First Who then What

Applying the wisdom of First Who then What in investing is as such – In most investment thesis, investors tend to focus on what is the strategy to achieve growth, what are the businesses’ strengths and weaknesses, and what will management do with the cash flow generated from their business etc. These are critical questions as they tangibly impact the business value, and thus bring about direct implications for shareholders, employees, consumers and even governments.

But more critically, we have to know who are the people running the business that we invest in. The quality of management carries much weight, and we should chuck these companies aside when management actions are not aligned with shareholders, or if they are outright dubious characters.

To add to that, strength is not the absence of weakness, and good is not the absence of bad.

I advocate a further probe into the people running the business to find out, not exhaustively, what they stand for, how do they build the culture of their business, how do they live their lives, what challenges have they been through, how do they treat their teammates, partners and consumers when they have the upper hand in knowledge and information etc.

Combined, it answers the question “If they can do that, will they?”

Founders, management and insiders typically know more information than their employees, partners and consumers, and as such always have an upper hand in knowledge and information. Can they potentially use this asymmetric gap to their advantage? The answer is typically a resounding “Yes.”

That might make you feel very uncomfortable for you are, in effect, placing your neck on their chopping board or perhaps more suitably, placing your money in their hands.

Therein lies the distinction behind the later part of the question – “Will they?”

A management misguided by their personal interests (however way they want to spin it) may choose to take advantage of such an asymmetric distribution of knowledge and information. And in so doing, it allows keen observers a glimpse into their character, and what they stand for.

They can, and they will.

And they did.

If this is what you observed through their actions, without judging or labelling the management, would you want to invest your time, attention and money with them?

Investors need not look far, for within our own shores, in Singapore, we have companies behaving exactly as such.

For instance, just over the past 24 months we have at least 2 Oil & Gas companies that filed for bankruptcy. And yet, if investors were to just scratch their financial reports ever so briefly, we would see how their capital allocations were simply not shareholder-friendly – Issuing dividends when the business required capital to grow organically, while increasing their salary and borrowing more money or issuing more shares to maintain their very comfortable lifestyle.

Of course, there are some other companies that operate differently yet within the same scope. Now, why would anyone invest time, attention and money with them? Maybe there is money to be made – As the saying goes “whose bread I eat, whose song I sing.”

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