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Read on to see an article from the archive of the Deep Value Shares blog:

Words of wisdom for investors

I’m busy analysing Avingtrans and Lamprell. If anyone has any information on these companies please could you let me know.

t’ll be next week before I can report anything more to you, so, in the meantime, I have some aphorisms for you to consider.

Management qualities to look out for

The extravagance of any corporate office is directly proportional to management’s reluctance to reward shareholders (Peter Lynch)

Comment: you should love it when you visit head office and factories and find cheap items being used by employees, from tables and chairs to the pictures on the wall (ideally no pictures at all).

It is especially encouraging when the directors have chosen a non-fashionable area to rent or buy buildings.

Anything that will had value to the customer-offering – that customers are more than willing to pay for – should, of course, be acquired, but anything that is merely for the ego-boost of managers should not.

Everything has to add to shareholder value. A penny spent beyond that is a penny wasted.

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Managers who have learned much from personal experience in the past usually are destined to learn much from personal experience in the future…. The trick is to learn most lessons from the experiences of others. (Warren Buffett (B.H.1985))

Comment: From time to time I’m tempted to think that a team of managers who have made very poor strategic or operational decisions in the past will learn from their errors. However, some managers are just not equipped to objectively observe past actions and outcomes, thereby analysing an error.

Quite often they are unaware of alternative courses of action, such as using shareholders’ money in another business area – they “know what they know”, and they stick to the same thing they were doing thirty years ago.

During those thirty years they have not spent much time examining strategic and operational mistakes and successes of other firms, except, perhaps those in their own industry, which leads to a very limited form of business schooling.

You might argue that they have non-executive directors on their boards to counter this ignorance and arrogance tendency.

But, I find many dominating shareholders/chairman stuff their boards with friends, sycophants and group-thinkers.   They value loyalty, even obedience, above rational argument and analysis.

Unfortunately, it takes some time to observe a director’s true character, which often becomes apparent only after you have become a shareholder, thus some of your portfolio might already be committed.

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We can obtain a better management result through non-control than control. (Warren Buffett (B.H. 1977))

Because of Buffett’s firm emphasis on getting to know, and then to trust, key executives at the companies in which he invests he does not feel the need to deal with managing the company.

Indeed, time and again he would say to potential sellers that the business had to come with good managers, because he did not have the wherewithal or the time to deal with issues beyond

(a) capital allocation,

(b) selecting the top one or two managers, and

(c) praising those generating high rates of return on capital

With this outlook Buffett could look at both quoted companies in which he commanded only, say, 10% of the equity, as well as wholly-owned subsidiaries and judge their suitability for investment on the same basis:

(a) quality of business franchise: sustainable competitive advantage?

(b) quality of managers: are they both able and treat shareholders well?

(c) stability: is the operating business reasonably predictable? Does the financial structure (debt level) place an instability burden on the firm?

(d) is there a margin of safety in terms of price paid being significantly less than intrinsic value?

While this quote seems to indicate that Buffett prefers non-control to control, I would advise that you read it in the light of other comments Buffett has made where he values gaining as much as possible of a “good thing”, i.e. a majority, if not all the shares.

Taking these other writings and actions into account, I think we can say that non-control or control is not the issue, and so he is neutral on that.

What really matters is the way in which the business has been and will be run. He does not want to control in order to micromanage a business to health – it must already be healthy.

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Read more sample articles:

Some thoughts on company management

Lamprell – is it a net current asset value investment?

Searching for a new net current asset value investment

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