The Best Companies to Invest in: 3 Tips to Finding a Great CEO

In Rule #1 Investing, one of the things we look for when we’re trying to really understand what the best companies to invest in are is the management of the company. What we try to find is a really great CEO. Follow these 3 tips to find qualities of a great CEO, who you would be happy to own a piece of the company.

How to Find the Best Companies to Invest in by Looking at the Management

In finding good companies to invest in we look at the management team to make sure that we really like the managers and we look at margin of safety.

The management team is really important to see that the company is going to be the kind of company we want to be an owner of. Does that CEO in particular connect with us as a great CEO?

1) Is the CEO an Owner of the Company?

An owner is somebody who founded this company like the guys that are doing Chipotle Grill, or Apple Computer. These guys that moved into the market at such an early stage in the company they are essentially founders. Were looking for someone who is deeply connected where they’re sort of sitting on the same side of the table as us. They have a lot of stock and they don’t make a lot of money, unless we make a lot of money.

2) Does the CEO Put Others First?

The second thing we look for is the CEO’s compensation scheme. This drives me nuts that some CEOs in big companies have decided to just pay themselves more and more money every year that isn’t really anything close to what they’re worth. These compensation schemes that have been put together make these guys vastly wealthy, like kingdom level of wealthy, by the time they have been with these companies for five or six years, and that’s insane.

This means that the CEO has a value set that’s more oriented toward his or her self than they should have as a leader. A leader, in my point of view is someone who is out there putting the rest of the troops first.

I learned how to be a leader at the school of hard knocks in Fort Benning Georgia in the infantry. They basically said, “You’re going to be an officer young lieutenent. You’re going to eat last. You’re going to get up first. You’re going to go to bed last. Your men are going to take care of their equipment first, then you take care of yours.” Everything is done for the troops first and then you do what you have to do.

I wish more CEOs lived by that ethic. Were going to see if we can’t force them to do so in the future.

The compensation scheme often shows a CEO who’s a mercenary and not a great leader.

3) Does the CEO or Management Team Shares Your Values

Finally, the CEO or the management team is establishing a kind of culture that you respect.

John Mackey, one of the founders of Whole Foods has established a management team that is absolutely out to change the world. I call this a “BAG” or a “Big Audacious Goal” and in Rule #1 Investing we love our CEO’s to have a big audacious goal to change the world.

Why? First off if it’s sharing our values, it’s exciting to be an owner of a company that going to change the world and wants to make the world a better place in 20 years. If the company is out there to really do something audacious, they will usually attract really good people who are going to work 70 to 80 hours a week and bust their butts in order to make this audacious goal happen.

That means that we get to ride on the backs of wonderful people who are here to create a great investment for us.

Conclusion

So, when we are looking for good companies to invest in, we love really long term owners, who are founders of a company. They aren’t overpaying themselves and are taking care of a whole stakeholder group that’s part of what they lead. And finally, a management team that is out there with a big passion and a big audacious goal. If you liked what you read, please share my blog with your friends. Click the below below to get my must have investing checklist. It details everything you should know about a business before you invest in it.

Now go play.

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About Phil Town – Phil Town is an investment advisor, hedge fund manager, two-time NY Times best-selling author, ex-Grand Canyon river guide and a former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence. You can follow him on google+, facebook, and twitter.

  • arben

    Hello everybody.
    I see that msn.com does not provide stocks statistics anymore. Where are you guys getting them for free or payment? Please let me know. Thanks in advance.
    Arben

  • Joe R

    Garrett in regards to the tools, my only point is yes in 2008 they did save you, however how many times has 2008 really happened (50% loss in value). Hardly ever. My thing is If u are bringing in more “berky” money, and valuations aren’t sky high, timing on tools isn’t worth it. However, having cash on the sidelines when ur up 20% for year or when the risk reward isn’t there for you is another way to prevent a 2008 massacre.

  • Garrett

    Robin / Rulers,

    I think that’s a good question regrading your concern for a declining US Dollar.

    I’ve read several of the doom and gloom books about the US Dollar and yet we find the Dollar currently strengthening. With all its faults, it’s the best of all the other currencies right now. Would you rather own Euro’s, Yen, Yuan or USD?

    And then there are the “Gold Bugs” who have lost tons of money but don’t care.

