Sep­a­rat­ing the ze­roes from the he­roes

When in­vest­ing in a stock, it is vi­tal to en­sure that the com­pany’s man­age­ment is do­ing its job prop­erly and in an eth­i­cal man­ner. This week, gives you some tips on how to gauge a man­age­ment team’s per­for­mance.

Finweek English Edition - - MARKETPLACE INVEST DIY - Ed­i­to­rial@fin­week.co.za

last week I wrote how I had sold my MTN shares af­ter the com­pany al­lowed price­sen­si­tive in­for­ma­tion (the $5.2bn Nige­rian fine, amount­ing to about R71.3bn) to be in the pub­lic do­main for hours be­fore is­su­ing a Sens an­nounce­ment. In this case I saw the story on Twit­ter early on the morn­ing of 26 Oc­to­ber, a Mon­day, and the orig­i­nat­ing ar­ti­cle had been on­line since Sun­day af­ter­noon. Yet MTN only is­sued a Sens af­ter 2pm on Mon­day.

Many have ac­cused me of re­spond­ing in a knee-jerk way while oth­ers say it was an emo­tional re­sponse. They may be right, but I have a sim­ple rule: I want to own out­stand­ing com­pa­nies and as a mat­ter of course they must have out­stand­ing man­age­ment that al­ways acts eth­i­cally. Is­su­ing a Sens an­nounce­ment five hours af­ter the mar­ket opened is nei­ther out­stand­ing nor eth­i­cal.

To my mind, sell­ing MTN was an easy de­ci­sion, but spot­ting less-than-out­stand­ing man­age­ment is usu­ally much harder. Prof­its may be grow­ing and the com­pany seems to be do­ing well, which cer­tainly points to com­pe­tent man­age­ment. But it does not in­di­cate out­stand­ing man­age­ment. What are they ex­pect­ing, what chal­lenges and what suc­cesses? Then as you con­tinue to read for­ward you see if they were largely cor­rect in their as­sess­ment. They are never go­ing to be 100% spot on. But do they have an un­der­stand­ing of what will hap­pen in the com­pany’s im­me­di­ate fu­ture and do they have a good plan for deal­ing with it? An out­stand­ing man­age­ment team should have at least five years of op­er­a­tions mapped out, so the chal­lenges for the next year should be pretty much known to them. Those com­pa­nies that com­mu­ni­cate frankly with share­hold­ers about the chal­lenges, and are mostly right about them, show signs of out­stand­ing man­age­ment.

When eval­u­at­ing a com­pany’s man­age­ment, some­thing else to look out for is un­ex­pected prob­lems that neg­a­tively im­pact profit but seem to crop up con­stantly. Ex­am­ples would be cur­rency loss, in­ven­tory is­sues, in­sur­ance prob­lems, ma­jor theft or even fires at the plant/ of­fices. In short, a litany of is­sues that al­ways seem to be­devil the com­pany and hit prof­its. This is not bad luck – it shows a lack of out­stand­ing man­age­ment. Lastly are deals that are sim­ply just dodgy. A few years back, a listed com­pany re­ported a prop­erty deal a year af­ter the event. In this deal, the com­pany had bought prop­er­ties for its op­er­a­tions, ex­cept ev­ery prop­erty had been bought from one of the di­rec­tors. Why the year-long wait? Man­age­ment then went on to say that it didn’t know the com­pany had to is­sue a Sens an­nounce­ment. Aside from that be­ing non­sense, it was sus­pect that some six prop­er­ties were bought across the coun­try and ev­ery one from a di­rec­tor! Make no mis­take, the com­pany iden­ti­fied the prop­er­ties, the di­rec­tors then bought them, added a markup and sold them to the com­pany.

I sold the stock im­me­di­ately and it then pro­ceeded to in­crease in value some five-fold over the next few years be­fore col­laps­ing to a third of my exit price. This is im­por­tant: just be­cause a com­pany has lessthan-out­stand­ing man­age­ment doesn’t mean the stock can’t move higher. How­ever, it does put the long-term sus­tain­abil­ity of the stock’s rise at risk and, more im­por­tantly, I don’t want sec­ond-rate man­agers or crooks run­ning the com­pa­nies I own, re­gard­less of whether they make money or not.

A fi­nal and im­por­tant point: know what mat­ters to you and your in­vest­ments and stick to your guns. In­vest­ing is not only about prof­its; it is also about do­ing it eth­i­cally.

To my mind, sell­ing MTN was an easy de­ci­sion, but spot­ting less-thanout­stand­ing man­age­ment is usu­ally much harder.

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