A Refreshing Reminder Of What Matters In Investing

For the most part, investors would do well to take anything that the management of a publicly-traded company has to say with a grain (or two) of salt. After all, CEOs are evaluated in large part on the price of the stock, and keeping investors enthusiastic and positive is a larger part of the job description than most would care to admit.

That said, every once in a while investors can find straight-shooting companies that offer insights that go beyond the fundamentals of the particular company in question. Berkshire Hathaway CEO Warren Buffett's annual letters to shareholders are rightly famous for their far-reaching discussions of management and investment philosophy, and the CEOs of other companies including Coca-Cola, General Electric and JPMorgan often pen high-quality letters as well.

A few months ago, however, I read a presentation from a small company, Contango Oil & Gas, that I found refreshing and well worth reading for most investors. At a minimum, it's a valuable reminder of what investors ought to hold as important when approaching long-term investments.

Honesty and Integrity
It's unfortunate that it still bears repeating, but a central obligation of the management of publicly-traded companies is to conduct themselves and communicate with honesty and integrity.

Companies have an obligation to communicate honestly, clearly and promptly with their shareholders. There is no excuse to "sit" on bad news, spin it or otherwise misrepresent it, and yet all too many companies bury bad news in SEC filings while using conference calls to celebrate non-accomplishments and puffery.

At the same time, companies should avoid jargon and make their accounting as simple as possible. In the case of Contango, for instance, there are certain unavoidable accounting concepts and reporting requirements that go with energy companies that are not intuitive. Here, however, management, takes the time to explain what the terms mean and how they are calculated, so that investors can understand the numbers that the company reports.

Along those lines, company executives would do well to lay out just what they believe matters. Managers should explain the metrics that shape their decision-making and what they believe builds value within the industry (without resorting to meaningless babble such as "delivering high levels of customer service" or "responding to the needs of our clients"). This is especially true when it comes to executive compensation; investors ought to be wary of companies that are either vague when it comes to how they evaluate and compensate executives, or rely on short-term and/or easily-manipulated factors such as reported EPS growth and near-term stock price performance.

Of course, investors have their own part to play here. Investors ought to push for clear disclosure and reporting, whether it be through communications with executives, proxy voting or supporting relevant legislation. Investors also need to realize that open communication can come at the cost of near-term performance - frank communication isn't always conducive to getting the market fired up about a stock, and investors need to accept that buybacks and dividends aren't always the best uses of corporate cash, and/or that it makes little sense to sell after one bad quarter if the long-term plan still makes sense.

Margin of Error
One of the parts of the Contango presentation that leaped out at me was how frank the company was about the probability that some (or all) of management's forecasts were likely to prove inaccurate to some extent. In the particular case of Contango, it's virtually impossible to predict where oil and gas prices will be next year, and it is likewise difficult to predict where service and equipment costs will be more than a quarter or two ahead.

While that may be specific to Contango and/or energy companies, the reality is that corporate forecasts are going to be wrong. Suppliers, customers and competitors are always in motion, and only a fool believes that he or she can unfailingly predict all of the independent and dependent actions that follow. Investors need, then, to accept that forecasts are "best guesses;" they are not set in stone or guaranteed forevermore. While some businesses are inherently harder (or easier) to predict than others, and some management teams are better (or worse) at forecasting, investors should realize that every prediction has a margin of error and they should always consider the "what if" scenarios of things going better or worse than predicted.

Successful investors and traders learn that there is a margin of error and uncertainty that is simply ever present. It is impossible to know everything about a company and it's really not worthwhile to try. More to the point, if you wait until you know everything (or think you do), you'll likely fall victim to an investment phenomenon known as "paralysis by analysis" and never end up investing at all.

