Value Investing – Evaluating Management

by Ye – GuruFocus

“Berkshire Hathaway is our largest holding because of Warren Buffett. Leucadia National is a large holding because of Ian Cumming and Joseph Steinberg. We think Eddie Lampert at Sears is a young member of that group.”

When investing in a business, Bruce Berkowitz tends to pay more attention to the jockey than the horse because if a company has the assets and management to do well in tough times, the seeds for exceptional performance is already planted.[1] Even Mohnish Pabrai has expressed, in his recent 2008 shareholders meeting, that he is now focusing more on management.[2]

Evaluating management is not easy. The key here is to make sure management has integrity, intelligence and energy. “But the most important is integrity, because if they don’t have that, the other two qualities, intelligence and energy, are going to kill you.”, as Buffett pointed out. Remember, when you invest, you are entrusting your money to management. In The Intelligent Investor, Benjamin Graham tried to tell us that, in theory, the shareholders are the most powerful people at a company. We are capable of bending any management to our will. But he gave up after realizing that, in practice, many shareholders simply surrender their rights to management by voting according to management recommendations.

So unless you have the resources to secure a controlling interest at a company, you will have to rely on your ability to pick capable management you are willing to get in bed with. Here are four points to remember when evaluating management.

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