Management: The Best Management Means the Best Stocks, Excerpt #3 from The Big Money

Here's part #3 in our series featuring excerpts from The Big Money. Today's excerpt is from Chapter Six which is titled “Management: The Best Management Means the Best Stocks.” Here's what the book has to say:

Buying Staples, Starbucks, Home Depot and More

The number one thing that investors always ask about is how they could identify the next Bill Gates or Michael Dell, or the next Cisco, Home Depot, or Staples.  I successfully bet on every one of the above managers and companies (and many, many more) starting the day they went public…when I did not find consistency, or execution ability…I had to sell lots of small companies….I built up positions of the good ones. I used the Seven Steps and the disciplines stressed repeatedly in this book.

First: With Microsoft, Dell, Home Depot, Cisco, and Staples, I knew several key things when they went public:

• The top guy had vision and could translate that vision into a strategy to make his company a long-term winner, not just a good story for one year or two.

• The person at the top was very competitive, but not someone who would take ridiculous risks, and he showed investors a solid plan to dominate his industry and become number one.

• Each company had already done something right and seemed to have what looked to me like a solid business model that described how it would excel in the industry, compete and grow well, and be profitable.

• Each company was in an industry that was just taking off, and looked as though it would be huge – an industry opportunity for the future.

• Each one either already had, or looked as if it would have, a lot of competitors who wanted a piece of that exciting industry.

The business plan had to be logical, show common sense…and [make] it possible for every nonprofessional investor to easily understand it.

This is one metric that I give pretty heavy weight to when buying a stock. On two recent purchases of Disney (DIS) and Home Depot (HD) stock, top executives were one of the main reasons I went ahead and bought the stocks. (You can see my thinking on one of them at I Bought DIS).

I'd be interested in hearing how Free Money Finance readers consider management of companies when deciding whether or not to by a stock. Is it an important factor? How do you decide what's "good" management? Any stocks you've purchased because of good management? What happened?

Comments

[MAJ]

Is it posible to aquire great wealth in the mutual fund arena? I use to own Dell and Walgreens but since the Ebron thing went down I have been less willing to purchase individual stocks. My wife and i do a great job of saving. Our current portfolio returns about 13% over the last 5 years.

[frugal]

Hi FMF,
How does one exactly go about evaluating the executives of the company? The things that you listed are somewhat subjective. How does one tell a crook from a visionary, especially when you are not very familiar with the industry? I'm interested in whatever that you could elaborate further. As on how I do it, I just go by financial numbers.

[FMF]

Frugal --

There's not a single method, but I can describe how I came to believe in the three leaders I noted on Fred's other post.

With DIS, I detailed my thoughts pretty much in this post: http://www.freemoneyfinance.com/2006/02/i_bought_dis.html . In short, Steve Jobs has made me a ton of money on two separate occasions and he seems to have the magic touch. I think he'll do it again with DIS.

With HD, I've followed Nardelli since he "lost" the race at GE. Often a smart guy spurned is a powerful force -- he's out to prove something -- so I've watched him. Recently, the fundamentals of HD were attractive. I then read a positive story in Business Week (and listened to their behind the scenes podcast) and it reinforced much of my thinking about HD. So, I took the plunge.

With JPM, you've got the "smart guy spurned" issue working again. In addition, I did a bank deal at my last employer just at the time when one of the banks we were considering merged with Dimon's bank. The execs I was dealing with had met with Dimon and said he was the "real deal". His performance since then seems to back up their feelings, and while I haven't purchased JPM yet, it's on my short list.

Hope this helps!

[FRED KOBRICK]

Hi, MAJ, thanks for the question. The quick answer is the (1) Yes, lots of people make a lot of money with mutual funds and early in my book I say have most of your money with a professonal advisor or in mutual funds. I say that people should not try to manage the whole portfolio themselves, and should start wiht a small portion and devote all thier time to recognizing WEALTH stocks--those that can make them wealthy for life.

The typical or average investor and even those without prior experince can use the fun case studies in my book to go froward and do that mission. I cannot tell you what those stories and lessons are in one blog, but you can look at all my posts and book excerpts and see that the book is far different than other investment books and easier, more fun, and more effective and my methods made my record amongst the top in the country for decades.
This site also has a link to this week's USA TOday book reveiw of The Big Moeny and it is a strong endroesement for my method.

SO, yes, you can do this, MAJ--chapter one is entitled "ANYONE CAN BECOME RICH"

[FRED KOBRICK]

Hi, frugal this is Fred. I know it seems frustrating or potentially hard to evaluate the executives of a company. Like most good investment issues, experience is the best teacher, and if you want that experience with somebody else’s money first, as well as lots of it with guidelines to boot, you need to study the experiences of investors before you and what they did to solve these problems. That is why I wrote the book as what we call “the case method”, or condensed experiences with lessons.

All the top investors have learned that way. So, when investors want to boil it down to a few simple rules, they should realize that this is why people fail to get rich—a few simple rules will not make you millions. The quick fix books come and go over the decades, and people still try, but find me the people that have read all the quick fix books in each generation and ask them if they finished the book let alone where their yacht is.

I have a chapter that is fun like the rest of my book, and uses great examples like McDonald’s to teach about management—but, I have already quoted from that chapter in this site, and if you have not read that stuff yet, you have to ask yourself if you are in the quick fix camp and will stay their all your life, or if you truly, truly, want to get rich and read and use a few hours a week to do so. I do realize that much of what people try and read is worthless, but go to a bookstore and thumb through my book, or look at al the excerpts and quotes on this site, and you should see what I mean about using your common snese and having a compass to guide you to just the four key factors of the wealth stocks.

The same goes for crooks---my example of how Sambo’s restaurants in the 1970s taught me what I needed to know to avoid Enron in the 1990s is a great, fun story, and that chapter tells you what you want to know. Thumb through it in a bookstore if you want more, or actually use a few books and try the book—you have a lot of preview material right here.

ONE simple things is that when you learn how to look at a company’s business model and you look at an annual report and either they have not made the business model clear or how they describe their operations or earnings reports, never, ever feel dumb, just know that they are doing a lousy job of reporting to you, or they cold even be crooks. But some case experience and personal experience is what ultimately guides people to know how to recognize the gret stocks and the crooks—it will never be a few simple rules, in my opinion.

Sorry for posting so late. A lot came up today.

By the way, I will be back early tomorrow, also, but not through the whole day as I have to get my family together for mother’s day weekend.