If you ever read Phil Fisher’s “5 Points” on the questions to ask yourself when looking for a stock to buy, you may remember Mr. Fisher’s point number two that you should ask yourself “Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials of currently attractive product lines that have largely been exploited?”
The problem, of course, is that unless you are the wife or husband of a top executive, you probably have little indication ahead of time regarding whether a management team is sufficiently motivated to grow profits and take care of shareholders over time (as opposed to resting on its laurels). Seriously, how the hell are we supposed to know whether the CEO at Procter & Gamble is any more motivated than the CEO at Philip Morris International? It’s just rank speculation.
Instead, I try to craft an investment strategy that does not rely upon a “motivated management” in order to be successful. In fact, I’ll take that a step further: I like to buy companies where the underlying business is so strong that the company could be led by bad management and still make profits for shareholders.
We saw this at Kraft a couple years ago. The CEO Irene Rosenfeld took a huge tax hit to sell Digiorno Pizza to Nestle and paid a premium to buy Cadbury which was compounded by the fact that Rosenfeld chose to issue undervalued Kraft stock to make the acquisition. The move was so terrible that even Warren Buffett publicly criticized the purchase, and he very rarely calls out the CEOs of companies in which Berkshire Hathaway has an ownership stake. But here is the thing: even though Rosenfeld made poor management decisions, Kraft still made shareholders money. Turns out people like to eat Oreos and Kraft Macaroni and Cheese no matter what, and the strength of brands like that can offset poor management.
That is why I do not pay particular attention to Phil Fisher’s advice when he tells us to seek good management. Obviously, if you can find good management, you can do yourselves a favor. McDonalds has had an excellent management team in place for the past decade and a half—and it shows—since shares bottomed out around $12 in 2002/2003, the fast food giant now sells around $100 per share on a regular basis because the management team has been able to grow earnings by over 12% annually for the past decade. When a market-leading business meets good management, fantastic things can happen to your bottom line.
But my point is this: At no point in my investing do I ever rely on excellent management to carry the day. Maybe you can have a couple exception stocks in your portfolio to allow for once-in-a-lifetime figures like Warren Buffett at Berkshire Hathaway, but I try to structure my assets in a way that rely on the underlying business to carry the day. It would be really hard for Johnson & Johnson executives to screw up Listerine mouthwash. It would be really hard for Coca-Cola executives to screw up the distribution of Coke. It would really be hard for the Hershey Charitable Trust to screw up a chocolate bar. While finding nice management teams can add a nice boost to the growth of your portfolio, I try to find excellent business models that flourish independent of who is calling the shots at the top.