Few Americans know Fimi. In Israel, everyone in business does. It is Israel’s first, and now its largest, private equity (PE) fund.

Since its creation in 1996, by Ishai Davidi, a former IDF Special Forces officer, Fimi acquired 72 companies. All but one are in Israel. Forty-one of them were sold, only three at a loss, and 32 are still owned. In the PE industry such a dominant fund is known as a country fund. Among the latest US investors in Fimi one can find Michael Milken, Jim Tisch of the Loews Corporation, and Jay Jordan of The Jordan Company.

There is no one formula for success. Moreover, no one knows in cases of successful investors if superior ability is at work or merely a halo effect. It is similar to Warren Buffett buying a company: everyone immediately assumes this is a company worth doing business with. IMD Professor Phil Rosenzweig documented this phenomenon in his best-selling book The Halo Effect. (Especially appropriate since halo effects lead to self-fulfilling prophecies.)

Even if Davidi’s success is due to halo effects , it is still worth examining the way he looks at the world. We may learn something. Here are some interesting principles he follows:

  • Fimi does not invest in financial or real-estate companies. Right off you can tell the guy is serious.
  • Each investment comes after years of patient monitoring of the target, and meeting with the owners.
  • Before making an offer, the fund assesses risk by running a red team/blue team war game. The stated objective of the war game is devil’s advocacy: argue that the deal should not be done.

Those steps, while prudent, don’t sound particularly innovative. But Fimi goes further. Fimi looks for companies with a) clear strategic plans and b) humble executives. Executive compensation must be correlated not only to performance over several years but also to workers’ compensation. Davidi does not believe in high executive pay and low workers’ pay. That’s not just about morality or generosity; it serves a business purpose. None of Fimi’s companies is unionized, in a country where unions are extremely strong and can be quite destructive, and Fimi wants to keep it that way. Finally, Fimi never looks for an exit. Instead, it improves the company’s performance. Davidi’s philosophy: once performance improves, offers will look for you.

The principles above do not amount to a formula for success; instead, they reflect a systematic, careful process of evaluation. Many investors, including our readers, follow similar logical process. So what makes Davidi different? I believe it is his ability to find the essence of competition in any segment where his portfolio’s companies play. It is almost as if he runs Porter’s Five Forces model for each company he buys. Consider this anecdote.

In 1999, Fimi paid $1 million for a small manufacturer of automobile engine parts. Fimi improved it and several years later sold it for $30 million. The new owners were not as strategic. In 2011, the company was near bankruptcy. Fimi bought it again for around $5 million. Today the company is valued at $210 million. Here is how Davidi summarizes the challenge in competing in the automobile supply market:

It takes years until the big car companies trust you enough to be in their supply chain. So you must participate in as many RFPs as possible, over and again. You must offer very low prices to gain a foothold. Entry into the trusted list is the most important aspect of the strategy, because once you are in, you are in. The car companies do not like to change suppliers. However, at a hint of legal trouble, they will drop you. So, when this company was in financial trouble, Fimi jumped in to avoid any creditors’ litigation or other legal wrangling which would have completely destroyed the company’s standing with the buyers.

In my career, I have met hundreds of executives who were extremely knowledgeable about every little detail of the competition in their industry. They tended to lose the big picture. They tended to think execution matters more than clear strategy. My perspective, as an observer of the skill of competing, is that Davidi’s ability to abstract from the details and focus on the most salient feature of competition is his biggest competitive skill. Once you crystallize the essence of competition in a given sector, you are at least looking at the right challenge to solve with your strategy.

Davidi, www.competing.com is not for sale!

Mark Chussil, co-founder of Competing.com, adds this: “Not so fast, Ben…”

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This essay is not really about Microsoft. I don’t know what Microsoft should do. Neither do you, reader. You think you know more about Microsoft than Steve Ballmer? Bill Gates? The Microsoft engineer living next door? Maybe. Probably not.

Important people commented on the imminent departure of Microsoft CEO Ballmer in USA Today’s Opinionline section. More than the substance of those opinions, which are hardly backed by unequivocal evidence, it is interesting to look at who said what.

The tech community is torn between Microsoft friends and Microsoft enemies-for-life (typically Linux fanatics). Tech Crunch writer Alex Wilhelm sees Ballmer as a good CEO who is exiting at his best. ZDNet writer Steven J. Vaughan-Nichols, a staunch Linux worshiper, has criticized Microsoft for years and naturally regards Ballmer as a flop. Both make cases based on technol­ogy, personal preferences, and anecdotal evidence. Of course none of those are the perspective that matters.

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Competing.com focuses on competing as a skill. Advantage in competing is the ultimate com­petitive advantage.

How do we know when someone is skillful at competing? Reflexively, unconsciously, and seem­ingly inevitably we turn to the person’s track record. A person with a string of competitive suc­cesses is more likely to be competitively skillful, we figure, than someone with a string of com­petitive failures.

The thing is, it’s hard to tell the difference between luck and skill. We all know luck plays a part. (Bad luck, anyway: we fail when we’re unlucky. Success always comes from skill, we assure our­selves.) That’s why we hesitate to call a person a genius after one good move or a dud after one bad move. But with a reasonably long track record it’s easy to fall into the track-record fallacy, the business equivalent of the prosecutor’s fallacy.

Stop! Do not let your brain recoil in fear of probabilities and actual logic! This is your chance to improve your skill at competing relative to the weaker souls who rely on lists of five magic se­crets of success.

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Businesspeople often cast critical thinking as a due-diligence gauntlet. Where did that number come from. How confident are you. What does [fill in author, authority, or celebrity] say.

Those aren’t bad questions; they’re just not good enough. They’re necessary but not sufficient. Saying you must be right because you survived the gauntlet is like saying you must be movie-star gorgeous because you floss your teeth.

Think of it this way. No strategy or business plan ever gets adopted without passing the gaunt­let, yet strategies and plans fail. We know that because companies go bankrupt (a severe form of failure), and it’s unlikely that bankruptcy was their goal.

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A recent story in USA Today: “Apple becomes a hedge fund target.” It seems that George Soros doubled his stake in Apple to 66,800 shares. Carl Icahn revealed earlier with a tweet that he is building up a big position as well.

Soros and Icahn are just the latest in the wave of large hedge funds and their billionaire founders buying stock in public companies. What’s news is that they are no longer confining their moves to smaller companies. According to USA Today, “The percentage of companies that activists are targeting valued at more than $1 billion is 29%. If that pace holds it would be a 45% jump from 2012, FactSet data show.”

At this point you may be reading to satisfy your curiosity about the big egos and big bucks involved. Ackerman and Soros bought into JC Penney, and now Ackerman has left the board. Soros is facing Ackerman on Herbalife, where Soros went long and Ackerman went short. Fascinating; boys and their toys. But if you stop to reflect for a minute, you may realize this is much more significant than rich folks playing. In fact, I claim, we are entering the Third Revolution in the history of public companies, thanks to the much-maligned hedge funds. A much-needed revolution, too.

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It’s easy to tell if a business was profitable after the fact. Unfortunately, we have to place our investment bets before the fact.

As my colleague Ben Gilad has described (“Why Venture Capitalists Fail”), even highly motivated professionals have difficulty consistently placing bets that win. John Bogle founded The Vanguard Group (currently managing $2 trillion) in 1974 on the idea that actively managed mutual funds will not beat a well-run index fund over time.

But regardless of difficulty, we still must place bets. We bet not only when we buy a share of stock. We bet also when we decide where to work and what business to start.

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