Tips on Reading into Management Behavior

Written by

Jae Jun

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As a member of, their July issue had an article “An Insider’s Look at Brokerage Research”. It’s a Q&A with Mike Mayo, a top-ranked bank analyst who wrote “Exile on Wall Street: One Analyst’s Fight to Save the Big Banks From Themselves“. The interview goes over how analysts are constantly under pressure to offer good recommendations and opinions due to fear of backlash.

In the interview, there were 3 Q&A’s  that I wanted to share related to company executives and how an investor can read into their language or behavior.

Tip #1: Management Hiding Information

Question: In terms of listening to conference calls, obviously, you see things from an insider’s point of view. When an investor is reading through a conference call transcript, are there any signs that maybe the CEO is putting pressure on analysts or that analysts are afraid to ask certain questions? Is there any way you can tell, as an outsider, that that type of thing is going on?

Answer: Very much so. And so much so that I write about it sometimes. Sometimes, when I’ve gotten beaten up on conference calls, everyone can see that. When a company is acting defensively and attacking me, the biggest mistake that I’ve made is to take it too personally—especially when I was starting out in the early 1990s. Instead, this reaction by a company has typically served as a red flag that that company has something to hide.

So, one sign is a company acting very defensively. Two, are they not disclosing information that it seems reasonable to disclose? Are they dancing around the answer? Are they addressing the question head-on, or are they simply evading that answer? And that’s something else that’s very clear. Many of the questions that I’ve asked on conference calls are very basic ones that were not answered. This includes during the financial crisis. I was referenced in the book “Too Big to Fail” by Andrew Ross Sorkin. Lehmann Brothers management said they needed $7 billion of new money, and they told us how they were going to raise $3 billion. The big question that I asked was, “Where are you getting the other $4 billion?” And Sorkin said in his book, “Well, Mike Mayo asked the question that really had management’s head spinning.” You know how I got that? Three plus four is seven!

So the point is, why isn’t management explaining things in very clear terms? Albert Einstein said you should be able to explain physics to a bartender. If that’s the case, you should be able to explain finance to a bartender, and to anyone else also.

So when there’s a discussion that’s so complicated that you can’t understand what’s going on, it’s not your fault. It’s the company’s fault for not explaining it in very clear and simple terms. Those are red flags for anybody paying attention to the management team.

Tip #2: Interpreting CEO Actions and Words

Question: So if someone sees something in an earnings release that raises a concern for them, and it’s not being asked about or management’s not addressing it, that should be a sign of caution for the investor.

Answer: Definitely. But I would go even more basic. Once a year, companies release annual reports, and there’s a letter from the CEO. Sometimes it’s only about five, six, or seven pages to read. Go ahead and read those five, six or seven pages from the CEO. Do you understand what the CEO is saying? Is the CEO defensive? Is there a clear strategy? I spent last weekend reading those first few pages from the CEO letter to shareholders in about eight different annual reports from the big banks, which I review. Once you’re done reading that, you get a sense about which companies have a clear vision and strategy and metrics to hold them accountable by. Others may seem all over the map.

Tip #3: Read at Least the 10-K if Nothing Else

Question: And what about the 10-K (annual report) or the 10-Q (quarterly report)? We always tell investors they should read them. Is there anything in particular that you look for when you pull those up? Or are you just looking for anything that seems out of the ordinary?

Answer: I once again stress the annual report more than any other document that you read. Sometimes the 10-Ks and 10-Qs get very complicated for somebody who is not a sophisticated investor. At that point, you may need to rely on professional analysts.

Having said that, changes in accounting policy can be a red flag. And then it simply goes back to what I learned in business school, the EIC approach: The economy—how does that impact the company? The industry—how well is the company positioned within the industry? And the company itself—what’s happening with the revenues and expenses and the trajectory of those trends?

Always Question Management

I previously made the mistake of being too confident in management for a stock I held and in the end it backfired. A CEO may be a stud, but in reality, most will place shareholders as number 2. The point about defensive, attacking and mumbo jumbo management is something to keep and eye out for. A simple answer should require a simple response.

Remember, falling in love with a company also includes falling in love with management and trusting their every word.

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