There are always risks to any businesses. I cannot really answer...

There are always risks to any businesses. I cannot really answer you based on metrics like EBIT, EPS etc. Those numbers generally lag the underlying business and it is well said that if we invest solely based on numbers, then the richest men would be accountants. And I am not sure what you mean greater risks to the upside. Do you mean this stock is more likely to go up or down? It really depends on how you look at it and how long your time horizon is.

Asset management is a great business to be in as long your AUM is increasing, but this is a double edged sword. Operating leverage can work really well in a bull market, but without controlling the expenses carefully, it can destroy a company in a down turn very quickly. Also a lot of people seem not to understand is that this is really a MARKETING business. Fidelity is a mutual fund company, but it is really a company does world class marketing. Asset gathering is a mantra in the industry and anything else, like add value to clients, is just blah, blah and blah.

With that said, FID is a people business. There are no meaningful differentiations between the company and its competitors. Everyone with some capital can go into this business, so the barrier is really low. It is not uncommon to see a company in this industry grow up quickly in a bull market, but it is very rare to see a start-up company like FID which grew through a big cycle while being profitable.

To invest in this company, you need to trust the management and their abilities. I never take heavy insider ownership seriously because I have seen people abusing their positions. There are a few things I want to mention here, to the management's credit:

- Current CEO frequently forfeited his 100,000 yearly cash bonus in the early years even though he hit his targets. I have no idea why, but guessed he wanted to be on par with his employees.
- Management never abused the options. There are only 2 conditions they issue options: one is the 100k share option granted to the CEO yearly with market price at the time as strike price; another is when the vendors ask for shares instead of cash in an acquisition.
- Management routinely pay around 4x EBIT for acquisitions
- The compensation is lower than similar companies
- Management is really serious about expense control. If you read the ARs from 2011, you will see there are years expenses were reduced while revenue increased sharply. I have never seen this in any other similar business, especially when this industry is well known for rewarding its star performers. This indicates FID really has a coherent and a team-based culture.
- Financials are extremely clean and easy to understand.
- When the CEO was asked why the company was not charging performance fees like everybody else in a TV interview(before the GFC I remember), he simply said it would be too much for his clients and the host could not help but chuckled. After, if you can do it, why not?

In the end, we ask ourselves, what really causes a company to succeed? There are failures in good industries and there are successes in dire industries. Ever heard of SouthWest Airlines and Nucor? How about Ulta, which is a make up retailer in the US(Amazon in mind!)? It is people who make things happen, not the other way around. I do not have a crystal ball and never pretended I have. But from 2 decades of experience, I saw something familiar in this situation and I made a heavy bet. Without really diving into those details, you can never be confident to hold it long term.

Fan