Capital Stewardship: from Clients to Portfolio Managers to Executives

No matter the position within the value chain, we are always outsourcing capital allocation in some instance. In this way, looking for outstanding capital stewards is of top priority for funds' clients (looking for great funds), portfolio managers (looking for great companies) and executives (looking for great projects).

In this paper, it's argued that no matter the insider ownership, one must analyze and trace the profile of key people. Stating the obvious: no matter if the key executive has 90% ownership in a company if he's a gambler who loves leverage willing to bet his entire fortune in one eccentric new segment. Right?

Analyzing people, their behaviors and habits, their principles and goals, their formal and informal incentives, is of main importance. We must remember businesses are run by people, so let's put "number crushing" a little aside.

Is the corporate culture appropriate? Is a repeatable mechanism entrenched in employees routine? Are leaders' personal goals aligned with the company's formal strategy? Which are the perverse incentives in place? What are the executives/board members' personal agenda main items? Do they conflict with the company's path? How?

Can you think of more questions?

Food for thought.

On Knowledge, Ignorance and Misperception

Many times we, research analysts, think we have completed the puzzle. Actually we NEVER do. What we actually do is think we have completed it. At the end of the day we are just tricking ourselves. If you think twice, our job is like playing the Jigsaw game - do you remember the movie? Things are getting scary, right? So, don't freak out and let me explain it.

Analysts are flood with information from companies, sell-side analysts and stockholders - to name a few. This is just like playing Jigsaw's game. The game is set up, someone controls your attention. You have to figure out  by yourself, just like a CIA agent, what the actual facts are. Distraction is across the corner, but the facts are buried down there. You will have to triangulate information across different sources in order to reach somewhere. Well, "somewhere" is a place where there are a lot more questions to be answered and that's what knowledge means: knowing what you DON'T know. In other words, knowledge is ignorance acknowledgement. And so the game goes on. It's an infinite game. Thus when you get home at night I suggest you to upgrade Munger's lesson "Make sure you learn something new every single day" to "Make sure you end your day with more questions than when you woke up."

Want to dig further?

Ignorance: How it drives science by Stuart Firestein

Finite and Infinite Games by James Carse