Money and Finance
Earlier this week, Brattle St. Capital shared an interview transcript (originally posted on ValueWalk) with noted investor Tom Russo in which Russo discussed the importance of investing in companies with management teams that have the "capacity to suffer":
Even if we're talking about an otherwise-strong business, it's not a recipe for long-term success if the CEO is overly-concerned about how a value-accretive investment will impact earnings per share in the current quarter or calendar year and how Wall Street may react to temporary weakness.
Put another way, if you're a patient investor in a company that's led by an impatient management team, be prepared for an unpleasant outcome.
To remedy this, Russo recommends looking for family-owned businesses that can afford to ignore the short-term obsession of the street and activist investors.
When researching a new idea that isn't family-owned, I also look through the list of the company's major shareholders - these are usually mutual funds and institutions.
Once you have the list of major owners, take a look at each fund's website to learn more about their philosophy and approach. Are they also long-term focused or do they have high portfolio turnover? How long have they held the stock in question?
The more the company is owned by investors who "get it," the less pressure management will likely feel to deliver short-term results at the expense of long-term value creation.
Related posts:
Best,
Todd
Subscribe to Clear Eyes Investing by Email
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Money and Finance
Considering Management's "Capacity to Suffer"
Earlier this week, Brattle St. Capital shared an interview transcript (originally posted on ValueWalk) with noted investor Tom Russo in which Russo discussed the importance of investing in companies with management teams that have the "capacity to suffer":
When management makes those investments, they must have the capacity to suffer. They have to suffer during the start-up period of those investments because they are not necessarily linked to at the hip with the Wall Street expectations of smooth and steady quarters, but they are able to withstand the burden of the investment cycle. It is inevitably certain that profits are low or non-existent during these early years. And if you do not have the capacity to suffer through that period, you will shy away from making the accurate amount of investment. Your management will under-invest at a time when they have set an advantage and will allow competitors to come into the market.This is an important point to consider. Can management make the necessary, long-term investments in its business that support or widen its moat without taking on significant career risk in the process?
Even if we're talking about an otherwise-strong business, it's not a recipe for long-term success if the CEO is overly-concerned about how a value-accretive investment will impact earnings per share in the current quarter or calendar year and how Wall Street may react to temporary weakness.
Put another way, if you're a patient investor in a company that's led by an impatient management team, be prepared for an unpleasant outcome.
To remedy this, Russo recommends looking for family-owned businesses that can afford to ignore the short-term obsession of the street and activist investors.
When researching a new idea that isn't family-owned, I also look through the list of the company's major shareholders - these are usually mutual funds and institutions.
Once you have the list of major owners, take a look at each fund's website to learn more about their philosophy and approach. Are they also long-term focused or do they have high portfolio turnover? How long have they held the stock in question?
The more the company is owned by investors who "get it," the less pressure management will likely feel to deliver short-term results at the expense of long-term value creation.
Related posts:
- When to stop researching a stock
- 5 signs of a good annual report
- Book review of The Outsiders
Best,
Todd
Subscribe to Clear Eyes Investing by Email
- Oaktree - Howard Marks: Letter To Clients
Of the two things I think are most wrong about American business, the worst is short-termism. (The other is the ability of executives to thrive while their companies do poorly.) Companies are rewarded for short-term success and penalized for short-term...
- Investing In Your Best Ideas
One of the things I struggle with the most as an investor is knowing how much capital I should put behind each of my investments. Indeed, the biggest mistakes of my investing career haven't been those where I've lost a little money, it's been...
- Some Investing Advice For My Son
My wife and I recently welcomed our son into the world and, like any new parent, I've been thinking about all the things I'll need to teach him as he grows up -- how to ride a bike, how to read, and, of course, how to invest. So with a few minutes...
- Nothing Should Be More Important To Investors
"Ultimately, nothing should be more important to investors than the ability to sleep soundly at night." - Seth Klarman In a recent post about becoming a more patient investor, one of the tips I shared was to stay reasonably diversified because...
- 9 Tips For Becoming A More Patient Investor
Even though the tag-line of the Clear Eyes Investing blog is, "Patience is the individual investor's greatest advantage over the market," patience is a virtue that doesn’t come naturally to me. Maybe I played too much Nintendo as a kid or something,...