Given the opportunity to sit down for an hour with the CEO of a company you were thinking about investing in, would you take it? The reflexive, no-brainer answer is "Yes, absolutely," but it's a more difficult question to answer once you start to think about it. Consider: How often do you hear a CEO say something bad about his or her company? How often does a CEO disclose real, specific risks? And when has a CEO ever conceded that their projections and expectations may not be all that realistic?
Odds are if you visit with a CEO, you will walk away with a more favorable impression than you had going in, and that's a dangerous reality when it comes to making unbiased investment decisions. It's particularly dangerous if you end up liking the CEO in question. Not only might you make a poor investment decision, but you might also hold onto the stock out of loyalty, even after facts begin to pile up against your investment thesis.
Here's how that plays out
So it may have gone, for example, with regards to Oakmark's previous investment in Washington Mutual. Oakmark manager (and legendary value investor) Bill Nygren was quoted time and time again in the press lauding Washington Mutual and the bank's former CEO Kerry Killinger from 2003 on. At the same time, the fund continued to build up a position in the company, at one time holding 15% of its outstanding stock, even as the housing market and the U.S. economy deteriorated. That decision turned out badly when WaMu became the largest bank failure in our country's history. The government seized it in 2008, and ultimately sold it to JPMorgan Chase (NYSE: JPM) for a song.
Or consider hedge fund BAM Investor's recent high-profile prediction that Apple (Nasdaq: AAPL) stock would fall to $42 between fall 2010 and fall 2011. That analysis was predicated on certain behavioral characteristics of investors, and it would not have been helped at all -- more like rather hindered -- by a conversation with Apple CEO Steve Jobs. Jobs likely would have pointed out Apple's strong balance sheet, popular and growing product lines, and myriad opportunities for growth and innovation. In fact, I'd be hard-pressed to think anyone could actually talk to Steve Jobs and not walk away fired up about Apple's stock and the company's growth prospects. Of course, you probably wouldn't spend much time during that meeting talking about options backdating.
This is precisely why Mohnish Pabrai, another noted value investor, famously refuses to meet with executives at any company he is researching. He derides them as salesmen and isn't interested in their biased opinions.
That's one perspective
Contrast that point of view with that of investor Mark Mobius, whose global travels in search of value are legendary. Mobius considers company meetings a critical part of his research efforts. In his book Passport to Profits, he writes that you can learn as much when executives lie to you as when they tell the truth. According to his blog, Mobius has traveled to South Africa, Brazil, Romania, Chile, and Greece already this year.
Although not quite as well-traveled as Mr. Mobius (though we've visited India and Greece over the past six months, and depart for China next week), our Motley Fool Global Gains research team shares his view that company meetings are worthwhile -- particularly when it comes to investing in volatile parts of the world. That's because: (1) It can be hard to keep tabs on companies in places such as China and India if you're investing from afar and have established no personal relationship; and (2) Given the volatility in these places, there are no more important companies to keep close tabs on.
What, then, can company meetings add to the investment process? We believe they:
1. Help you better identify promising opportunities.
Sound leadership is a key ingredient to outperformance. Even if you use a meeting just to get a sense of your CEO's values, or to figure out whether he or she is smart enough to carry on a conversation, I believe that's worthwhile. Furthermore, it's an immediate red flag if a company refuses a meeting, as Baidu.com (Nasdaq: BIDU) has done to us several times in China. There aren't many satisfying answers to why a company might not want to sit down with its shareholders.
2. Help you keep better tabs on the companies you own.
Ideally, we'd all take the Peter Lynch view that a share of stock is not a lottery ticket, but rather representative of part-ownership of a business. If that's to be true, however, then the company you own shares in must be willing to treat you like a part-owner. And while most managers consult their owners from time to time, this doesn't happen all that often in the world of public companies. If, however, you're able to meet with an executive, and open up lines of communication, that goes a long way toward achieving Lynch's ideal.
How to make it happen
Have we been duped sometime over the past three years in our more than 100 company meetings for Motley Fool Global Gains? Probably, but given that our returns from companies whose executives we have met are better than the returns from companies whose executives we haven't met with, we believe meetings have helped more than hurt. Furthermore, 80% to 90% of the companies we meet with never receive our investing stamp of approval.
That said, we make sure to do three things before every meeting, to make sure we maximize our learning and minimize the influence of any sales pitch. We:
1. Read everything we can about the company and executive in advance of the meeting.
2. Formulate a list of questions and make sure each one is addressed before the meeting ends.
3. Assign one member of our team to write down questionable assertions and fact-check them afterwards to determine whether a follow-up is required.
By being prepared and focusing on fact-checking, we believe anyone can get value out of company meetings without compromising the integrity of their independent thinking. And as I said, we'll be putting that system to the test again next week, when we travel to China. We'll meet with executives we've already met, and with a handful of those who lead new, promising investment opportunities. If you'd like to get our notes from those meetings, simply sign up in the box below.
Get Tim Hanson's "Global View" column every Thursday on Fool.com, or by following him on Twitter.