Along similar lines, it's important to avoid a false sense of security. By all means, conduct thorough due diligence, but understand that no investor can find all of the information he or she wants, and there is always the possibility that the analysis/conclusion will still be flawed. This is particularly true when it comes to areas such as modeling or fundamental product research. Knowing the pharmacokinetics of a drug backwards and forwards and/or creating a highly detailed line-by-line financial model is all well and good, but be sure that you're not simply substituting dozens of smaller guesses for one big guess and thinking yourself somehow safer.

Investor's Responsibilities
To close this article, it is also important for investors to acknowledge and fulfill their own responsibilities in the process. It doesn't really matter how honest or thorough a company is; if shareholders are careless or lazy, their investment decisions are not likely to end well.

Do Your Homework!
As Contango's management urged in its presentation, it is critical for investors to read a company's financial filings. No company can put everything an investor needs to know in a press release or investor presentation. That's not an excuse for executives to bury bad news, but rather just an acknowledgment that almost no investor is going to regularly read a 20-page quarterly financial results press release.

Along with reading the financial filings and understanding recent events in the company's business, it is vitally important for an investor to understand the business and industry as well as possible. A great deal of information can be gleaned from corporate websites, annual reports, investor presentations and financial filings.

Likewise, an hour or two on the internet can usually uncover invaluable information about the target company and its industry. In so doing, it's also vitally important to read the filings and presentations of rivals, competitors, suppliers and customers. Pay particular attention to what information other companies include or omit, and an investor can walk away with a good sense of not only what makes a business tick, but whether a given company's executive team is realistic and communicating openly and honestly with shareholders.

Be Realistic!
One of the most important investor responsibilities is to approach every investment with a realistic sense of the potential risks and volatility of a company and its stock. For instance, most experimental drugs fail, few tech companies succeed in more than one market, and few small companies can elbow aside the giants in an industry and become major players themselves.

Companies do not grow at a 20% or greater clip indefinitely, nor are huge returns on equity typically sustainable. Remember, then, that if something looks too good to last, it most likely will not. Likewise, be wary of company valuations that essentially predict a small company becoming an industry titan in less than a decade.

Understand What Matters
As Contango's management said in its presentation, per-share shareholder wealth creation (including dividends) is really the only thing that matters in the long term. It doesn't matter if sell-side analysts love or hate a company, it doesn't matter if writers like myself love or hate a company and it doesn't matter if there are shortsellers out there hoping for the company to fail. If a company can deliver an in-demand product or service better than its rivals, do so in a profitable way and prudently reinvest the capital generated by the business in a way that builds shareholder wealth, the company's long-term investors will be rewarded.

Understanding what matters is a pretty comprehensive concept that incorporates much of what has already been said here. At a minimum, investors need to understand how a company builds value - not only for shareholders, but for its customers/clients as well. Metrics such as return on invested capital (ROIC) do help point to value-creating management teams, but it is arguably more important to know why a company's ROIC is what it is (particularly relative to its peers) than just the absolute number.

The Bottom Line
There's nothing better than identifying a company where management communicates clearly with shareholders (telling them not only how the business is performing today but also how it evaluates its relative performance), lays out clear expectations for the business, and prudently marshals and deploys the firm's capital to build value. I've been fortunate enough to find several such companies over the years, and they've been significant multi-baggers for me (despite operating in what are, in some cases, industries held to be low-growth opportunities).

As the Contango presentation reminds me, wisdom can come from many different corners of the market. Oftentimes, investment wisdom is disarming in its simplicity and logic: be honest, be thorough and be realistic. If investors keep these ideas in mind and make a point of focusing on companies that communicate clearly, lay out measurable metrics and standards of performance, and hew to logical, shareholder-friendly policies, the long-term results can be surprisingly lucrative.