    My best idea for hedging against a US Dollar currency collapse would be to stay invested in energy – specifically oil and then Coke. And I’m not against 10% of the portfolio being invested in Gold or Silver as a hedge. – But I’d wait to invest in something like the GLD Index as its recently broken through old floors and is on the way to $1000 or less. There is a lot of evidence that the Gold markets are highly manipulated.

    As the USD decreases in value, the price of oil increases, likewise when the USD increases in value as it is today, the price of oil decreases (and supposedly right now the gurus are saying we have a bunch of oil in storage which is further dropping the price.)

    Buffett would say that being invested in Coke is a hedge against a declining USD. Coke’s share price follows a baseket of currencies such as the Euro, Yen and British pound. Cokes shares price will increase on a weaker dollar because Coke is an exporter. The weak US Dollar means its products to foreign buyers are cheaper. and Coke gets more dollars with a stronger Euro, Yen or pound. When this happens revenue rises – thus profits.

    In my Dad’s account which I help him manage, we own Exxon and Coke as part of “The Story” for a hedge against a debased/devalued US Dollar.

    To Your Wealth!

    Garrett

    • Robin Cutenese

      Thank you Garrett for your valuable input re the USD. I agree that energy is a hedge against a devalued US Dollar. The doom and gloom folks are advocating “hard assets” as well, but thus far my portfolio remains mostly in cash except for some BP and DE holdings. You make a good point about COKE. I’ve bought and sold COKE along the way, but had not considered it a hedge until now.
      Live and Learn

      • Ryan

        Thanks Garret, Robin for all the info.
        I’m curious about Hedging The USD with other currency.
        Since you said as USD goes down, oil goes up, what about a commodity based currency such as the Canadian Dollar? It’s currently sitting at $0.87 to the $1 USD.

        The Canadian dollar is sitting at a five year low due to the flooding of oil into the market. My belief is that the low price of crude will not stay depressed forever, so as oil prices increase & or USD decreases, we should see a rise in the Canadian dollar. Would this work as a hedge against the american dollar collapsing or would it just follow suit?

        Just thinking out loud…

        ~Ryan~

  • Martin

    Thought I would post up some quick numbers on Valmont Industries. I have posted a background on the company before but just a quick picture…their major divisions are utilities support structures, irrigation, metal coating, and engineered infrastructure products. They have good Rule#1 numbers and positive things are mentioned about the CEO Mogens Bay.
    I ran four different growth rates and used the EPS of 8.50 because that is what is most recently projected by the company for this year. This is their revised earnings guidance that they released because they admitted they did not do a good job of forecasting the problems that their Utilities Support Structure business has had. The industry for Utilities Support Structure in past years has not had enough capacity in the industry to catch up with demand. Now that the demand has been met there is increased competition and VMI has been stuck bidding on smaller projects. Now that capacity has been built out they are focusing on becoming more efficient. Here are some of my numbers:
    12% growth rate, EPS of $8.50, forward PE:24 = Sticker $156.61 MOS of $78.31 which would yield a 6 year payback. The 8 year payback would be 117.09
    10% growth rate, EPS of $8.50 forward PE: 20 = Sticker $ 108.89 MOS 54.50 which would yield a 5 year payback. The 8 year payback would be 106.93
    15% growth rate, EPS of $ 8.50, forward PE:30 = Sticker $225, MOS $127.50 which would yield an 8 year payback. The price of 134.18 also yields and 8 year payback.
    Just to give a sense of the numbers the 10 year BVPS growth is 18.6%, 10 year EPS growth 25.6%, Cash Flow per share growth 19.4%, and Sales growth 13.4%
    The growth rate consensus is in the 10% range.
    If we bump the growth rate to the 10 year Book Value per Share growth rate of 18% the Sticker come out at $395.88, MOS $197.94 with 9 year payback and 8 year payback at $153.73
    Using the retained earnings valuation method that Garrett used on John Deere gives the 2009 “end of the world price” to be the equivalent of $104.50 today.
    I bought one tranche of this company last year and my current basis is approximately $130. A little high but I am happy holding it and reducing basis. I would be happy if the price broke down below $130 for a sustained time. (It dropped to I believe $126 around the last earnings report.) But I would not want to buy more unless it hit $125 or below. Any VMI followers have any input?

