How to spot a hones and competent management?
“Somebody once said that in looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if you don’t have the first, the other two will kill you. You think about it; it’s true. If you hire somebody without [integrity], you really want them to be dumb and lazy.” -Warren BuffettThe part about “honest and competent” management of Warren Buffetts criteria is something that is often missed in a stock-analysis, often followed by this Quote: “I try to buy stock in businesses that are so wonderful that an idiot can run them because sooner or later, one will.” from Warren. Analysts are more numbers-peoples who avoid to looking at soft-skills. I think this is a mistake and I will try to look more at characteristics of the management of companies in the future – I want to get better at analysing them.Vernon Silver and Elisa Martinuzzi wrote this very interesting and eye-opening article about how “How Deutsche Bank Made a $462 Million Loss Disappear” at Banca Monte dei Paschi in 2008. I recommend it highly. bloomberg- how-deutsche-bank-made-367-million-disappear
.. was down €367 million on a single investment. Losing that much money was bad; having to include it in the bank’s yearend report to the public, as required by Italian law, was arguably much worse.
For one half of the deal, Paschi would make a sure-thing, moneymaking bet with Deutsche Bank and use those winnings to extinguish its 2008 trading losses. Of course, Deutsche doesn’t give away money for free, so for the second half of the deal, the Italians would make a bet that was sure to lose.
Here is the 2008 Financial Report of Paschi (link)
If criminal energy is involved and the Management tries to betray the shareholders (or at least don’t present them the thought) it is really hard to discover this timely – I would say for a non institutional investor it is virtually impossible. My conclusion from this is: It needs an honest management whom you can trust for me to own the stock, in best case with skin in the game – otherwise buy an index-funds.
How to do this
It is not easy to evaluate the caracteristics of people – especially from a distance. This would be the creterias that I like to see in a managemnt team:
- never was involved in sleazy actions (especially against shareholders)
- humble appearance like at InvestorAB or Warren Buffett (the opposite of show-offs)
- reasonable capital allocation (did they buy in 2009?)
- communicate misstakes (early), assume responsibility (don’t blame the weahter)
- owner owned (is not neccesary but adds some safety)
- no exessive salary (1-$ managements ?)