More From Investopedia

--

Get stories like this on the Yahoo app and discover more every day.
Download it now.
Loading...
  • Poland first in Europe to issue Chinese 'Panda bonds'
    Poland first in Europe to issue Chinese 'Panda bonds' AFP News - 13 minutes ago

    Poland on Thursday said it became the first European country to issue government bonds on the Chinese market, opening the door to new sources of financing as Warsaw plans to run a record deficit next year. The Polish finance ministry said it had … More »

  • Fiscal spend in richer euro countries would help periphery - ECB paper Reuters - 30 minutes ago

    Fiscal spending in "core" euro zone countries, such as Germany, would help weaker economies in the region's periphery at a time when European Central Bank rates are stuck at zero, an ECB research paper showed on Thursday. The authors argue for … More »

  • Oil prices fall as production freeze expectation fades
    Oil prices fall as production freeze expectation fades Reuters - 34 minutes ago

    Oil prices slipped on Thursday as the market focused on oversupply and fading expectation of a production freeze. U.S. light crude oil (CLc1) was down 15 cents at $46.62 a barrel, after dropping 2.8 percent on Wednesday. Oil prices rose more than … More »

  • Standex posts 4Q profit Associated Press - 37 minutes ago

    On a per-share basis, the Salem, New Hampshire-based company said it had net income of 95 cents. Earnings, adjusted for one-time gains and costs, came to $1.31 per share. The equipment manufacturing company ... … More »

  • Two of China’s Biggest Banks Hold Back Rising Tide of Bad Loans Bloomberg - 55 minutes ago

    Investors are looking for any signs that China’s banks are getting on top of their bad loans, estimated by analysts to be much higher than the levels officially reported. Likewise, Bank of Communications executives cautioned that it was too early … More »

  • Poland first in Europe to issue Chinese 'Panda bonds': ministry AFP - 1 hour 9 minutes ago

    Poland on Thursday said it became the first European country to issue government bonds on the Chinese market, opening the door to new sources of financing as Warsaw plans to run a record deficit next year. ... … More »

  • China graft inspectors call on energy agency to speed up reforms Reuters - 1 hour 11 minutes ago

    China's graft inspectors have called on the nation's energy regulator to intensify oversight of the approval process for new projects and accelerate reforms of its massive oil, gas and power sector as Beijing cracks down on widespread corruption. … More »

  • Global stocks wilt ahead of Fed gathering, dollar wobbles
    Global stocks wilt ahead of Fed gathering, dollar wobbles Reuters - 1 hour 14 minutes ago

    European stocks saw their biggest fall in three weeks on Thursday and currency markets were noticeably subdued as investors took to sidelines ahead of one of the big global central banker gatherings of the year. Japanese and Chinese stocks had … More »

  • 'Queen of Knitwear' Sonia Rykiel dies aged 86
    'Queen of Knitwear' Sonia Rykiel dies aged 86 AFP News - 1 hour 37 minutes ago

    Sonia Rykiel, the French fashion designer known as the Queen of Knitwear, died on Thursday at the age of 86 after a long battle with Parkinson's disease, her daughter told AFP. "My mother died at 5:00 this morning at her home in Paris from the … More »

  • Navios reports 2Q loss Associated Press - 1 hour 45 minutes ago

    On a per-share basis, the company said it had a loss of 29 cents. The shipping and logistics company posted revenue of $105.7 million in the period. The company's shares closed at $1.03. A year ago, they ... … More »

  • Deutsche Boerse, LSE submit merger to EU regulators for approval
    Deutsche Boerse, LSE submit merger to EU regulators for approval Reuters - 1 hour 50 minutes ago

    Deutsche Boerse and the London Stock Exchange Group have submitted their $29 billion merger deal to European Union competition regulators ahead of a Sept. 28 deadline for a preliminary review. The European Commission's antitrust department, whose … More »

  • European equities slide in choppy trade
    European equities slide in choppy trade AFP News - 1 hour 55 minutes ago

    European stocks slid Thursday in choppy trade as investors eyed poor German data and recent oil price falls, on the eve of a speech by Federal Reserve boss Janet Yellen. In late morning deals, Frankfurt sank 1.0 percent, London lost 0.3 percent and … More »

