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.
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.