February 16, 2010 - If investing were only about numbers, then the math Ph. D.'s would have all the money. But they don't. While numbers are very important and provide the majority of an investment decision, other elements come into play that are critical to any stock's success. They're hard to find sometimes but always worth the effort. If you can discover these elements in a stock and great numbers, too, you've got all the odds for investing success in your favor.

More specifically, it's the CEO, Chief Executive Officer, who makes the most difference. Think of Jack Welch when he was at GE or Bill Gates at Microsoft or John Chambers at Cisco. These names are/were associated with the best companies. They are/were the driving forces that made good ideas turn into outstanding businesses. These are the role models all investors look for, and they have the following traits:
1. Intelligence 2. Hard Working 3. Honest

To paraphrase Warren Buffett: when I buy a business I look for these three characteristics. They have to have all three because if they only have the first two, they'll kill you.

Management does have a scorecard: it's called Return on Equity. That measures how well management is taking care of capital. It measures how much return investors make on their investment. The higher the return on equity, the better management is managing the business.

Great management is extremely hard to find. Good management is more the norm, and that's fine if you, as an investor, are satisfied with normal returns. If you're looking for exceptional returns, you need to find great managers. It's one of the scarcest of commodities, and when you find it, stick with it.

The next, non-numerical piece of the puzzle is the company's reputation. Can anyone ever say they've had a bad experience at Nordstrom? The company built its business on customer service. They've been known to take back items that were bought years ago to satisfy a customer. There is almost no limit to their largesse. In return, they have a very highly satisfied customer base which shops intently and often. Most other retailers can only look on with envy. A company with a great reputation can't be easily duplicated or quickly emulated. It takes years and many positive stories to create a strong brand image. And it's not limited to retailers.

Another, non-quantifiable element is employee turnover. This is tough to gauge since there are no numbers reflecting it. But companies gain a reputation in their industry as to whether people want to work there or whether the front door is always revolving. Employee retention is critical, particularly in service businesses since every night all the company's assets walk out the door. It's always more efficient to keep employees than to continuously train new ones. Any company that has a great reputation will have a list of applicants waiting to join the "fun" (think of Google or Electronic Arts or Yahoo! a few years ago). Companies known to have a bad reputation will have a hard time recruiting good talent, then keeping it. Other than calling around to competitors, it's hard to find this information, but it is available if investors dig enough.

These are three critical elements to any successful company: management, reputation, employee retention. While a challenge to find the information, it is possible. It takes a few phone calls, maybe even knowing someone in the industry, but it can be done. Once you add these facts to all the numbers availabe in databases, you'll have a much fuller picture of what your investment really looks like.

- Ted Allrich