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Jefferson Capital and the Noah Rule

"Predicting rain doesn’t count. Building arks does."

By David M. Burton, CEO

Jefferson Capital Holdings

Most companies spend a fair amount of effort using today’s information and trying to look around the corner. They gather market intelligence to make a prediction, then seek to leverage it into a competitive advantage. Like a farmer looking at today’s weather to determine which seeds to purchase and when to plant, they use today’s marketplace indicators to determine which sectors to invest in and when to move forward.

At Jefferson Capital, we certainly utilize marketplace indicators to inform our actions. But unlike others, we take it a step further. With a nod to Warren Buffet, and as one of the secrets to our success, I’d like to share some insights into how we do so and the strong foundation it has provided over the past 21 years.

Watching the Weather

This week economists concluded that the U.S. had tipped into recession. Their conclusion was based upon the latest economic data, most notably news showing a marked drop in job growth during the month of July.

This came as a surprise to many, as before last Friday many economists had believed a recession would not occur. They had pointed to the U.S. economy’s growth in the face of the Fed’s high interest rates. They also cited strong government spending, consumers continuing to subside on the remnants of pandemic aid, and the increasing use of credit cards as explanations why a recession would be avoided. They also referenced the fact that the personal saving rate, which had averaged 8% since 1960, had fallen to 3.4% in June. Explaining that consumers were spending rather than saving, they believed the threat of a recession had passed.

Then last Friday news dropped that payroll employment had grown by only 114,000 jobs in July, which was well below what economists had forecasted. They also noted that the unemployment rate had increased to 4.3%, which was markedly above the 4.1% rate the month before and the 3.5% rate a year earlier. After months of trying to predict when a recession would arrive - - or if it would arrive - - the rain began to fall.

Warren Buffett and the Noah Rule

In his 2001 Annual Shareholder Report for Berkshire Hathaway, Warren Buffet sought to explain his company’s unexpectedly deficient performance that year. In doing so he referenced the little-known Noah Rule. In a simple yet profound statement Buffet wrote, “Predicting rain doesn’t count; building arks does.” Buffet explained that he had made a significant investing mistake that year, which was intensified by the events of 9/11. Most importantly, he used the Noah Rule to explain that although he had anticipated several market events that led to inferior performance, he had failed to translate his thoughts into actions. The rain had arrived as he anticipated, but he had failed to build an ark.

Building Arks Over the Years

We have been building arks for over 20 years at Jefferson Capital. While others spend resources trying to predict when the rain will fall, we take it a step further and act upon it. There are many examples of this in our business, some of which go back to our beginnings.

For example, when we started out over 20 years ago, we achieved tremendous success in one area of the consumer financial services market – credit card receivables. We also examined the marketplace indicators and determined (like others in the industry) that rain would eventually arrive; that our success would breed increased competition and reduced returns. Yet while others focused on timing the rain, we began investing in other asset classes. In time, the highly competitive credit card receivables market did arrive. Although most knew this would occur, they were forced out of business due to an inability to plan for such an eventuality. Fortunately for Jefferson Capital, our ark had already been built.

Another good example is our early focus upon compliance. From the beginning, the large banks and credit originators with whom we partnered (and with whom we continue to partner) had significant compliance requirements that were more stringent compared to other creditors. Although most foresaw regulators eventually applying these more stringent standards across the industry, they focused on determining when it would occur. At Jefferson Capital, we didn’t wait and immediately invested in higher compliance standards. Years later, with the advent of the CFPB and the heightened scrutiny of state, federal and local regulators, those that were unprepared or unwilling to invest in compliance were forced to leave the industry. Our ark had been built well before.

In Conclusion

Last week’s job numbers resulted in what many believe is the tipping point of recession. Like others, we saw this coming as consumer balances have grown, interest rates have increased, and inflation eroded consumer purchasing power. Clearly, delinquency and charge off volumes are on the rise and at JCap we prepared ourselves to support our clients’ growing debt sale volumes. For example, in the first quarter, we issued our second senior unsecured bond creating additional capacity to grow our portfolio purchasing at the very time that our clients need it most. We are well prepared for this week’s rain.

Following the Noah Rule at Jefferson Capital requires time, resources, and dedication. It can certainly be a distraction from our day-to-day operations. But for over two decades we have been able to weather the storm regardless of when the rain arrives, and we look forward to continuing to do so for the next 20 years.

#DoTheRightThing #BuildTheArks