How closely should you pay attention to management? According to Eddy Elfenbein, who writes about investing at Crossing Wall Street, very closely.
Elfenbein was named by CNNMoney as “the best buy-and-hold blogger” on the Web. Last month, during an hourlong interview in Washington, D.C., I asked him for his views on company management. Watch the video below for our exchange. (Run time: 3:29; there’s also a transcript below.)
Brian Richards: Do you pay attention to management at all? How closely do you follow management? Is that a decision for you to either buy or sell?
Eddy Elfenbein: Management is absolutely crucial. It's one of the most important things.
A lot of individual investors get into stock screens, and I urge people to -- I don't say ignore those -- but sort of downplay those because it doesn't tell you everything you need to know.
And one of the best ways to look at management is when you sort of dig down in the financials some things really can't be made up or fudged. Look at a company with high return on equity, a company that's consistently outperforming on its financials. Again, you can't always be in the building every single day, you don’t know all the decisions, but it gives you a good idea. I like to see a management team that's been in place for a while. I like to see financials and management discussion that's very open and things that I can follow. I like to see consistent operating histories and a string of dividend increases.
I'll give you an example. One of the companies I like a lot is Aflac (NYSE: AFL ) , the duck stock.
Richards: We had Dan Amos in the office last year.
Elfenbein: And he's from down-home Georgia, and it's a family company. And he's one of these guys -- he sort of comes across as a good old boy. These guys know exactly what they're doing. And I remember when there was the terrible earthquake and tsunami in Japan, and so much of their business is based there and so they were on television asking him about this, and he said, "No, we're ready. This is what we do. We're prepared for this and we're going to be fine," and that means so much.
When you see that these are professionals, they know exactly what they're doing. And a lot of times people assume that these companies are just going to move in the one-point trend is going to continue and so a lot of people were concerned about Aflac and their investments in Europe, and that got a lot of concern on Wall Street. And what did Aflac do? Well, they headed it off. They did something about it. They were ahead of the curve. Some of them had a bite on their investments in Europe, but these guys are smart and they're looking out for that.
So that's what good management can do, because people assume that it's just this one company sort of it's a one-variable operation. It's not at all. ...
Or here's something you'll see. XYZ Corp. has come out with a press release that we announce a cost-cutting initiative. Well that will get a little pop in the stock. Now the obvious question is, "What were you doing before the profligate initiative?" Good companies are always looking for ways of cutting. They never announce it because they're always doing it. After a while, the quality does shine through. Management is key in every business.
For more from my interview with Eddy Elfenbein, see his take on how to go about selling stocks, or check out his site, Crossing Wall Street.