Best Investment Lesson learned from Davidson: The CEO is the focus of the Value Investor. Those companies which offer the greatest value to consumers have the widest Net Income Margins.
The CEO is the focus of the Value Investor.Those companies which offer the greatest value to consumers have the widest Net Income Margins.
Action: use this method to research BAC, AIG and Xerox
The goal for Value Investors then is two-fold: 1) Identify those economic indicators which let one efficiently track the business cycle and 2) Identify those portfolio managers and company CEOs who create better value during the cycle.
Value Investor Approach:
1) Identify those economic indicators which let one efficiently track the business cycle
2) Identify those portfolio managers and company CEOs who create better value during the cycle.
3) Identify the price levels which represent under-value and over-value across the business cycle.
The Take-Away:
1) Individuals create value and seek to profit in a competitive marketplace. They convert intellectual value into marketable products and services.
2) Consumers decide which products and services add value to their standard of living and decide which products will succeed in the marketplace.
3) Those companies which offer the greatest value to consumers have the widest Net Income Margins.
4) Companies must be managed by competent CEOs if they are to continuously succeed with consumers.
The Value Investor Perspective:
Only a few examples are provided here of the relatively wide range of business returns. The markets make investing complex by the fact that investor perceptions price each of these issues relative to future expectations of general economic, sector and individual corporate financial performance. Value Investors make their investment decisions based on a stock’s price and the financial performance of the CEO. Value Investors know that the ultimate performance of any corporation is not from its products, but derives from the decisions of the CEO. If one identifies an exceptional CEO, Value Investors frequently buy shares during periods of market distress with commentary about how skilled is the CEO. Value Investors in effect buy the CEO’s financial performance at cheap prices even though they talk about historical Book Value and Cash Flow. After all, companies do not self-assemble to make offerings for consumers. Companies are assembled and operated by people with creative ideas. It requires a competent CEO for a company to continuously succeed with consumers who are the ultimate decision makers of corporate profitability. The CEO is the focus of the Value Investor.
Companies do not self-assemble to make offerings for consumers. Companies are assembled and operated by individuals with creative ideas. It requires a competent CEO for a company to continuously succeed with consumers who are the ultimate decision makers of corporate profitability.
- One cannot invest without knowing the general direction of economic activity.
- One cannot invest without assessing within the general economic trend the separate trends in individual economic sectors. All the economic data is available to perform this analysis including the analysis of asset classes.
- Once it becomes clear that an economic trend is in place, one identifies the better CEOs to build a portfolio to benefit from the trend.
- It is in having a process to assess the CEOs which permits the overall investment analysis to coalesce. One does this by merging biographical and financial history with what they said they would do in comparison with what they eventually did. The greater the CEO consistency, the higher level of confidence one has for continuance in corporate performance. Individual investment success or failure, in my experience, is tightly tied to the CEO’s skills.
Investment Process Top-Down:
1) Identify the trend of economic activity, expansion or contraction
2) Identify which sectors of economic activity and which asset classes appear to offer the greatest benefit.
Investment Process Bottom-Up:
1) Through analysis of financial history, identify the better corporations(CEOs) or better portfolio managers for investment potential based on Top-Down analysis.
2) By comparison of fundamentals to market pricing, identify the better Price-to-Value opportunities and allocate capital.
Lessons of the Market:
1) Expanding economic activity lifts all stocks-Contracting economic activity causes all stocks to decline.
2) Invest in the better companies and investment management teams during economic expansion, let them handle the details of day-to-day.
3) Shift capital to 5yr Treasuries during economic contractions as investors panic. They are safe, simply understood and historically provide the better returns.
