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Choose Business Fundamentals over Mgmt Quality
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KiLrOy
Master |
19-Oct-2007 12:39
Yells: "I buy only what I can see." |
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Choose Business Fundamentals over Management Quality when InvestingHow important is a company?s management in gauging whether to invest in the company? That's a question that investors ponder when looking for investment candidates. The answer is management is important, but not the most important factor when considering a company?s stock. Some investors will disagree with that statement and as with all investment guidelines, it has its caveats. Equal FundamentalsGiven two companies with roughly equal fundamentals and all other economic and market factors the same, the better-managed company will excel.There are two problems with this hypothetical scenario: first, you very seldom look at two identical companies; and second, judging the quality of management can be very subjective barring some glaring foul-ups by one team or the other. I could add a third problem and that is management can change in the blink of an eye. The CEO with the vision and drive to succeed is lured away to another challenge ? than what? Great EconomicsGreat companies have great economics. They are at the top or headed that way because of fundamentals that are superior to the competition. They do it better, faster, cheaper, or whatever and they have such a competitive advantage that their position is well protected. A crackerjack management team may have gotten the company there, but it is the company?s market superiority that makes them a viable investment candidate. You have to assume that if the CEO leaves, the board of directors will be smart enough to find another captain to keep the ship on course. In the interim, market leaders are built by the whole organization, not just a few people at the top. A market-beating company can do just fine with average management, but even great managers may not be able to turn around a company with lousy fundamentals. ConclusionIt is no coincidence that many great companies have great managers, but it is usually best to bet on a company?s economics and not its management. |
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