The Best Questions To Ask When Investing: Final Part
We spoke about my favourite investment book of all time; “Common Stocks and Uncommon Profits” by Philip A. Fisher, and how it has changed my perspective on investment.
One of the most valuable insights I gained from the book are the fifteen questions that Philip Fisher asked when analysing a company. I continue to ask those questions with every investment I made until this day.
So far, these questions have been very profitable for me. I’ve reviewed the first 13 questions here (the first three), here (the next three), here (the seventh), here (the eighth and ninth), here (the 10th and 11th), here (the 12th) and here (13th).
It’s now time to explore the last two questions.
Question 14: Does the management talk freely to investors about its affairs when things are going well but “clam up” when troubles and disappointment occur?
If you talk to any listed company, you will most likely not see a single CEO that would be pessimistic about his or her company. Every company would seem like a great investment if you speak to the management team. Yet, no business, like people is ever perfect.
So management that can talk candidly about the challenges the company is facing and the risk that they are struggling with, is ironically a sign of strength and not of weakness.
A good place to start investigating if the management has the confidence to be honest to shareholders is by reading the annual reports.
Take a look at how management discusses the business year after year and compare it with how the company is actually performing. If you see a company that the management is constantly talking about its strength but yet you see the financials of the company suffering year and year, you know that the management does not have what it take to talk freely to investors. These are the companies you might want to avoid.
Question 15: Does the company have a management of unquestionable integrity?
Warren Buffett once said that if you want to hire someone, you need to look for three qualities in the person: Integrity, intelligence and energy. If the person does not have integrity, you would really want them to be lazy and dumb.
It is similar when we are looking at a management. The team needs to demonstrate high integrity and ability to put the company before themselves. This can be examined by looking at the management team’s compensation package. One way is to see if the company has a compensation that is aligned with shareholders. Secondly, you can take a look at the company’s related party transactions. The rule of thumb for related party transaction is that, there should not be any.
Management with great integrity is hard to come by. But if you come across one, you will know that you have hit upon something great.
These are the 15 questions that Philip Fisher would ask when investing in the market. It is important for us to learn from the greats and understand how to better evaluate the management team of a company.