Corporate Management And Investing
( Originally Published 1939 )
AFTER having selected the industry and the company, your attention should be directed to the management. Especially is this so, if you have selected some company that you believe is at the logical point of beginning and its future before it.
Management always plays an important part in any company. A good management can often times take a poor company, in a good industry, and turn it into one of profit. By the same token a bad management can throw a good company into bankruptcy.
Usually management reflects the policy dictated by the board of directors, nevertheless, the directorate is often composed of part of the management, and the problems the management presents are instrumental in creating policies.
The many related and component parts which go to make up a company must be harmonized by management. This includes the ability to organize personnel, the purchasing of raw materials, the manufacturing of these materials into finished articles and the ability to sell these articles advantageously after they have been manufactured.
Then there enters the psychological side: Management must have a knowledge of both men and methods. Many companies have reached spectacular successes, because their management was shrewd enough to take what might ordinarily be considered unwise chances. Usually such men, however, were not taking blind chances. They knew the people with whom they were to deal, whether it was an individual, a group, or a nation.
Wise management also trains men to succeed it. A corporation does not and should not cease to exist with the passing of any individual or group of individuals. A company having reached a high point of efficiency due to its management, should insure it-self with capable successors, just as an individual insures himself with life insurance.
While it is true that one-man organizations have been known to make huge successes; nevertheless, it is unwise to lean too heavily upon the personality and abilities of one man. What will happen when Henry Ford dies? Possibly nothing, but consider a few years back when he was confronted with a grave financial problem. Ford's ingenuity extracted him from it, but suppose his death should have occured during or shortly following, such a crisis? The history of the Ford Motor Company may have been written differently.
Many industrial reorganizations which take place, and are there-after successful, can contribute their success more to management, than to any abstract change in their finances. This is true, for good management can always command finances. Banks often prefer lending money to men, rather than to property, especially if the property is in reorganization.
We can accept it as almost axiomatic, that a company, in the right industry, with a wise management, is usually assured of profits.
If you have made your decision as to the company and the management, however, you naturally wish to thoroughly investigate it before comitting yourself to an investment. How will you go about this, you inquire?
Books, of course, are the eye glasses through which you can see into any business, and the company's income statement and balance sheet reflects the books. But are you sure that you know just how to read different statements from different companies? All companies do not use a uniform system of reporting, and the principle upon which you base your calculations of one company, may serve you false in another. Therefore particular attention must be paid to two divisions of a corporation's report, namely its income statement and balance sheet.
The income statement should reflect the difference between the amount of income taken in, and the amount expended, during a certain period of time. It is especially important to know whether the income and operating expenses, appearing on the statement, are recurring or non-recurring. Only by ascertaining this can you accept figures of an income statement as conclusive.
Many companies are very meager with their information. A great many only issue statements once a year, and even some of the prominent ones report neither their sales nor operating expenses. The investor, especially if he is inexperienced, who at-tempts to base his calculations upon such meagre information, may find himself wrong..
The Stock Exchange has tried, and is trying, to secure a uniform system of reporting, but due to the wide and complexed activities of numerous companies, their efforts have not met with complete success.
In a later chapter I have setforth a simple formula which the investor might employ to advantage in trying to penetrate the complexities of some balance sheets and earning statements. While not perfect, it is to be preferred to the vast number of irregular and complicated statements.