  • Michaels meets 2Q profit forecasts Associated Press - 1 hour 56 minutes ago

    On a per-share basis, the Irving, Texas-based company said it had net income of 17 cents. The results met Wall Street expectations. The average estimate of seven analysts surveyed by Zacks Investment Research ... … More »

  • Turkey sends more tanks to Syria, warns Kurdish militia
    Turkey sends more tanks to Syria, warns Kurdish militia AFP News - 2 hours 6 minutes ago

    Turkey on Tuesday sent more tanks into Syria and sternly warned a Kurdish militia to withdraw from frontline positions, a day after pro-Ankara Syrian opposition fighters captured a key border town from jihadists. The tanks joined those which … More »

  • Brexit hits German business morale, Ifo index plunges
    Brexit hits German business morale, Ifo index plunges Reuters - 2 hours 7 minutes ago

    The Munich-based Ifo economic institute said its business climate index, based on a monthly survey of some 7,000 firms, fell to 106.2 in August from 108.3 in July. "Business confidence in Germany has clearly worsened," Ifo head Clemens Fuest said … More »

  • 'Bogan', 'ranga', 'rurosexual' added to Australian dictionary
    'Bogan', 'ranga', 'rurosexual' added to Australian dictionary AFP News - 2 hours 16 minutes ago

    Heading Down Under where locals are "dry as a dead dingo's donger" and beachgoers don "budgie smugglers", but unsure what this means? The second edition of the Australian National Dictionary -- a heavy two-tome hardback containing the definitions … More »

  • Gold holds above four-week low, awaits clues on Fed rate hike
    Gold holds above four-week low, awaits clues on Fed rate hike Reuters - 2 hours 21 minutes ago

    Yellen is scheduled to address a meeting of central bankers in Jackson Hole, Wyoming, on Friday, and recent comments from Fed policymakers have raised investors' expectations that she might adopt a less cautious tone on rates. "Investors are … More »

  • Medtronic tops 1Q profit forecasts Associated Press - 2 hours 21 minutes ago

    The Dublin-based company said it had profit of 66 cents per share. Earnings, adjusted for one-time gains and costs, came to $1.03 per share. The results beat Wall Street expectations. The average estimate ... … More »

  • Oil prices fall as hopes of production freeze fade
    Oil prices fall as hopes of production freeze fade Reuters - 2 hours 22 minutes ago

    Oil prices slipped on Thursday as the market focused on oversupply and fading hopes of a production freeze. U.S. light crude oil was down 5 cents at $46.72 a barrel, after dropping 2.8 percent on Wednesday. Oil prices rose more than 20 percent in … More »

  • South Korea offers Tokyo-funded money to 'comfort women'
    South Korea offers Tokyo-funded money to 'comfort women' AFP News - 2 hours 23 minutes ago

    South Korea said Thursday it will offer each surviving victim of Japan's wartime sexual enslavement 100 million won (US$89,581) using funds provided by Tokyo, an offer quickly rejected by some of the women. The plight of the so-called "comfort … More »

  • This Philippines bitcoin firm has acquired a defunct Silicon Valley company
    This Philippines bitcoin firm has acquired a defunct Silicon Valley company e27 - 2 hours 29 minutes ago

     The makers of Rebit.ph, Bitbit.cash, and PrepaidBitcoin.ph now have a partner in the world’s biggest tech ecoystem What kind of company would be magnanimous — or foolhardy — enough to pull another company out from the grave? Philippines-based … More »

  • Chinese telecom firm ZTE books 9.3 percent rise in first half profit on 4G growth
    Chinese telecom firm ZTE books 9.3 percent rise in first half profit on 4G growth Reuters - 2 hours 34 minutes ago

    Chinese telecom equipment maker ZTE Corp on Thursday booked a 9.3 percent rise in first-half net profit as China's adoption of fourth-generation (4G) mobile technology offset the impact of restrictions on its U.S. operations. Profit reached 1.8 … More »

