Joshua Kennon

I’ve been thinking a lot about the ultimate form the partnership or the holding company is going to take when I consolidate everything I own – all of my private businesses, stocks, bonds, real estate, and other assets, along with my parents, family, and friends, under a single investment vehicle (I explained this in We’ve Finally Settled on a Course of Action).  This has been occupying and increasingly large percentage of my time, mostly because I think the best thing to do is to simply raise capital, take a percentage of the profits, and then invest the money in the best risk-adjusted opportunities.  Which opportunities present themselves and which time is beyond our control, so there’s really no way to predict, ahead of time, what our holdings will be.

I do know, however, that there are a few areas that interest me.  I’ve been breaking them up in an organizational matrix so I can think about how to put together the various “pieces” when the time comes.  This is probably 5+ years in the future.

Here’s the plan …

The point is, we may or may not be involved in any of these industries.  They are merely areas in which I have an interest and a competitive advantage in understanding.  What the empire ends up looking like will depend almost entirely upon opportunity cost and the prices at which we can acquire control.  The only thing I care about is earning the highest risk-adjusted real return on capital.  If that means that I end up owning a media distribution business in Southern Asia and nothing else, then so be it.  What I’m doing now is drawing “circles of competence” around which I look for opportunities.  This concept was originally created by the legendary CEO of IBM, Watson, but made famous by Warren Buffett because he quotes it all the time.

Retail: I would love to end up owning something like a Borsheim’s, Meirettos, or Hamilton Jewelers, generating substantial sales from a single location.

Right now, most of our online stores are consolidated as part of the Cherrywood Shops family.  This includes retailers selling everything from baby gifts and wedding favors to letterman jackets and murano glass beads.  We also have the prototype retail store, Kennon & Company, in a town just north of Kansas City, where we test our merchandise.

Over the next few years, we will be building the stores, redeploying cash from our other operating businesses into them.  On a long-term basis, once we get the formula down, I’d be willing to invest heavily, perhaps getting into fine watches, diamonds, or other merchandise.  It just comes down to the return earned on capital.  If I can be satisfied that the money is there, I’d seriously consider selling off stocks, bonds, or other assets and expanding the store, and its product offerings, exponentially.  It’s like anything else in my life … I spend years studying it on a small scale and then (what looks like overnight to people on the outside), it’s 10x larger than it appeared a few months earlier.

Maybe I get this from my parents.  When we were kids, they sat us down and explained they were starting a business, saving their money, and that we could really make something of it if we worked hard but it would mean sacrificing for many years.  They asked what we thought, and if we were willing to do that.  We talked about it and basically voted as a family.  Everyone got behind the decision we continued to live in a rather pathetic 900 square foot house for many, many years as the capital built up silently in the background.

Finally, one day, my mom decided it was time to get a new house because the business was self-funding.  Again, they sat us down and took a vote, asking if we wanted to build something in the town where we grew up (Savannah, Missouri), or move somewhere else.  We voted for the latter and started house shopping.  We found what we liked and they dropped a couple hundred grand on the new place.  The business, however, always came first.  (I didn’t realize, at this time, that most people spend everything they can on appearing well-off rather than investing.  I mean, the house purchase was tiny in comparison to the machine purchases my parents were making to buy equipment for the company because the house, although it was nice, couldn’t generate cash whereas the company could.  That is why most people never progress financially, for what it’s worth.)

Anyway, the point is that within a 30 day period, it looked like we went from a tiny house driving a 10-year-old van with no hubcaps to a huge new one, with new cars, and a bigger company.  Apparently, this caused some of our family and friends shock and, in some cases, a bit of passive aggressive anger, which I never understood.  Then again, I’m somewhat dense that way because I still don’t get it.  Our balance sheets were more important than our pride.

Hospitality Group: I love the idea of owning mid-tier hotels (Comfort Inns, Hampton Inns, etc.) that generate steady streams of earnings over five to ten year periods when bought well.  I also love the idea of “cheap” businesses, such as The Waffle House, or car washes, that have an easily determined return on capital.  As our other businesses throw off cash, having a collection of assets that can use that cash almost instantly to fund expansion is going to be important.  The hospitality group is going to have to have some sort of debt component, although I think my conservatism will shine through and we will have far more equity than the bankers and Wall Street say is “standard”.  I love the idea of knowing that my family and my shareholders are making money from customers as they eat at our restaurants and sleep in our hotels, while we’re at home or the office, reading The Wall Street Journal over a cup of black coffee.  This will come later, and most likely start because some hotel goes onto the market for less than I think it’s worth.  It could be 3 years, it could be 25 years, but at some point, this division will be launched.

Sporting Goods: We already own several sporting goods companies, specifically on the manufacturing side.  I grew up in this industry so I like the idea of holding on to these, although if it meant getting my hands on enough capital to launch my other projects, I would consider parting with them.  The only complicating factor here is that some of my companies, and the company my parents own, compete against one another in some ways.

Insurance: Anyone who knows me understands that the first 25 years of my life consisted of me being obsessed with the insurance industry.  One way I made quite a bit of money early on was preparing NAIC statutory accounting vs. GAAP reports to search for companies that were over estimating reserves so I could buy shares of stock when they appeared to be fairly valued (knowing that earnings were purposely being artificially depressed).  Something about adjusting deferred acquisition costs still makes my heart stir.  You don’t have to get it – no one seems to, anyway.  It just makes me happy.

The property and casualty insurance group is going to be a huge part of the overall plan, giving us access to low-cost float and a business that I enjoy.  Through it, we can also offer financial products and services, such as annuities and mutual funds.  That’s why I spent so much time interning at a $5+ billion insurance company on the East Coast and learning from the controller and CEO so much more than the industry (the company’s culture was the secret to its success and that’s what is going to be the hardest part to structure, develop, and maintain in any firm I own).  They also taught me a lot about internal audit.  I had no idea how important that function was but it was definitely driven home.

Publishing: Our publishing business includes digital content, downloads, subscriptions, and other services that have 90% or greater operating margins, drowning us in cash that can be redeployed to other divisions.  The model is to build a network of sites that have content contributed from readers, thus building themselves.

Video Games: The video game company will be close to headquarters, and both Aaron and I will be involved.  In many cases, I will compose the soundtracks for the games (one of the reasons we both spent $140,000 each to attend one of the best music schools in the United States on a voice scholarship for my undergraduate degree, learning music theory, composition, etc.)  We will focus on creating great games.  It is that simple.  I’ll make the money and resources available to create products that build franchises.

The Bottom Line

I can’t wait for my family and friends to spend their paychecks buying shares of the company so that when they drive by businesses, they know they own part of it.  While the shareholder base is still small, we can have an annual dinner at our house, taking questions about operations and investing in general.  The ultimate form we take – hedge fund, publicly traded stock, or privately held business by invitation only – is still a mystery.  As I said before, it will be mostly opportunity cost and the availability of certain assets that determines the answer.  The only strategic plan is to grow our capital.  How that is done isn’t important.

Related posts:

1. We’ve Finally Settled on a Course of Action for Kennon, Green & Company
2. Cherrywood Capital Group Successfully Divested Two of Its Investments
3. The Kennon Retirement Insurance Plan
4. Kennon Home Accessories Expands Into Murano Glass Beads
5. Within 12 Hours, We Declare War on the Letterman Jacket Industry