STREET DOGS

We have made the mistake more than once of not investing in a company with a great management team because of valuation concerns — only to look back a year later and realise we missed an opportunity because the management team made intelligent, strategic decisions that had a significant impact. — Lee Ainslie

One often overlooked place to discover a company’s human side is the CEO’s annual letter to shareholders. At its best, this document provides the CEO’s candid reflections on the company’s progress over the past year, as well as insight into where it is headed. At its worst, it’s pure promotional fluff, designed to deliberately obscure the truth. But these letters can reveal clues into a company’s strategy, values, and ability to meet stated goals. Those investors whose investment approach is primarily centred on the numbers and who love the black-and-white clarity of financial statements can all too easily miss out on what’s behind the numbers: people. It’s a company’s people that determine a business will thrive, stagnate or fail. The key, to telling the difference between forthright disclosure and wasted paper, lies in reading several years of the CEO’s letters. They can provide a useful gauge of a company’s long-term investment potential. A story unfolds of promises made and promises kept; the evolution of a company’s business strategy; progress, or the lack thereof, in reaching goals become apparent. As does management’s quality. When the letters demonstrate honesty, an understandable explanation of the business, progress towards goals, and smart strategies for the future, you may want to invest in it, given the right price. In contrast, when letters contain inconsistencies, confusing jargon, or a lack of relevant disclosure, it’s probably a company you wouldn’t want to own, regardless of the stock price.

Matt Richey