in business strategy, capital allocation, Charlie Munger, conglomerates, Constellation Software, management, Mark Leonard, metacognition, On Writing, roll-ups, shareholder letters, software, Stocks, Warren Buffett

Love Letter

One hallmark of great business leadership and investment thinking is clear writing. Warren Buffett’s letters to shareholders likely set the precedent (and standard) and over the years others followed suit in its practise.

At the top of the pack is Mark Henri Leonard from Constellation Software.

His letters are direct. His style is self-effacing (to the point of self-deprecating at times) but mainly from a place of being critical about his past choices, how he could’ve done better in specific ways and how he can continue to do better with the intent to invalidate any poor ideas upfront. As you read, you’ll realize that he’s being generous and humble; you know he’s put a lot of thought into every word and every decision he makes or doesn’t make.

In the beginning, Leonard wrote quarterly letters to shareholders that became annual ones in 2009. But that all stopped by 2017 along with quarterly results calls to analysts (likely in an effort to be efficient and instead spend the time running the company). In its place, Constellation adopted an asynchronous, periodic Q&A portal on their investor relations site.

That’s why it was (pleasantly) surprising to have discovered that Leonard recently penned a new letter to shareholders after stopping for 4 years.

It makes sense; in all his choices, he only speaks when there is something to be said. And in his latest shareholder letter there is something to be said; he lays out his thoughts regarding major changes to the capital allocation strategy at Constellation.

It’s only a page and a half long. It’s a solid letter (though I’ve read better from him) and of course there are some amazing quotes from it, but my favourite is straight from the first sentence: “One of our directors has been calling me irresponsible for years.” If that isn’t something that catches your attention…

You don’t need to know too much about Constellation (a roll-up conglomerate of over 500+ autonomously run operating software companies) or know too much about Leonard himself (apparently he’s elusive as described by this piece in The Globe and Mail back in 2014) to understand the basic story he’s laying out to fellow shareholders. I suggest you take the time to read it because it’s a fascinating case study into thinking about capital allocation as a mature company.

If for nothing else, this letter clearly walks through how his thinking has changed and that even when something might seem entirely empirical and objectively logical, it sometimes might not be the best thing to do when compared to the alternatives at the time (i.e. opportunity costs). Leonard, like all the great investor and business minds, are at their best when they become what Charlie Munger has called Buffett: a “learning machine”. The “greats” have learned to adapt to the changing market conditions, using data to confirm or disconfirm and using excellent judgment to know when to be pragmatic and when to be stubborn on one’s principles. Leonard has shown in this letter that he is willing and able to change his mind when circumstances warrant it.

After-all, investment and business management is a game of metacognition and in almost every way Leonard has guided himself and Constellation to adopt that at an organizational-cultural level. I surmise that this is why great letters showcase great investors because of this approach. (And also why these investors welcome the opportunity to write about their thoughts and reflect on their decisions.)

Of course so much still remains to be seen at Constellation (isn’t that always the case?) and Leonard always lays that out brilliantly in what ways they might not be successful (i.e. the pitfalls) and that it’s “likely to be uncomfortable in the early going”.

Who says a leo(n/p)ard can’t change its spots clearly wasn’t talking about Constellation Software’s founder. I, for one, cannot wait to see what it changes to.

Postscript: Fast forward to 2023, there is a book out by Arthur C. Brooks and Oprah Winfrey about how metacognition is a key to building the life you want the art and science of getting happier. Thinking about thinking isn’t something that’s exclusive to applying to business, compounding, but also to our personal lives — essentially it’s how to navigate a world of dysfunction and more toward function.