Properties of a great company...great management

Dear Reader and Fellow Investors,

We are not in the habit of talking openly about individual security investments we make, but are more than happy to openly discuss our principles and concepts.

In a client meeting last week, the discussion veered towards the business of the individual, and how he was reacting to his current business environment. The discussion reached a point where the question arose: if half his clientele where to leave the area, would the company be worth half as much due to the immediate drop in revenue?

A range of questions can follow such as was the migration permenant? How can we measure that? Will new people come and take their place? etc etc.

Let us assume, due to the high quality of the area, that the majority of people leaving will return in the future. If this is simply a cyclical adjustment, in the future surely they will make the same earnings, or more, when inflation adjusted? Surely the cyclically adjusted earnings would be a good starting point for valuing the company?

The client very astutely asks, but what if the new clients want different products? I may not have an edge on that product? ahh. That is the question.

However, good management adapts to the different situation. No product is sustainable for ever. What makes a good company great, is its ability to last, and that often means it ability to adapt, and that is often reflected in the quality of its management. Good management understands the market dynamics, places themselves strategically within it to increase barriers to entry for competitors.

Management skill cannot be ignored when looking for an investment strategy based on a long term relationship.


Yours sincerely,

Alessandro Sajwani