As we have repeated many times on this blog, the investment process we endorse is not based upon trying to time market movements but rather is founded upon ownership of carefully selected companies with certain characteristics which are held through the market and economic cycles. Please see previous posts here, here, and here for discussion of that major principle.
T. Rowe Price, who to the best of our knowledge (and his) was the founder of that theory and the first to publish a decades-long record of portfolio performance based on that principle, identified the most important characteristics of a company for investment in these words:
"When selecting growth stocks, the most important requirement is capable, dynamic management operating in a fertile field for future growth" ("A Successful Investment Philosophy based on the Growth Stock Theory of Investing," 1973).
Although based upon owning businesses for many years and not selling them and buying them back at every market turn, this is is not a "buy and hold" philosophy. There are "sell signals" -- they are simply based on signs in the company itself or the industry it operates in, rather than the fickle moves of the market. In fact, elsewhere in the same essay, Mr. Price wrote that his approach was to buy shares in promising business enterprises and then "stay with them as long as they were operating in fertile fields and benefiting from capable management."
The "as long as" part indicates that when you see a change in the growth landscape, or an indication that the company is no longer benefiting from capable management, it is time to put your capital elsewhere.
The above interview from this past Monday is an excellent discussion of some of the issues surrounding the evaluation of the management of a company. In it, Hank Greenberg discusses some troubling signs concerning the overall management of iconic insurance firm AIG*, a company he previously served as CEO and Chairman of the Board. Admittedly, he has a perspective which may not be absolutely unbiased when evaluating the current leadership, but the discussion hits on many of the areas you must look at when evaluating whether a company you are considering for the investment of capital is "benefiting from capable management." Further, his deep knowledge of the issues surrounding company management and his long years of experience with the company he is discussing are indisputable.
According to Mr. Price, this was one of the two most critical areas of evaluation for a company you own or would like to own. If you see troubling signals indicating management capability may be compromised, it is a sign that you should stop investing capital in that company and move it elsewhere.
* The Principals of Taylor Frigon Capital Management do not own AIG.
For future posts dealing with this same subject, see also:
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