And rest assured…it’s not your personal wealth that’s first and foremost in the minds of lawmakers.
While solid diversification and proper asset allocation can help minimize risk, the truth is individual investors like you and I feel the sting of any company that “implodes” while we’re holding it. In that sense…they’re all “too big too fail.”
That’s why you and I must remain vigilant when it comes to each stock that makes its way into our portfolios.
With that in mind…there are two things for us to keep in mind when it comes to our own “portfolio regulation” and the potential failure or implosion of a company:
1. After looking at all the numbers, don’t forget to look at management
Many investors get fixated on the numbers. Of course, earnings per share, operating margins and profit margins are important, but don’t lose sight of the people running the company. There are now far too many examples of CEOs who were able to fool regulators…and even some very knowledgeable investors. So remember – looking at the numbers is important…but you should also try to find out as much as you can about the people who control the numbers you see.
2. No amount of oversight can prevent fraud or failure
If someone wants to commit fraud, all the oversight and sign-offs by big-name accounting firms will not stop them. Warren Buffett once said: “The CEO who deceives others in public would likely deceive himself in private.” When management wants to deceive, all bets are off. There are not going to be many signs that one could point to before the fact.
Read the Letters
When I review a company, I read at least five years’ worth of the chairman’s letter to shareholders. The letter appears in every annual report. It is there that the chairman or CEO outlines the company’s goals for the future. The letter tells you what went right in the past year and – not often enough – what went wrong.
I start with the oldest shareholder letter and then see if new initiatives that were discussed in glowing terms appear in next year’s letter. Are mistakes and a setback discussed and addressed, or is the outlook for the business always great? When you read five years’ worth of letters, you start to get a feel for the way the head honcho thinks and what is important to him or her.
A friend of mine who worked at a public relations firm for several years told me that when he broke into the business, he was amazed at how many CEOs write their own letters to the shareholders. I suggest you go to the web sites of some of the world’s most respected companies and read their letters to their shareholders.
In addition, many companies have their latest conference calls with analysts archived on their websites. I highly suggest you go to their sites and listen to recent calls. How do the CEO and senior management answer tough questions? What is important to them? Do they sound like they have shareholders’ interests at heart? The answers would give you a good feel as to the type of people you are investing with.
Put Your Own “Personal Portfolio Regulation Plan” in Place
I plow through annual reports and listen to conference calls in pursuit of great companies with good management. The recent failures – by both financial institutions and other companies – really drove home the point to both sophisticated and novice investors: after all the numbers, projections, financials, etc. – management still counts.
Remember…it’s virtually impossible for you to avoid being harmed when a company – or a CEO – intentionally commits fraud.
But there are a few simple steps you can take – your own “Personal Portfolio Regulation Plan,” if you will, that can go a long way toward helping avoid those companies who might implode.
The Easiest Way to “Regulate” Your Portfolio
… Starting Today
I should tell you…
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This post was originally sent on 11/01/09 to the Hidden Values Alert email list