2024-03-08: Letter to shareholders
Recently someone asked me for a stock tip. Immediately I think of two characteristic behaviors of single-stock buyers: the lack of attention for what it is that they are buying, and lack of interest in the management of the enterprise.
Most people who buy single stocks tend to think of them as pieces of paper that go up and down in price every trading moment. While this is factually true, it’s also the first misconception that ends up causing much angst and misunderstanding: buying a stock is buying a piece of real economic flows from a company’s business.
Little to no attention is also paid to the management of the entity in whose economic wellbeing the same people are participating. They think in terms of products, growth, sectors, themes, competition and of many other pertinent matters but they usually forget the single most important one: who runs the shop. That is a pity, since when buying into a company we are hiring a group of people in whose hands we entrust the execution of a strategy and a business plan. Judging management is not easy and it does require additional legwork. It is an exercise in trust and gut-feel, because you need to rely on management and determining its worth is akin to determining integrity: it’s an art, not a science. Reading several annual letters to shareholders of the companies we plan to invest in can come very handy here. This invaluable exercise allows us to understand management’s thinking, methods, values, approach and measurement of results. It’s a surprisingly accessible window into the mind of who runs the business, and the more letters we read and study the easier it will become to spot the bad apples.
On a different subject, this is an excellent FT article on private equity, its returns and its value in a portfolio, from the author of ‘Trillions,’ a great book on the history of the investment management industry in the US.
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Another good week for asset returns, pretty much across the board. ‘AI’ and Tesla (= Elon Musk) made again the news on several fronts, while Chinese retribution against American businesses showed up at Apple’s door. Also, the ECB kept rates unchanged even though inflation continued to slow down in February. One spurious item: the UK budget contains new provisions for the taxation of ‘resident non-doms’, exposing once more – if we needed further proof – the penchant for the country’s politicians to shoot themselves in the foot.
[Cover Source: International Monetary Fund]
