Careful Investors look for Signs of Quality Management


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One of the main factors determining the success of a corporation is the competence of management.

Buy into companies with “good management.”

But in practice, how do you know?

  • Ideally you begin by meeting management.  However, the door is open to very few and the ability to assess it is just as limited.
  • The practical approach is to begin by looking at the record.

Practical Approach:  Looking at the Record

If a company’s earnings are increasing, this is one piece of evidence pointing to good management.

  • However, the results must be measured against others in the same industry.  
  • Otherwise, a management which swims with a favourable tide may get more credit than it deserves.  

Often a superior management fighting bad conditions is unjustly criticized.

Type of Management Counts

Is the company in question headed by an old-fashioned entrepreneur who has made management a one-man show?

Or does it have good management in echelon depth which can survive the retirement or death of its chief executive?

Officers’ shareholdings

One aspect of management worth noting is the extent to which the officers own their own shares.

Broadly speaking, it is advantageous for the officers to have a stake in ownership.

It makes a difference whether they own the stock

  • because they want it or 
  • because they are stuck with it.

You should consider whether they

  • acquired it through inheritance, 
  • bought it on option, or 
  • bought it in the open market.  

Likewise, where possible, consider the purchase date and price paid.

Close Watch Pays Off

One of the many ways of making money in securities, is through a close watch on management.

Watch and understand the changes where companies have been in difficulty, their stocks depressed and general dissatisfaction expressed and where a new management comes in and invariably begins by sweeping out the accounting cobwebs.

  • Everything is marked down or written off so that the new management is not held accountable for the mistakes of the old.  
  • Very often dividends which were imprudently paid are cut or passed.  
  • Thus an investor at this juncture often gets in at the bottom or the beginning of a new cycle.
  • A recent example:  TESCO London.

Conclusion:

Attempting to evaluate management, even though you cannot get all the answers, is worth all the effort it entails.

Related post:

Management Compensation
https://myinvestingnotes.blogspot.com/2010/04/buffett-1994-in-setting-compensation-we.html

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