  • robin cutenese

    Going with the scenario that one’s portfolio is now mostly “in cash”, how do we hedge against the [collapse of the dollar] as some analysts are now strongly predicting is coming and coming soon? These same analysts advocate that the hedge against this pending $ collapse is via “hard assets” in your portfolio (railroads, metals, farmland, water, etc.)……”hard assets” people CAN’T live without! Input welcome…..
    Live and Learn

  • Garrett

    Hello Rulers (and Joe R, thanks for the comments/suggestions on previous blog headline…yes, NOV is interesting, isn’t it?)

    I’m just trying to get a grip on what Mr. Market is doing. We’ve been out in Montana for a few days wrapping up some things and dumping copious amounts of cash into the local economy.

    In the meantime, The Fed stops QE and then the Bank of Japan goes into overdose. Mr. Market rallies and I’m mostly cash – scratching my head trying to stay rational. Forget trying to time this stuff – it doesn’t work. And when it does, you’re just lucky.

    If I were using “The Tools” based on a Weekly View on the S&P 500, here’s what $100,000 would look like today if I started on Jan 2014:
    Get In: 3/3/2014, 1878
    Get Out: 4/7/2014, 1815
    Get In: 5/19/2014, 1900
    Get Out: 8/11/2014, 1955
    Get In: 9/2/2014, 2007
    Get Out: 10/6/2014, 1906

    Result? $94,423…sitting on a nice fat loss so far.

    And how about just buy and hold?
    Today the S&P 500 is up 9.3% for the year.

    So that kind of stinks, doesn’t it?

    How about if I switch from a Weekly View to a Monthly view?

    Then I’m all in joining the party and I’ve got a 9.3% return because the only “Red Arrow” on the S&P 500 so far this year based on a Monthly View has been the MACD on Oct 1st.

    One thing that may help is that in both my wife and my employers 401K if you choose to buy the index that matches the S&P 500, then once you “get out” you can’t “get in” until 30 days later. So in some respects, a Monthly View may work better for your investing and emotions.

    Let’s take a quick look at “The Tools” on the S&P 500 from Jan 2008 to Present based on a Monthly View. We’ll start with $100,000.
    The Tools say “Get Out” on 1/2/2008…so we’re waiting for 3 Greens, still $100K in cash
    7/1/2009 “Get In” …987
    9/1/2011 “Get Out” … 1131
    2/1/2012 “Get In”…1365
    Today…Still All In.
    Result? $169,826 as of Today. We’ve got6 years from 2008 to 2014. And using a quick growth rate calculator on google, I see that I’ve got about 11.3% per year.

    What if you just did the buy and hold thing from Jan 2008 to Today? Suppose you bought the S&P 500 on Jan 2008…$100,000 at a price of 1378 gives you 72.56 shares. Today those shares are worth 72.56 x 2023 =’s $146,806.

    Big difference, yes? $169,826 vs $146,806 and a lot less stress if you were lucky enough to be in cash when the market crashed. So for me the lesson learned in all this is use “The Tools” to protect your wealth and take some of the emotion out of the daily/weekly psychotic swings that Mr. Market has. Instead, get to cash when “The Tools” say “get out” on a Montly View if your a 401K S&P 500 Index investor.

    To Your Wealth!

    Garrett

    If you decide to invest that way, BACK TEST your strategy! One thing a Monthly view should do for you is protect your portfolio from a 2008/2009 meltdown.

    To Your Wealth!

    Garrett

    If you’re a 401K Investor dancing In and Out of the S&P 500 basaed upon “The Tools” on a weekly view, then on September

  • Rich

    For the past couple years, I have been in and out of C&J Energy Services (CJES). Buying when the price appears to be a good value, selling covered calls when it appears overvalued and selling puts when I can get my MOS/PBT. This has turned out to be one of my successes to this point (balanced of course, against others that have not been successful).

    They are involved in leasing equipment in the energy (fracking) industry. The CEO and founder is Josh Comstock who is a former Exxon employee and started CJES in1997. After listening and/or reading the last 3 years worth of annual and quarterly reports and calls I feel comfortable and confident in his leadership of the company. Also, the CFO and COO appear to be straight talkers. There is a consistency on the calls from one quarter to the next. My confidence has grown with time. I don’t think there is a shortcut to this. I have a different level of conviction with someone I have heard once or twice and someone I have heard many more times.

    Please don’t take this as an endorsement. I currently have about 2% of my portfolio in CJES. I find I am not nearly as diligent in my research if I do not have any “skin in the game”.

    Thanks to Phil for putting a magnifying glass on these topics that he already covered in his books. Some of us need reminded!