The most important question in any bull case
Can you trust management?
Disclaimer: The information contained in this article is not and should not be construed as investment advice. This is my investing journey and I simply share what I do and why I do that for educational and entertainment purposes.
At the beginning of my career, I started a job where I was expected to build out sell-side coverage on European capital goods companies, i.e. manufacturers of machinery and automotive parts.
When we discussed which company I should initiate coverage on first, the firm’s lead analyst who had hired me told me something very important (although I didn’t fully appreciate the importance in that moment). He said something along these lines:
“Take a very close look at the management team. They are the ones who will have to execute on the investment case you are pitching. Their integrity and competence decides everything.”
It’s a very obvious point of view, but I feel like it gets underappreciated. Many seem to believe anything the management of their favorite company tells them. Especially in a raging bull market where balls seem to grow bigger every day while brains are shrinking at the same pace.
I certainly underappreciated this issue when I was younger. I wasn’t going to let anyone bullshit me, of course. But I didn’t feel like I needed to be particularly alert about this matter. As long as management claims sounded reasonable, why wouldn’t I trust them? Why should they lie when it will be revealed later on, potentially destroying their credibility and legacy? I wanted to study the competitive environment, the company’s valuation, the product etc. That’s where I saw my value add.
It occurred later to me that they obviously lie all the time and way more than I could have ever imagined. And even if it gets uncovered later, it’s usually without consequences. Management teams have all kinds of incentives to mislead their audience. Much of their job is about “story telling”, i.e. creating a fiction of the company to attract investor money. And markets have an incredibly short memory. Nobody cares about anything that was said and promised a year ago.
In this article I will list what I consider the most important questions to figure out whether management can be trusted. And I will share examples where management signaled high credibility. And where it did and does the opposite. There will be more examples on the latter because it’s easier to find bad examples than good examples. Trustworthy management teams tend to perform as silently as a good referee in a soccer game.