St.Francis de Sales once said, “Do not lose your inward peace for anything whatsoever, even if your whole world seems upset.” Investing in a company with opaque management can make you lose your sleep which can impact your health and happiness.
For us, understanding the company’s foundation is crucial to assessing what motivates the CEOs, which ultimately impacts the share price.
As the saying goes, life can be understood backwards, but it must be lived forwards. A great business reputation is slowly built on a firm foundation of integrity in the same way that you build a house – the foundation has to be right and the materials you use have to be durable and high quality otherwise it can all crumble during the storm.
The same principle holds when investing in a company, if the leadership is right the rest normally follows. As Jack Welch eloquently stated “Great business leaders create a vision, communicate the vision, passionately own the vision and relentlessly drive it to completion.”
Their habits are from the smallest details such as improving customer experience and investing in the future, all while there is pressure from the investors to report strong earnings in the short run.
A leader is someone who is creative, imaginative and thinks long-term to create value for customers and shareholders.
A leader who allocates capital very well and has skin in the game encourages senior management to think like a business owner and not be greedy with the compensation plan.
It’s important as investors to do our duty, always without attachment to reach the ultimate truth. To study, study, study the company management.
Every investor has his or her criteria for identifying investment opportunities. For example, we have a 21 point checklist for the 21st century when we conduct our research.
If I had to describe them succinctly it would be leadership and the ability to allocate capital with plenty of reinvestment opportunities to repeat the process, that ultimately what will drive the share price.
A leadership with integrity and vision to take the company to the destination they imagined. A management that’s rational and whose interests align with shareholders.
A leadership that is creative, adaptable, courageous and obsessed with customer experience.
Warren Buffett said, “When we own shares of extraordinary companies with outstanding management, our favourite holding period is forever.” Yet, we must also think of the continuity of success post-founder to prevent any disaster. In order to do that perfectly you need to know what you own and why you own it.
Since continued transformation and reinvention are the keys to long-term growth, will the new leadership repeat the same success? It is best to sell and move on if the answer is no. As Thomas Edison once warned, “Vision without execution is hallucination”.
The key is to invest in companies that are run by a visionary person you trust and who knows how to allocate capital very well. Secondly, once you own an outstanding business, never sell it unless you are no longer confident that the management will take it to the promised land. In our research, we have discovered only a few well-selected businesses meet these criteria. Once those companies present us with the opportunity we must seize it with courage because it can lead to great investment success.
YFS Intelligent Wealth Fund Performance vs. IA Global
Awet Ghirmay, Head of Investment Research
If you want to learn more about this topic, please find the link here.
More information about our fund can be found here: Hargreaves Lansdown or AJ Bell
Risk warnings
The value of investments and the income derived from them may fall as well as rise. You may not get back what you invest. This communication is for general information only and is not intended to be individual advice. You are recommended to seek competent professional advice before taking any action. All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs practice. Levels and bases of tax relief are subject to change. This blog is based on my own observations and opinions.
