1 CEO Quote Every Investor Needs to Read

Source: World Economic Forum

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Few would describe Jamie Dimon as warm and cuddly. At one point during JPMorgan Chase's (NYSE: JPM  ) investor day, the feisty CEO responded to bank analyst Mike Mayo with a snarky, "That's why I'm richer than you." And while that could perhaps be waved off as playful, in the wake of the London Whale trading debacle and the CEO/Chairman brouhaha, there are plenty of investors and market watchers who simply can't stand Dimon.

But I would suggest that even the harshest Dimon critics set aside their ire -- even if just momentarily -- and tune in to one particularly insightful moment from JPMorgan's second-quarter conference call.

Throughout the call, analysts peppered Dimon and CFO Marianne Lake with questions pertaining to the particulars of the company's accounting -- most notably, approaches to adjust the bank's balance sheet to accommodate proposed new capital rules. Late in the call, NAB Research analyst Nancy Bush just happened to ask the question that pushed Dimon over the edge.

His response:

     This is what the issue is with all this, you spend all your time talking about
     accounting, as opposed to business. The business is deposits, serving clients,
     doing things. And now we talk all the time about [accumulated and other
     comprehensive income]. And we have a lot of asynchronous accounting, and
     pro-cyclical accounting and stuff like that, that we try to explain. But we try to look
     through all of that and build a business, more clients, more bankers, more branches,
     happier clients.

Love him or hate him, I think everyone has to admit that Dimon nailed it there.

To be sure, the accounting is important. It's critical that the bank get the accounting right, and it's helpful for investors -- even if just at a high level -- to understand the accounting.

But the accounting isn't the business. The Q2 linked-quarter change in operating expense isn't the business. The year-over-year growth in the cash balance isn't the business. And no, I'm sorry, but the profit per share that just beat (or missed) analysts' expectations isn't the business. (Full disclosure: I'm as guilty as anyone of focusing on the accounting too much at times.)

Foolish investors are long-term investors, and long-term investors should be most focused on what's going to drive success over five, 10, or 15 years. And, as Dimon points out, that comes from focusing on and building the big-picture business, not getting swallowed up by the accounting minutiae.

For JPMorgan specifically, meeting the new capital requirements -- should they be officially put in place -- will be a must. But these are capital requirements that chief rivals Wells Fargo, Bank of America, Citigroup, and Goldman Sachswill also have to meet. For investors to succeed with JPMorgan -- or conversely, with any of those other banks -- they need to look beyond that and be convinced that there's something that JPMorgan is doing to set itself apart from the others so that it can attract more deposits, loyal clients, top-flight employees, investment assets, and so on.

In short, a company needs to have a strategy for delivering services that customers will value, and it needs to execute on that strategy. Without that, management can nail the accounting all day long, but the business would be a mess of uninvestable mediocrity.

Bruce Lee said: "It is like a finger pointing away to the moon. Don't concentrate on the finger, or you will miss all that heavenly glory."

For investors, numbers and accounting details can help point the way. But in the end, we need to be careful to remember that we're investors in operating businesses, not static ledgers.

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  • Report this Comment On July 19, 2013, at 2:12 AM, northsider75 wrote:

    Shock of shocks, Dimon is here to waggle his finger and lecture the investor community about how we're the ones who "don't get it". I personally would love to be able to do exactly what he's talking about: focus on the core business and the various metrics that the accounting statements produce, rather that quibble over details, assumptions, and interpretations of rules or conventions used in creating the statements.

    But we have to.

    Why? Because endless parade of self-righteous business leaders and high priests of the financial markets (not naming any names, here) who bellyache about having to dot every 'i' and cross every 't' for accurate representation of the fin'l health of the reporting entity. Y'know, the reason we have accounting in the first place.

    Sad to say, Dimon, you're clearly the last person in the room aware of the fact that's what all of your inquisitors at these 'investor's day' conclaves have to ask. Because tomorrow it's another jerk who probably has SOMEthing to hide -- we just don't know if it's a squint-your-eyes-and-its-ok assumption about remaining use of a long-term asset or it's operating expenses funneled through as an investment outflow.

    The day we can stop worrying about problems like that, then you have a legit complaint about investors who want to subject you to an accounting colonoscopy. And, no, that's one exam you can't leave up to the Invisible Hand of the free markets.

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