When it comes to buying stocks, one question I am often asked is: what is one of the most overlooked factors that investors miss?
While some people might create an investment strategy for buying stocks based on valuation or growth levels, one common variable that is crucial for long-term success for any investment strategy is missed: the management team of the company.
This sounds obvious, but you would be surprised at how few investors actually research the people who are running the company before buying stocks in that company.
Why does this matter when it comes to buying stocks?
Management is extremely important for a company, since these people set out the investment strategy for the future of the company. When you think of Apple Inc. (NASDAQ/AAPL), you naturally think of Steve Jobs and the innovation he helped bring to the company.
In fact, when he passed away, a common concern amongst analysts was how to value the stock with the key component of the management team then missing.
In contrast, a recent example of an ineffective leader and his impact on a company’s success (or lack thereof) is Steve Ballmer, CEO of Microsoft Corporation (NASDAQ/MSFT).
Upon announcing that he will retire as CEO, the share price of Microsoft shot up. Obviously, this tells us that investor confidence in Ballmer was extremely low. The investment strategy that he laid out over the past decade has led to Microsoft continuing to fall behind its competitors.
Buying stocks for the long term is about being a part owner of the company. As such, your investment strategy should be to look for companies that not only have an edge in the market, but also have a management team that can continue driving both earnings and revenue growth.
Chart courtesy of www.StockCharts.com
The chart above, showing the gap in price following the announcement that Ballmer is leaving clearly shows how the market felt about his leadership abilities. Since 2000, when he took over as CEO, the personal computer (PC) market has lost substantial business to mobile computing, including smartphones and tablets, leaving Microsoft to fall behind.
Considering that Apple and Google Inc. (NASDAQ/GOOG) control such a huge market share in the mobile sector, it’s quite obvious that Microsoft has been completely ineffective in its investment strategy to branch out from its traditional PC base.
The takeaway is twofold: focus on buying stocks that have a current management team that has proven its ability to create and maintain a strong investment strategy for an extended period time, or look at buying stocks that are undergoing a transition.
At times, when stocks are poorly run, there occasionally can be a dramatic change in leadership. Perhaps an activist investor brings onboard new management in an attempt to change the company’s investment strategy and turn the ship around. However, these are far more speculative plays, and one should be extremely cautious when considering buying stocks of this nature.
Conversely, there are companies such as Google and Costco Wholesale Corporation (NASDAQ/COST) that have extremely talented managers who continue to refine the company’s investment strategy and deliver a consistent performance year after year.
The next time you’re considering buying stocks, take a look at the company’s management team; it can make all the difference between a good investment and a bad one.
~ by Sasha Cekerevac, BA
This article was originally published at Investment Contrarians