The Starfish and The Spider back in January 2008 with my highlighter searching for insights into the fate of Yellow Pages. Four years ago, most investors were still steadfast in the long-held belief that directory companies were a source of predictable and sustainable cash flow, resulting in a superior business profile. But I was not your typical follow- the- herd Sell-Side Equity Analyst. Back in September 2006, I incurred the wrath of a few corporate clients that I classified as “Straw houses at risk of collapsing” in my controversial research report titled: “If The Economic Wolf Comes Knocking, Is Your Trust Built of Bricks or Straw?”
And having used Craigslist to find my last place to live, and from my ongoing conversations about how technology was disrupting traditional business models with my boyfriend (who I am happy to report is now my husband and business partner), I knew I could no longer be in denial. It was Rod and Ori’s book that really crystalized it for me and gave me the conviction to go against the consensus and downgrade Yellow Pages to SELL:
“We believe investors may be naively assuming directory companies will be able to simply shift their advertising clients from print to online and maintain their current high level of free cash flow. However, we believe the 2006 business book, The Starfish and the Spider, provides a note of caution and a dose of reality. According to the authors, “starfish” organizations, such as Napster (NAPS-NASDAQ), Craigslist, or Wikipedia, which rely on the power of peer relationships, are causing an increasing threat to traditional “spider” organizations, which have weaved their webs over long periods of time, slowly amassing resources and becoming more centralized…We believe one of the authors’ key principles of decentralization: as industries become decentralized, overall profits decrease, provides a note of caution for directory companies.”
“Yellow Pages No Longer a Conservative Investment: Downgrading to SELL” – Barbara Gray, CFA –Analyst, Consumer/Diversified, Blackmont Capital – January 4, 2008 (YLO.UN-TSX-C$13.98)
Today, four years later, Yellow Pages’ stock is trading in the pennies.
If you click on the link in the tweet I sent out on January 4th, it takes you to the profile page for The Starfish and The Spider in the “Leading Edge” business book category in the Library of Brady Capital Research. As a testament to the valuable connecting power of Twitter, a true starfish platform, Rod saw my tweet and tweeted back to me the same day inquiring about how I fund my equity research group. As it is hard to explain that in only 140 characters, we carried the conversation over to e-mail. It’s funny, as I had not really thought about the costs involved with starting up my own investment research platform.
Two years ago, I decided to take time off from my 15-year career in Sell-Side Research to focus on my personal life. And if you go to the home page of Brady Capital Research, you will see a picture of Brady, our now one-year- old baby boy. As being able to stay at home with Brady during his first year was priceless to me, it has not seemed like much of an opportunity cost to have not “worked” the past two years. And if you look at the extensive list of business strategy books in the library, you will see that a large portion of our “start-up capital” went to Amazon.com as I used the time off as an opportunity to indulge my passion of reading business strategy books, like The Starfish and The Spider. It is interesting as after Rod contacted me, I went back and reviewed the book and I realized how our firm, Brady Capital Research, has a very starfish-like DNA.
Looking through the ten “New Rules of the Game” in Rod’s book, I realized that we possess many starfish-like traits. “Diseconomies of Scale” (Rule 1) definitely applies to us as my husband designed our website using WordPress and I work in the mornings out of a local coffee shop taking advantage of free Wi-Fi. I think of it as my version of Cheers, except I arrive there at 6 am, not 6 pm, and order a Strawberry Tea Latte instead of a beer. And I try to conduct most of my calls on Skype, the starfish platform that has completely disrupted the telecommunications industry. To position our firm to be able to take advantage of the network effect (Rule 2), I am using starfish platforms such as Twitter and LinkedIn to build bonding, bridging, and linking social capital.
I think one of the most meaningful starfish traits we embody is “ideology is the fuel” (Rule 8 ) as our mission illustrates: “To create an innovative qualitative-oriented investment research platform focused on companies with a greater purpose.” Our ultimate goal to, “build a community connecting investors with heart and soul companies and leading-edge business strategists and develop new ways for investors to look at and value companies” is based on my realization that all of my best calls as an Analyst have come from insights that I have gained from reading business strategy books.
For instance, my best LONG call was when I initiated coverage on lululemon athletica (LULU-NASDAQ) on September 11, 2007, shortly after its IPO, with a BUY recommendation. Based on our investment thesis the company had created a unique “blue ocean strategy” and was positioned for superior sustainable earnings growth.
Part of our conviction also came from the parallels we saw between lululemon and Starbucks after reading “Pour Your Heart Into It: How Starbucks Built a Company One Cup at a Time” in which Howard Schultz, CEO of Starbucks, shared, “O ur goal was to build a great company – one that stood for something – one that valued the authenticity of its product and the power of its passion.” Interestingly, our idea is based on the theory that the “best knowledge is often at the fringe of the organization” (Rule 4) and our ability to build a community rests on the notion that “everyone wants to contribute” (Rule 5).
The challenge we face is that most investors don’t care whether or not a company has a “greater purpose” as they believe the doctrine that companies should be focused solely on maximizing value for shareholders at the expense of their other stakeholders. And they continue to use traditional quantitative analytical and valuation metrics and dismiss our qualitative heart- and- soul versus shell investment thesis.
As evidenced by the fact that Time’s Person of the Year for 2011 was “The Protestor,” social media is ushering in the era of the Social Revolution. And we believe social media is the “catalyst” (Rule 7) that will change the rules of the game, as we expect it will quickly erode the traditional economic moats of “shell” companies whose competitive advantage is based on their ability to exploit their stakeholder base.
At the same time, we believe it will foster in a new source of competitive advantage for “heart and soul” companies whose business strategy is focused on building higher levels of social capital for their stakeholders. In the end, I believe what will ultimately differentiate us from other investment research firms is the “Power of Chaos” (Rule 3) as Brady Capital Research is really just an incubator for our innovative, yet potentially very disruptive, investment thesis that the “Social Capital Revolution will change companies’ risk/growth profiles and accelerate the value erosion/creation process.”