These Three People Could Ruin or Help Your Investment

While LearnVest’s philosophy is to buy mutual funds and ETFs that help you diversify and spread your risk, if you are set on investing in individual securities, here are some tips from our partner InvestingAnswers

Regardless of all the moving pieces involved, you really need only two things for a successful flight:

  1. A safe airplane.
  2. A pilot who knows what he’s doing.

No matter how great the pilot is, he can’t stop a broken plane from falling apart. No matter how safe the plane is, it can’t protect passengers if the pilot has no idea what he’s doing.

It’s the same with investing in a company. Evaluating ratios and sales numbers is important, but if you don’t also take a look at who’s running the show, you’re missing a big piece of the puzzle. What if the pilot doesn’t know how to steer the plane?

Even the best, most profitable companies can’t survive for long if the people at the top don’t know what they’re doing.

So put down your spreadsheets and financial calculators. Today, we’re going to spend some time looking at the pilots.

The CEO

Ah yes, the CEO. The head honcho… The top of the company… Occupier of the corner office…

But what does he really do?

I like to think of the CEO (and the board of directors, but we’ll get to that in a minute) as one of the BIG PICTURE people. His chief role is to run the show, and his big ideas guide future business strategies.

The ideal CEO is always aware of his surroundings. Sure, he’s keeping an eye on current resources and operations but he’s also envisioning the future.

Former Apple CEO Steve Jobs decided to build the iPhone because he obsessed over competition that could mess with Apple’s success. Jobs’ conclusion: “The device that can eat our lunch is the cell phone. Everyone carries a phone, so that could render the iPod unnecessary.”

people that can ruin your investmentEven with the overwhelming success of the iPod, Jobs kept an eye on what was around the corner.

Look at these questions when you’re evaluating the CEO:

  1. Is the CEO a longtime employee or an outsider recently brought in? It’s generally believed that hiring a CEO from inside the company will keep it on its current path, while hiring an outsider can be a sign that management is looking for someone to change the company’s direction.
  2. What’s the CEO’s prior experience? Does he have a solid foundation to draw from?

The Board of Directors

The board of directors is mainly responsible for two things: establishing corporate policy (e.g. determining the quarterly dividend payment and executive salaries) and weighing in on major company issues. For example, Apple’s board of directors pushed Jobs to address the iPhone 4′s broken-antenna issue after its release.

Like the Supreme Court, the board serves as a check-and-balance system over company executives. And with billions of dollars on the line, it makes sense that investors should look for a board that minimizes conflicts of interest.

You want a mix of executive insiders who know what’s going on in the company and outsiders who present independent insights and objectivity. Too much of one and you’re left with either a board that knows too little about what the company does or one stacked with sycophantic yes men.