It's What You Know And Whom You Trust
When a fund like Baron Partners is simply a part of your portfolio, its volatility is diluted by the more consistent performance of other funds and stocks. Don't be afraid of concentration, but be wary of too much.
• Don't get overwhelmed by numbers. "Mastery of minutiae does not equal insight," writes Brown, expressing unusual sentiments for someone who is an accountant by training. Wall Street, he writes, "is full of intelligent people who unfortunately like to spend too much time bathing in data." Riveted by a company's numbers, these folks "ignore that environment in which the numbers arose, and arrive at crazy conclusions."
Brown warns, for example, not to become transfixed by rising revenue (since those added sales may be unprofitable), not to be dazzled by the predictability of results (since management may be artificially creating consistent numbers at the long-term expense of the business) and not to be afflicted by the Wall Street malady of concentrating on just a single piece of information as shorthand for the health of the whole enterprise ("net interest margin, loan loss reserves, you name it").
Remember, he says, it's the business that gives rise to the numbers, not the other way around. Use the numbers to understand the business, but don't let the numbers take on a life of their own.
• Evaluation of management is critical. My shorthand is, "Invest in people, not stocks." Brown says that if he doesn't know a company's senior management, he "won't own a meaningful position in the company." When he gets face to face with the top executives, he uses some tricks "to find out whether a management is the real deal."
First, he visits the company on its own turf since a chief executive "is never as complacent and unguarded as when he's sitting behind his own desk." Second, he watches body language. "Fidgets can speak volumes." Finally, he listens to be sure that everyone on the team is on the same page. He asks the same questions over and over, with slight variations, of different people. "You won't believe what you hear sometimes; you'll wonder whether the guys are from the same planet."
A smart management team, Brown writes, "knows the business it's in, knows its company's strengths and weaknesses, and knows its numbers cold. The members of the team communicate with each other, clearly and regularly." The team "wants nothing better than to win, and knows how to."
The problem for small investors, of course, is getting access to managers in order to make these judgments. In most cases, you won't be able to. But, sometimes, you will be able to size up a chief executive, who may be a neighbor or a friend of a friend. Take advantage of the opportunity; it may come just once or twice in a lifetime. And, in the meantime, invest in mutual funds whose managers take Brown's approach and assess not only a company's fundamentals but also its leaders.
James K. Glassman is a resident fellow at the American Enterprise Institute, a Washington think tank, and host of TechCentralStation, a Web site focusing on issues of technology and public policy that is sponsored by various corporations and trade associations. He is also a member of Intel Corp.'s policy advisory board. Of the stocks mentioned in this article, he owns Apollo Group, Netflix and Capital One. His e-mail address is firstname.lastname@example.org.
© 2004 The Washington Post Company