(With addendum in red)
One of the costly mistakes I have made during my not-so-long investing career is to entrust my hard earned money onto companies with not-so-good management team.
There are numerous examples that happened on our own soil here in Malaysia recently that proved that I am not the only one that have to learn from this mistake. Transmile, Megan Media, Wimems, F-Tec.. just to name a few, have seen their share prices hammered badly due to questionings by SC on suspicions of wrong-doings within the companies. I am pretty sure there are still many similar cases out there, and it's going to be up to us as an investor, to be extra cautious when picking stocks.
But the questions is, how do we know if the company is managed by trustworthy people? Here are some of my humble thoughts:
a) Most importantly, refer to the financial statements and compare them across a few years. Good management should exhibit capability to grow revenue while cutting down costs, widening the profit margin, continually generating high returns on capitals over the years and etc. All in all, making more money for the shareholders. For the sake of this topic, let's just keep to these simple stuff.
b) Another more entertaining way compared to reading those boring numbers is to read the Chairman and MD's statements in the annual reports. Trust me, these statements tell alot about the person in charge. Ever read/heard about the world famous "Letter to Shareholders" written by Warren Buffett himself in the annual report of Berkshire Hathaway? In these letters, Buffett explains the performance of the company for the year, and some major decisions made by himself and some of his thoughts that he wanted to share with his shareholders (or usually referred to as Partners). These letters are treated like Bible by the investment community and there are people who try really hard to study the philosophies and principles of the legendary investor, as well as to find clues about his next move from these letters.
Besides, I especially like to read those statements by Chairman where the companies are in the red. It is usually interesting to see how they tried to cover the holes and give unreasonable excuses to us shareholders (when he thinks that we are suckers). These are usually followed by some very optimistic projections about the future and promising ways to improve the condition. Hmm.. if they already know what need to be done, why haven't they start doing them? Worse, sometimes I feel like they didn't even write those statements themselves..
c) Take a look at the Directors' Salaries and Remuneration package. I prefer those below 5% relative to the Net Profit. You can have your own threshold, depends on your generosity.
d) Read the newspaper and Internet. They might give some clues on what the person in charge is working on at the moment, and sometimes, their characters. I've heard jokes (or real cases, I don't know) where some "people" fly first class to meet their girl friends in London, bought a penthouse for them as "investment in strategic properties" with the companies' fund, buy a multi million dollars paintings as "furniture and fittings" for the office and etc, all in the company's expenses. I didn't say these are all wrong, my point is: Rich people have different hobbies from us ordinary people... Well, some of them might be really beneficial to the shareholders, hell knows. Why bother with these stuff? Mr Buffett once said something like: if the CEO of the company is someone you are comfortable to marry your daughter to, then it is the right business to invest in (well, of course with the assumption you don't hate your daughter). So, don't you want to know a little more about your potential son-in-law?
e) Lastly, this might need you to put in some effort to master the skill. Ever heard of a type of Asian fortune telling skill called "Face reading"? This is defined in Wikipedia as ".. the interpretation of facial features of the nose, eyes, mouth and other criteria within one's face and the conversion of those criteria into predictions for the future... usually covers one phase of the client's life, and reveals the type of luck associated with a certain age range". Once you master the skill, go look at all the pictures/portraits of the directors in the annual reports. Believe it or not, it might even be more accurate and effective than all those other methods mentioned above.
(Seriously, ignore the last one, I am merely writing to make up the numbers)
Addendum on 10/10/07: One big mistake I have made was that I overlooked the impact of management can have on a business/stock. I used to pick "undervalued" stocks by looking only at the numbers in the financial statements and totally ignored the intergrity of the management at the helm. From my experience, there are more homework need to be done. No matter how good the business prospect is; or how dominating it is in its market; or how "cheaply valued" the stock is, as long as you have someone stupid/dishonest/incapable/selfish/greedy (or whatever bad characteristics you can think of) up there, you won't see the stock performing well in long term. Period.
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2 comments:
Good that you emphasize on the importance of management. Through my experience in my professional career (only 4 humble years), I was lucky enough to have direct interactions with some of the top management of listed companies. Senior MD of SunCon, MD of CIMA (GLC), MD of one of Sime Darby's subsidiary and most recently MD and senior management of a GLC. And I see them at least once a month. You can really tell the difference between a good and a bad company by interacting with them. The way that the speak, the things that they do, their thought process and their integrity are really indications of how the company operates and whether it will excel. I really respect those selfless, far-sighted, no-nonsense and action oriented leaders. However, sadly for Malaysia, there are some (if not most) management that do not deserve to be there. They normally have their own hidden agenda and like to talk big but no action taken. As you would have guessed now, they are mostly in GLCs.
Hell right!! You are so lucky to have such opportunities in meeting them in person. I think, for the purpose of valuing a company, nothing beats talking to the people at the helm in person. Although there are exceptions where companies with bad management still see their share price increase, God bless the investors!
Anyway, thanks again for posting your valuable comments. It's very encouraging to have such 2 ways interactions. Please keep them coming..
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