FOOL ON THE HILL
News of FedEx founder Frederick W. Smith's recent heart-bypass surgery may not be as well-known as the story of the company's founding, but it is just as important. Market returns aren't everything in investing. Special individuals are often responsible for long-term shareholder wealth creation, and we should be thankful for them.
Most everything an investor needs to know about Fred Smith can be summed up in the simple but telling way in which he came to found his company. The story of FedEx's origins is a business school classic and one of the most powerful reminders I know of what makes up the true American entrepreneurial spirit. It's an old story, but for those who may be new to business and investing, it's worth a short retelling.
While an undergraduate student at Yale, Mr. Smith wrote a paper on the basic premise of FedEx and the hub-based distribution model for airfreight. What grade do you suppose a paper containing one of the best value creation ideas of the last quarter century would get from one of the finest academic institutions in the land? How about a "C." That's right, FedEx was only a "C" idea. (I'd hate to see what grade the same professor might have given Sam Walton and his counterintuitive "lower the markup, increase the volume" retailing idea, the idea that gave rise to Wal-Mart.)
The takeaway from this little anecdote is not to ridicule the poor anonymous Yale professor after the fact for his lack of business foresight. He probably still flinches every time he sees a box with FedEx's trademark orange and purple logo on it. No, the really inspiring part of this story is that Mr. Smith took his "C" idea and went on to build a successful company anyway.
Starting with just 14 small planes in 1973, Fred Smith's company started turning a profit two years later and has never looked back. In short order, FedEx became one of the fastest-growing U.S. companies in the later half of the 20th century. The firm posted $1 billion in annual sales in 1983, just ten years after starting operations. Fiscal 2000 revenues topped $18 billion, representing a compounded annual growth rate of 18.5% over the past 17 years. Today, with 663 planes and more than 2.5 million customers worldwide, FedEx remains the leader in the express distribution industry it played a large role in inventing 27 years ago.
With any growth company, it is natural for an investor to look at the impressive tally of past financial figures and growth rates and completely disregard what it took to generate those results. This is an easy trap to fall into with FedEx, which has had to overcome extraordinary challenges throughout its business evolution. Oil crises. Huge investments in equipment and technology. Tough government regulation of the air cargo industry, both here and abroad. Brutal competition from a number of sources, from Big Brown UPS (NYSE: UPS) to the U.S. Postal Service to the fax machine to email and the Internet. And to top it all off, the company's business at its core revolves around the idea of solving millions of individual logistical nightmares every day.
It's little wonder, then, that FedEx would need an exceptional leader like Fred Smith at the helm to steer it through the whitecap-filled waters of the fast-growth seas. The real wonder is how he has managed to do it for so long. Many new-economy executives today like to brag that they have what it takes to manage effectively in a hypergrowth environment, but Mr. Smith has done this for over a quarter of a century. Given his service record, Mr. Smith makes much of the current managerial happy-talk about "scalability," "execution," and "organic growth" appear to be just that -- talk.
Considering everything he has achieved over the past 27 years running FedEx, Fred Smith doesn't need to prove much of anything to anyone. His business record speaks for itself. This is a rather enviable position for a manager to occupy. Needless to say, we live in a time when investors -- whether large or small -- feel more compelled than ever to hold a manager's feet to the fire over every error in judgment or execution, regardless of how great or small.
The wonderful tale of FedEx's start may be the story that sells the paper and the one that every investor remembers. But it is last week's small article disclosing Mr. Smith's recent surgery that brings home an even more important investing point, a point that can be so easily overlooked in a time of market return single-mindedness: Companies are run by real people, and people are fallible and mortal. As individual investors in a company like FedEx, we are merely riding along on a wealth creation train that has as its engine a human being. We should be thankful for our good fortune.
Great leaders and visionary businesspeople don't grow on trees. Still, they all seem in many ways to be cut from the same vine. They often fly against the wind of convention and strike out on new paths with little more to go on than the strength of their own convictions. For the long-term investor, a manager who thinks independently is a true blessing. Especially if you are looking to invest in small companies that have the potential to grow their business values rapidly in the years to come, you want to have someone of Fred Smith's entrepreneurial spirit and managerial fortitude on your side.
Get well soon, Mr. Smith. The parallel worlds of business and investing need more examples like you.