Watch Out For Used Car Salesmen Masquerading As CEOs
The Dynamic Wealth Report
January 14, 2010
by Robert Morris, Editor
“It sounds to me a little bit like selling a car with faulty brakes, and
then buying an insurance policy on the buyer of those cars.” That’s how
Phil Angelides, Chairman of the Financial Crisis Inquiry Commission,
characterized the behavior of Wall Street’s biggest banks.
In case you missed it, the Commission held its first hearings yesterday
into how the banks’ conduct led to last year’s near meltdown of the
financial system. Mr. Angelides didn’t pull any punches when he compared
these “Masters of the Universe” to used car salesmen.
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That comment and another one by Mr. Angelides got me thinking. Both of
them address something every investor needs to take to heart.
He said, “I am troubled by the inability [of bank CEOs] to take
responsibility because I think it’s fundamental.”
I bet you’re nodding your head in agreement. It’s such a simple truism. When you make a mistake that hurts someone else, you ought to
acknowledge what you did was wrong and take responsibility for your
actions.
That’s one sign of good management…
One of my favorite quotes by Warren Buffett sums it up perfectly…
“In evaluating people, you look for three qualities: integrity,
intelligence, and energy. And, if you don’t have the first, the other
two will kill you.”
But, how can we as small-fry investors tell if management’s honest?
We don’t know these people. We don’t have an opportunity to look them in
the eye and talk to them directly. How can we really size up someone’s
character if we can’t interact with them in person?
We all know the insatiable greed of Wall Street fat cats was the source
of the financial crisis. But, they’re not apologizing and taking
responsibility. They’re busy profiting from the aftermath… and blaming
the government for letting the banks take on too much risk. (Now that’s
just downright disgraceful in my book.)
This is not the kind of behavior I want to see from the executives of
companies that I invest in. And, you shouldn’t either.
What we’re really talking about here is honesty and integrity.
These are the most important, most fundamental character traits I look
for when assessing a company’s management team. If the CEO and top
executives lack these qualities, you can be sure the company’s headed for
trouble.
It all starts with diligent research.
Read the company’s annual reports from oldest to newest. These will give
you a good idea about management’s perspectives, strategies, and goals. By reading them in chronological order, you can get a feel for how
consistent and reliable management is.
It’s also important to go back and review press releases, quarterly
earnings reports, interviews, speeches, and the company’s website.
These too provide insight into the character of a company’s management
team. Lucky for us, the internet makes it very easy to gather this
information quickly and conveniently.
Most investors don’t take the time to properly assess the quality of a
company’s leadership before buying the stock.
They usually spend all their time reviewing the company’s fundamental
data or studying the stock chart. Those are very important parts of the
research process. But you need to spend some time assessing the quality
of the people running the business.
Sometimes you’ll spot trends in management behavior that gives you
pause.
For example, you might find that a hotshot CEO has a history of sweeping
problems and bad news under the rug. And when the problems finally come
to light (they always do), the arrogant CEO will shift the blame
elsewhere rather than take responsibility for them.
Avoid companies whose managers are not “candid” with shareholders.
Good managers freely admit their mistakes. By admitting their mistakes,
they can study and learn from them. And, they’re more likely to correct
problems before they blow up and cause catastrophic failures.
Of course, honesty and integrity aren’t the only qualities a good
management team should have.
They should also be highly rational and intelligent. Do they make good
decisions about allocating capital? Are they focusing on what really
makes sense for the business and shareholders?
And, good managers are able to act independently of external and
internal pressures. They’re able to resist what Buffett calls the
“institutional imperative”.
The institutional imperative is a combination of influences often
pushing managers to act in unreasonable ways.
For example, Wall Street analysts, fund managers, and large shareholders
are extremely focused on the short-term. They reward and punish
companies based on quarterly results.
This pressure to produce results today (no matter what) has caused many
a CEO to cut corners. Many will pursue strategies that aren’t in the
company’s best interests. While it’s important to deliver consistently
good results, it’s more important to do what’s necessary to promote the
company’s growth over the long run.
A good CEO understands how these forces work. And, he’s able to balance
the needs of institutional investors for short-term results with the
need to successfully grow the company longer-term.
Next time you’re researching investment opportunities, make sure to spend
some time assessing the quality of management. You might see things that
help you avoid the next Bear Stearns or Enron. Remember, the numbers and
chart patterns are important, but the values of the people calling the
shots are critical for long-term success.
Dry-bulk shipping stocks are continuing to move higher in a new uptrend. The entire sector broke out of a six-month sideways pattern at the first
of the year. Rising commodity prices and pent-up demand are driving
shipping rates higher. The Claymore Delta Global Shipping ETF
(SEA) is up 2.8% today and nearly 18% so far this year.
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