“If a company’s balance sheet passes muster, I then try to get a handle on management. The competence, motivation, and character of management often are critical to the success or failure of a company. To form an opinion on management, I normally pay careful attention to the management’s general reputation, read what the management has said in the past, assess whether the management’s stated strategies and goals make sense, and analyze whether the management has been successful carrying out its strategies and meeting its goals. However, I am humble about my abilities to accurately assess managements.
Experience shows that investors can be unduly impressed by executives who are charismatic or who purposely say what investors want to hear—who play to their audience. Also, investors frequently will undeservedly credit management for a company’s favorable results and vice versa. Favorable or unfavorable results often are fortuitous or unfortuitous. A number of years ago, I was one of a few hundred securities analysts attending a particularly charismatic Wall Street presentation by Dennis Kozlowski, the CEO of Tyco International. At the end of the presentation, the audience burst into applause, and one attendee turned to me and said: “Kozlowski might be the single best executive in the country today.” A few years later, Tyco was near bankruptcy and Dennis Kozlowski was headed for prison. This is just one example of why one should be humble about his abilities “to judge a management.”
“After trying to get a handle on a company’s balance sheet and management, we usually start studying the company’s business fundamentals. We try to understand the key forces at work, including (but not limited to) quality of products and services, reputation, competition and protection from future competition, technological and other possible changes, cost structure, growth opportunities, pricing power, dependence on the economy, degree of governmental regulation, capital intensity, and return on capital.”
“Because we believe that information reduces uncertainty, we try to gather as much information as possible. We read and think—and we sometimes speak to customers, competitors, and suppliers. While we do interview the managements of the companies we analyze, we are wary that their opinions and projections will be biased.”
Excerpt From: Edgar Wachenheim, III. “Common Stocks and Common Sense”