Warren Buffett's advice on how to identify companies with good management
The quality of a company's management is a key factor in whether a stock will be a good investment. What qualities should we therefore look for in the managers of these companies? Let's see what the greatest of investors, Warren Buffett, has to say about this.
Warren Buffett
Buffett identifies the key characteristics of successful managers
It's not unusual for a manager to perform roughly in line with the sector, but as investors we look for managers who will run companies in a way that outperforms the sector in which the company operates. Warren Buffett believes that the quality of a company's management is a key factor in whether or not a stock will be a good investment. He made his comments on this topic during Berkshire Hathaway's 1994 annual shareholder meeting.
"I think you're judging management by two standards," Buffett said. "One is how well they run the business, and I think you can learn a lot about that by reading what they've accomplished and what their competitors have accomplished and seeing how they've allocated capital over time."
He said it was important to see how a manager performed in relation to the company's position and competitive position in its industry after they first took on a leadership role. We should look at what they have achieved compared to what is happening in the industry.
For the second method, Buffett said investors should read how management has treated shareholders in the past.
"You want to find out ... how well they treat their owners," he said. "Read the proxy statement, see what they think - see how they treat themselves and how they treat shareholders. ... Poor managers also happen to be the ones who really don't think so much about shareholders."
Buffett cited Bill Gates at Microsoft , Tom Murphy at Capital Cities and Donald Keough at Coca-Cola as examples of outstanding managers who worked for shareholders.
There is no template for success
This is not a set template for finding good managers, but it is a useful blueprint. The number of managers in the American business world who don't deliver on their promises and put shareholders second is relatively small. Unfortunately, it is not easy to separate the wheat from the chaff.
The only way to get to know a manager and his team is to spend time reading annual reports and letters to shareholders. This will give you some idea of how they treat their investors and whether they deliver on promises or consistently miss targets.
Of course, even the best managers in the world usually can't turn around a troubled business. So finding a good business is probably the first step investors should take before they start evaluating the quality of management. That being said, even good companies can be ruined by bad managers, so perhaps it is better to start with the management team first.
Source: Guru Focus, CNBC, YouTube, Yahoo Finance
DISCLAIMER: All information provided here is for informational purposes only and is in no way an investment recommendation. Always do your own analysis.
