All of us listen to the management interviews, conference calls, press releases very carefully.
Coming through the official channels, we take those at face value while deciding to buy/ sell a stock.
Presumptions are –
- managements are always supposed to speak the truth;
- they can be held accountable for what they are saying; and
- they have to disclose everything to help investors take an informed decision
Read the above three presumptions again and you know the answers !
Most of the times there are selective disclosures as well as over commitments to manage investors’ expectations
Simple answer is – management comprises of individuals who are humans too.
- Their fortunes are linked with the Company’s stock price as well.
- They also want to be recognised, are media hungry and hence end up commenting on topics outside their domain/ knowledge.
- They also want to be looked as the front runners in catching the emerging trends.
- Like everyone else they also find it difficult to accept mistakes. Natural tendency is to shift the blame on the external factors.
Obviously there are exceptions – some managements play for the long term, are laser focused on their core strength, least interested in the media interviews and not at all bothered about the stock price movements in the short term. However, in general you will find them boring, uninterested and perception of being laggard. Though looked closely you may find them with solid businesses, strong balance sheets, enviable consistent financial performance and least volatile stock price movements. However, this post is not about those kind of managements as in any case they speak very less. You have to listen to them through their performance !
You must be thinking that if quiet managements can generate good returns then why should anyone be even bothered about the other managements?
Easier said than done – we all want action and are interested in catching the emerging trends. Besides it’s not that talkative managements are not good. Some of them will significantly out perform the quieter ones.
On a lighter note – take Tesla as an example. One of the best performing stock in the recent times with a significant history of speaking too much and over commitments. Same goes true for India’s Tesla.
The facts are –
- You may miss many good stocks if you will only invest in the boring managements; and likewise
- You may invest in many average stocks if you will simply invest based on management’s talks
Maintaining a balance between the two may be a pre requisite to generate high risk adjusted returns.
Let’s now look at some examples. I am classifying them into two broad categories.Future Visions/ Predictions vs Past Visions/ Predictions
Managements wants us to know the future vision/ predictions about the Company
I want to know what happened to the past visions/ predictions about the Company
Past visions are present reality
“In next 10 years, contribution from our new business initiatives will exceed our traditional businesses”.
– I will instead check how the business composition has changed over the last 10 years and try to figure out whether Company has demonstrated any intention to make a change. Future 10 years is a long time and I will have sufficient time to catch up. There is no need for me to start giving new business valuations to the current business.
“We started/ acquired this business 5 years back. We are committed to turn it around over the next 2 years”
– But you said the same thing 3 years back also. Why did it not happen before and why would it happen now?
“The new car model that we are launching is disruptive and is destined to be a category leader.”
– I believe in your product. However, it would be helpful if you can share the lessons learnt from the previous two highly touted model that failed to perform and how you are incorporating those lessons to make the new launch a sustained success.Positives vs Negatives
Management wants to highlight the positives
I want to know the negatives
Management’s disclosure about the negatives allows a more constructive analysis
“Our people did a brilliant job of delivering these results in such a difficult environment”
– I am aware about the reported results. I am more interested in knowing how these could have been better for which I need to know the lapses during the period.
“A new CEO has come on board who is a veteran”
– It would be helpful if more disclosure can happen as to why the previous one left. If the previous one has got bigger role within the group, it’s normal course. However, if he has joined a competitor then all the more important as to what led to the exit. Senior people normally stick on with well treating employers.
I can keep writing many more examples. However, I think you would have got the idea.
Managements in general want to emphasise on the positives while trying to negate the negatives by either not highlighting them at all or attributing them to the external factors. Along with that the effort mostly is to throw the carrot of extraordinary future to try create the FOMO (Fear of missing out).
Our job as investors is to try cut through the noise and focus on only what is relevant.
There is no magic trick to achieve this easily. One thing that has always helped me is to try looking at Company’s past track record of delivering on it’s promises.
Guaranteed that it’s not fool proof but atleast it helps minimising the mistakes. Rest as one spends more and more time, connecting the dots start happening.
Other related articles you may want to refer –
- Should Promoters care about the stock price?
- Management commentaries and what I make of them
- 3 key learnings from inves4’s journey so far
Disclaimer – examples used in this post are general and not reflective of any particular company. Idea is to try convey the points to the readers and let them relate those with their own experiences.