So, the truth is out, from no less than the oracle of Omaha. What’s the skinny? The biggest problem we face in investing in companies are the CEOs themselves. You knew that didn’t you?
According to the Oracle, “You get a guy or a woman in charge of it—they’re personable, the directors like ’em—they don’t know what they’re doing. But they know how to put on an appearance. That’s the biggest single danger,”
But wait a mo. Wall Street doesn’t look at the behavior or CEOs. For all the billions they spend on analysts, quants, algorithms, data, sages, consultants, blah blah, the brilliant but fevered minds in the hallowed portals of Wall Street spend nothing at all in analyzing the behavior of CEOs to figure out if they’re more than just a pretty face.
The financial guys are missing it pretty hard too. How about Archegos, wasn’t that a humongous failure? Not only did Bill Hwang pull the wool over the eyes of all those exalted Swiss and US bankers, but he had also done it before and been criminally sanctioned by the SEC. And still Wall Street went in with him again! Can you believe that?! Or Adam Neuman who took billions from figures as apparently canny as Masayoshi Son and Rupert Murdoch. The list goes on.
What analysis do we have on CEOs’ behaviors? None, zilch, nada. OK you have the obligatory bio in the proxy statement, but these are worse than useless, designed to make the CEO look good, lovingly crafted and continually burnished by IR folks paid to make every CEO, no matter how clueless, seem like a combo of the Greek God Xerxes and Adonis. Where’s the behavioral transparency a careful investor should have access to? Nowhere, that’s what.
I’ve been preaching from this hymnbook for many years. Most recently I wrote a blog post on this topic “Why Don’t We Rate Management Teams?” making exactly the same point as Buffett, maybe he read it ? The point I was making is that you can’t expect investors to get it right about the investment prospects of the company unless they understand the behaviors of the CEO. Of course, that’s exactly what the CEOs don’t want and in many cases fear.
But of course, behavior is out of vogue. The financial analysts know it all right coz they have MBAs from the best business schools taught by the very best professors. Hmmm, the more degrees, the bigger the losses, right? How could people ignore the significance of Adam Neumann turning up shoeless to business meetings and having his annual crazy-WeWorker bash which was really homage to the Man.
It would be nice to think that the bad guys are just the obvious narcissists like Neumann and Bernie Madoff. But it doesn’t work that way. Most of the ones you need to steer clear of are, just like Buffett says, apparently practical responsible men and women albeit they often have a silver tongue, are extroverted and are superb networkers.
You won’t catch them out by talking to them because they are articulate to a fault and will soften you up without you or the analysts and credible journalists ever twigging to the fact that you’ve been conned, however softly. You have to understand them at a deeper behavioral level, so that you can get independent psychometric evaluation as to their capacity to add value at a reasonable cost. But who does that?
We do, that is my company. We have developed unique psychometric approaches to rating CEOs so you can get over the problem that Buffett is talking about. But the Wall Street guys, against all the evidence believe that they don’t need any of the that stuff, they’re just too smart to need it.
Question: Why don’t we rate CEOs? Answer: Coz no-one ever did that stupid! So why should we start now?
Wall Street and investors everywhere are going to continue to get burned until they realize that they’re missing the only thing that can help them make better evaluations about investments – that is to get access to better judgements about the behavior and thus the real-world performance of CEOs.
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