This site is all about interaction with our readers, so we loved it when Djamel asked the following question in response to this post.
“Hi, I would like to say that this was a great article – I appreciate the time and effort that goes into writing informative articles for free.
I have a few questions though (if you’re interested in answering):
How do you get comfortable with management – is this a gut feeling you get, or do you have a number of questions on their management style, etc. Is there not a danger of falling into a trap of investing with people you like rather than excellent managers? For example, I know some really charismatic guys who are great at raising equity, but even greater at squandering it. Also I read somewhere that Warren Buffet doesn’t put much store in management and is more interested in the underlying business assuming that eventually idiots will be in charge (if not already).
Finally if you’re a small investor will business managers still have the time of the day for you? How do you approach the subject of wanting to meet up with management?”
This is a great question, and as such I thought I’d dedicate this post to it.
First, don’t expect any Übermensch from me. When my net worth hits the 9 figure mark I’ll let you know, but until then I’ll be learning from readers as much as readers will learn from me. O.k., with that caveat in place I’ll deal with Warren Buffets’ views and then my own. Mr. Buffet (Warren to his friends – of which I’m not one, lol…) makes no secret about the fact that he is a long-term investor buying companies he intends to hold forever. I on the other hand do not invest in this fashion.
Outstanding Management Will Achieve Growth
I attempt to find companies in the very early growth stages and invest in them for as long as it makes sense to do so, keeping in mind my expected return (I have a high risk tolerance). Take for example a large-cap company like Microsoft. What are the chances of MSFT doubling from its present $218B market cap? Not great would be my bet. On the other hand, a $4 M market cap company with great fundamentals can quite easily, if run correctly, double, triple or quadruple its market cap within a few short years, if not sooner.
The only way for any company to achieve this sort of growth is with outstanding management. A great company with poor management can be ruined quite easily. Granted a company as large and profitable as MSFT would take a longer time to destroy its current advantages and value, while a small-cap company run by fools will be able to do so in a heartbeat. Remember Swiss Air which was known as the world’s most efficient airline and affectionately termed a “flying Bank”?
Pay Attention to Management, Not Charisma
I have seen marginal businesses taken over by a great management team turn into fantastic investments, but I have yet to see profitable businesses become more profitable with poor management. I ALWAYS pay attention to management.
It is not necessary to be “friends” with management. You are quite correct about falling in love with charismatic management, but realize that you are not seeking a lifetime partner to “spoon” with here. Charisma is not good management. Learn to distinguish the wheat from the chafe. I could care less if managements are beastly ugly, have poor table manners and halitosis that will strip wallpaper. You want great business minds… that’s it!
Enjoy your week!
“Annual income twenty pounds, annual expenditure nineteen ninety six (£19.96), result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six (£20.06), result misery.” — Charles Dickens