In his latest interview with Ironhold Capital, Bruce Greenwald discussed the qualitative characteristics of good management, and how to quantify those factors. Here’s an excerpt from the interview:
I think there are qualitative things you want to look for and then there’s actually a quantitative number you want to look for. In the book we actually do this for a company which is Intel.
So the qualitative thing about management is, and remember this is mostly going to be for franchise businesses, because the bad managements are usually going to die in the competitive markets, and therefore ideally they’ll get taken over and the asset values will circulate.
So we’re now talking about the franchise businesses. The first thing you want these companies to do is the boring everyday stuff of improving operation operating efficiency.
So when you go to talk to that management you want to look at their record of growing margins without crazy investments. Without sort of trying to do leading-edge technology. Just every day paying attention to small improvements and have a record of growing margins. So that’s the first thing you want to look for and you can quantify that.
When you project out organic growth it’s going to be organic growth in sales which is driven by economic conditions but also organic growth and margins that’s going to be driven by technology and management.
Second thing is when they retain your money, remember we talked about retained earnings, you want to know what kind of value they’re going to create now.
Again start with qualitative, they better be investing where their competitive advantages carry over. That is in the markets they’re already in or the adjacent markets where their economies of scale apply, and if they’re going to China and all over the world, and especially if they’re doing it in an undisciplined way forget about it. They’re not going to create value.
But then you can look at their expansion history because they typically have to report geographic and other statement performance, and you can look at the returns that they’ve generated.
You can also look at their history of acquisitions and there is a number that we talk about in the book which is a value creation factor. For every dollar that they retain and reinvest in active sort of expansion of their business how much value do they create.
You can watch the discussion here:
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