How Talking To Management Can Sometimes Backfire

How Talking To Management Can Sometimes Backfire

by VW StaffMarch 28, 2014, 4:00 pm

An integral part of most institutional investors’ analysis involves meeting with management to gain deeper insight into a company’s strategy and prospects.

Unlike most investors, we steer clear of such meetings, for two essential reasons: to reduce the emotional aspects of investment decisions and to avoid the short-term outlook that often underscores earnings guidance.

Although most investors — experienced and novice — realize that fear, hope, hunches and solid information affect every buy, sell and hold decision, other factors may also exert undue influence.

A compelling narrative delivered by a charismatic chief executive may overshadow financial data that could serve as an early warning sign of shifting fortunes or trouble ahead. Favorable short-term results or earnings guidance delivered by an overly promotional management team may mask the unfavorable economic reality of the company’s underlying business.

Our search for value focuses on identifying significant deviations between the price of a stock and the issuing company’s intrinsic value.

For most value investors, the primary challenge of analysis is to fully understand the issues that have created the discount,whether those issues are temporary or chronic, and what circumstances or events are likely to close the gap between the company’s stock price and its intrinsic value. Understanding the causes of the discount helps separate companies with serious structural, financial or secular problems from those that are simply not performing to their full potential.

In light of a significant gap between the company’s stock price and our determination of its value, we assess the decision-making skills and leadership of a company’s management team.We think that an accurate assessment of management’s capabilities and role in the company’s low stock price should rely less on what management says and focus instead on what the company’s management has done and continues to do.

Forensic Analysis

One of the fundamental tenets of our investment philosophy is that a forensic analysis of a company’s financial statements, regulatory filings and accompanying footnotes reveals the quality of a company’s earnings, the success of its strategy, the sustainability of its performance and the impact of management decisions on future free cash flow.

When assessing management,we pay particular attention to the economic reality of the company’s financial statements and related footnotes, the conservatism of its balance sheet, and the quality and consistency of its disclosure practices.We also evaluate management by analyzing the consistency and integrity of its shareholder communications and presentations over many years.

Most companies use financial accounting and reporting practices to present themselves in the most favorable light, meaning that they engage in some type of earnings management or make assumptions that may prove to be unrealistic.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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