With the start of a new year, investment strategists and Bay Street analysts are releasing their top stock picks and recommendations for 2017. Fourth-quarter earnings are also starting to flow briskly.
This makes it a good time for investors to review their portfolio holdings to assess if they should increase, decrease or even eliminate positions.
You, not your financial adviser, have the greatest interest in your own portfolio. Consequently, successful portfolio management comes down to your investment decisions.
When assessing a security, a good starting point for long-term investors is to evaluate the strength of management. Successful leaders can motivate individuals and drive companies to achieve their full earnings and growth potential.
Just ask Warren Buffett. The investment mogul often stresses the importance of identifying and investing in businesses with strong leaders at the helm. In his 2015 annual letter to Berkshire Hathaway shareholders, he stated that Berkshire increased its ownership positions in several investments that "possess excellent businesses and are run by managers who are both talented and shareholder-oriented."
So how do you assess the quality of management?
These are the four things I look for.
Research management's background and read their biographies on their websites to gain knowledge of their experience and how that may pertain to your investment. For instance, a chief executive officer may have experience building a past company and successfully selling this business. Or the CEO may have experience in successfully identifying, acquiring and integrating companies. While past performance is not necessarily a predictor of future performance, it can be a good indicator.
Find out whether management delivers on its promises. Ideally, you want to invest in a company at which management has a tendency to underpromise and overdeliver, rather than overpromising and underdelivering.
Companies that meet or exceed earnings expectations are valued by investors, and are often stocks that command a premium valuation.
In a study by Michael Clement, Richard Frankel and Jeffrey Miller that appeared in the Journal of Accounting Research in September, 2003, they found that stocks with earnings guidance provided by management that closely matches the Street's expectations will have positive price reactions.
You want to invest in companies at which management's priorities and goals are aligned with your personal investment objectives – whether that be growth, income or a combination of the two. Ask yourself: Is management looking to grow the company aggressively through acquisitions, or is management more conservative, taking a more cautious, steady and measured approach to growth? Are dividends and dividend growth a priority to management?
Look at ownership positions and insider transaction activities. Does management have skin in the game? What is management's ownership position? Do managers purchase shares or units on price weakness? This information is freely available to everyone on the website www.sedi.ca. If management owns a sizable number of shares, this can be a positive indication that its interests are aligned with shareholders as it has a vested interest in having the company succeed and deliver strong performance.
The bottom line
Research and evaluate management regularly. Keep in mind that when you invest in a company, you are a part owner in a business, and they, in turn, become a partner in your finances.
Jennifer Dowty, CFA, Globe Investor's in-house equities analyst, writes exclusively for our subscribers at Inside the Market