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:
- A safe airplane.
- 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.
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."
Even 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:
- 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.
- 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.
It's important to cover these bases when you're evaluating the board:
- Is the chairman also the CEO? If he is, it could indicate a board more dedicated to executives than to shareholders.
- Is there a mix of company insiders and objective outsiders?
- Does the board meet frequently, or once a year? If it doesn't meet often, the board might not be very receptive to shareholder concerns.
Earlier I mentioned that I like to think of the CEO and board as the BIG PICTURE people. It's obvious why these people are vital to know--they decide the future of the company.
But when you're as high up as these folks, it's hard to see what's actually happening on the ground floor. That's where the senior-level employees come in. They work with the people actually creating and designing the company's products. They set goals, troubleshoot problems and generally have a better idea of what goes on in the day-to-day.
They're also not as visible to the public as the CEO or board of directors. Newspapers typically don't profile them. The Wikipedia entry for Apple CEO Tim Cook is nearly 1,000 words, but there are only 153 words on Bob Mansfield, Apple's senior vice president of technologies.
So how do you get to know these people? Sadly, there's no quick number you can just pull up on Morningstar or Yahoo Finance. This time you're stuck with homework.
Few companies would grant individual investors private meetings with executives and board members, but a glut of interviews, articles and commentary are available on most.
Start with shareholder letters, which are in the company's annual report--but remember, these are written and controlled by the CEO, so take their rosy outlook with a grain of salt.
Conference calls are a great resource. Note how management handles questions from independent journalists and analysts and you'll come away with a good understanding of how they run the company.
If you're interested in hearing from senior-level employees, look for big company presentations like annual forums or major product announcements. These department heads usually will be responsible for presenting their department's major achievements.
Biographical information also can help provide some basic insight into who these people are and what experiences they draw from. Will the new CEO at a failing auto giant be prepared to right the ship? It might help to know if the last company he ran was a small tech start-up or a major clothing retailer.
But here’s my favorite resource: guest lectures. They're not always easy to find, but the information you can take away from them is unbelievable. This is where the senior-level employees shine. They're the people who have boots on the ground, and when they talk to college students (especially grad-level), their stories are honest and real, painting a candid picture of the company's highs and lows.
Recently, I watched a video of retired Intel Chief Architect Dr. Bob Colwell discussing the future of microprocessors to an engineering class at Stanford University. During the 90-minute presentation, Colwell discussed the Intel projects he had led, as well as his views on the industry's future. (His big bet--mobile.) He voiced concerns that when it came to the next major move for chips, the executives at Intel were wearing blinders.
Oh, yeah, did I mention that he gave this presentation in 2004?
Colwell had seen the writing on the wall eight years before Intel got slammed for missing the mobile boat. He knew the company and knew what executives were asking chip-makers to focus on -- key details that individual investors can't discern from P/E ratios and don't often hear about in earningsreports.
The Investing Answer: Before you throw money into your next investment, research the management. Start with the basics--letters to the shareholders, conference calls and a little bit of history. Even if the ratios and earnings numbers are exciting, stay objective and ask yourself: "Does this pilot really know what he's doing?"
Disclosure: Meredith Margrave personally owns shares of Intel.
Nothing in this article should be construed as a personal recommendation or advice. Nor should anything in this article be construed as an offer, or a solicitation of an offer, to sell or buy any investment security.