So how can investors beat the market?
Photo: Jason DeFillippo. Source: Morguefile
There are lots of answers to that question. One approach is to find a stable of well-managed companies and stick with those. It’s harder than you think. For one thing, good management is hard to find. A great CEO can inspire people to deliver results that even they don’t think they can do; can to envision markets that don’t exist right now; and avoids professional and personal potholes that erode trust and poison the culture. These are hard to do, and they’re even harder when you’re a CEO with fiduciary responsibilities. The only person you can talk to about all your problems is your Priest or your dog.
There are some extraordinary leaders out there, a lot of mediocre ones, and a few really bad apples. It’s hard, from a distance, to identify who the superior managers are, to separate the wheat from the chaff. At Charter we look at corporate financial performance as well as manager compensation. When they treat the company as if it’s their personal piggy bank, that’s a bad sign. One investor has noted that the extravagance of a corporate office is inversely proportional management’s commitment to shareholders. Warren Buffett bought a stake in an insurance company when he saw that they had linoleum floors in their headquarters. “They’re cheaper to clean,” the CEO told him.
Great leaders can make potato chips or dumping trash exciting for those who work for them. Owning stocks based on management competence and financial performance is a solid, fundamental approach to adding value. It doesn’t require a lot of trading. And management isn’t as volatile as the market.
There are plenty of ways to add value. Finding a manager that you can grow with is a good way to do this.
Douglas R. Tengdin, CFA
Chief Investment Officer