  • Malaysia's AirAsia values leasing unit at $1 bln -analyst presentation Reuters - 2 hours 40 minutes ago

    AirAsia Bhd, Asia's biggest low-cost airline, values its wholly owned leasing arm at 4.1 billion ringgit ($1 billion), and aims to attract an equity investor to the unit by end-2016, it said in a presentation to analysts. The Malaysian airline aims … More »

  • Europe Stocks Snap Three-Day Winning Streak as All Await Yellen Bloomberg - 2 hours 44 minutes ago

    The Stoxx Europe 600 Index slid 0.8 percent to 342.24 at 11:27 a.m. in London, with almost all industry groups falling. Germany’s equity benchmark DAX Index fell 0.9 percent, for the biggest decline among major western-European markets, as a report … More »

  • Chinese telecom firm ZTE books 9.3 percent rise in H1 profit on 4G growth
    Chinese telecom firm ZTE books 9.3 percent rise in H1 profit on 4G growth Reuters - 2 hours 49 minutes ago

    Chinese telecom equipment maker ZTE Corp on Thursday booked a 9.3 percent rise in first-half net profit as China's adoption of fourth-generation (4G) mobile technology offset the impact of restrictions on its U.S. operations. Profit reached 1.8 … More »

 
Recent Quotes
Symbol Price Change % Chg 
Your most recently viewed tickers will automatically show up here if you type a ticker in the "Enter symbol/company" at the bottom of this module.
You need to enable your browser cookies to view your most recent quotes.
 
Sign-in to view quotes in your portfolios.

MARKET MOVERS

  • Most Actives
    Most Actives
    NamePriceChange% Chg
    0.128-0.001-0.78%
    N21.SI
    0.355-0.010-2.74%
    E5H.SI
    0.59-0.01-1.67%
    5TP.SI
    1.00+0.01+1.01%
    Y92.SI
    0.785-0.010-1.26%
    BS6.SI
  • % Gainers
    % Gainers
    NamePriceChange% Chg
    0.45+0.09+26.76%
    AYB.SI
    0.465+0.080+20.78%
    E8Z.SI
    0.16+0.02+14.29%
    UV1.SI
    0.20+0.02+11.11%
    BGO.SI
    0.188+0.018+10.59%
    AWS.SI
  • % Losers
    % Losers
    NamePriceChange% Chg
    0.35-0.10-22.22%
    BFK.SI
    0.185-0.040-17.78%
    Y35.SI
    0.40-0.06-13.04%
    BBW.SI
    0.20-0.03-13.04%
    AWI.SI
    0.194-0.026-11.82%
    BLZ.SI

Market Data

  • Currencies
    Currencies
    NamePriceChange% Chg
    1.3535-0.0002-0.01%
    USDSGD=X
    1.5284+0.0035+0.23%
    EURSGD=X
    1.7865-0.0041-0.23%
    GBPSGD=X
    74.2380+0.095+0.13%
    SGDJPY=X
    5.7260+0.0024+0.04%
    SGDHKD=X
    2.9796+0.0027+0.09%
    SGDMYR=X
    9,815.5518+32.3105+0.33%
    SGDIDR=X
    4.9153+0.002+0.04%
    SGDCNY=X
    1.0297-0.001-0.10%
    AUDSGD=X
  • Commodities
    Commodities
    NamePriceChange% Chg
    1,323.00-6.70-0.50%
    GCZ16.CMX
    18.53-0.03-0.14%
    SIU16.CMX
    95.34
    ^XAU
    2.08+0.01+0.29%
    HGU16.CMX
    46.60-0.17-0.36%
    CLV16.NYM
  • Bonds
    Bonds
    TreasuryYield (%)Yield Change
    1.16
    ^FVX
    1.58
    ^TNX
    2.26
    ^TYX