The latest installment of The Apprentice featured the book-smart college grads locking horns with high-net-worth, high school-educated entrepreneurs to see who could do a better job renovating an oceanside motel. In the end, Magna, the college-educated candidates, came out on top. And the way NetWorth's high school grads lost provides an important lesson for any investor.
Arriving at the Surfside Motel along the New Jersey shore, NetWorth project manager Brian decided to forego developing a budget or a timeline. That was a poor decision that Donald Trump associate George Ross skewered in the boardroom, and it led to Brian's firing. But NetWorth's chances really went astray when Brian made the decision to replace 14 perfectly usable toilets, wasting money that his team would need later on to clean carpets and make other general improvements in the motel. Not surprisingly, the team got poor marks from guests upon their checkout. (Guests rated their stays using the Yahoo!
You could say that Brian's ill-fated bathroom upgrade was ignorant of broader customer-service needs. And you'd be right, of course. But the investor in me sees Brian as a CEO who caused his business to suffer by misappropriating capital. Indeed, superinvestor Benjamin Graham often wrote that management's most important job is to allocate capital for shareholders' benefit. He was talking about money from any source -- equity, debt, and revenue generated by selling products and services. That capital is supposed to be used to grow the business or, in lieu of that, returned to shareholders in a dividend.
When cash is retained for business growth, as Brian did in reinvesting a portion of Trump's $20,000 investment in 14 new commodes, it generates a return, which can be measured by either return on equity (ROE) or return on invested capital (ROIC). We can't say for sure what Brian's ROE and ROIC were, but both might as well as have been zero, since his team lost the task.
We've got articles here and here that will help you study these concepts further, and I recommend that you do. They'll help you spot effective management when you're evaluating stocks, and being able to do that will help you determine the stock returns you're likely to get, since those returns hinge so much on the quality of management. Trump knows that essential truth well, and that's why he sent Brian packing.
For related Foolishness:
- Which will it be? Book smarts or street smarts? Give us your take at the Trump's Apprentice discussion board.
- Fellow Fool and Trump watcher Rick Munarriz says you need both.
Fool contributor Tim Beyers has been known to apply capital toward coffee and doughnuts. Fortunately, he's not a CEO of a major public company. Tim didn't own stock in any of the companies mentioned in this story at the time of publication. To find out what stocks are in his portfolio, check his Fool profile. The Motley Fool has a disclosure policy.