HUMMONEY - The Truth (Perspective)

- by Greg Lewin

“I never did give anybody hell. I just told the truth and they thought it was hell.” -- Harry S. Truman

The truth about common stock investing is actually quite simple, follow the cash. Every business must eventually be capable of generating sufficient funds to keep their business sustainably healthy such that it can return cash to investors at an attractive rate of return relative to the perception of risk.  

And for your convenience financial disclosure laws enacted over the last two decades have greatly simplified the process of analyzing a company’s financial condition.

Facts and figures that used to take hours and hours to disassemble now are carefully and clearly presented in virtually all financial statements.

Therefore, with some well established, long standing companies you can rather easily figure out what you are paying for the business, judge what cash this business can generate over a period of time, examine the company’s disposition toward sharing that cash with investors and just maybe judge if this is the rare business whose competitive position is such, that in this fast paced, globally competitive, highly leveraged world, their future may look something like their past.

But for the vast majority of businesses you soon discover that there is little comfort to be found behind this curtain of disclosure because the real devil is not in the details but in the assumptions which lie behind these details. Because in today’s business world best management practices are well known and widely followed.

Of course, some companies are more advanced than others, but those talented individuals capable of quickly getting a company on track with the latest software and systems are out there for the hire. So with many of the details cared for, it is the assumptions made by management that ultimately dictate success, and this is where the devil truly lies.

Many years ago, I was a significant investor in a very closely followed public company.  Back in the day Wall Street demanded that every company give 12 month earnings forecasts. I had been following the company’s progress for many years and finally figured out that they could forecast important business conditions for about 3 months into the future and after that their guess was little better than mine.

Upon confronting senior management with this observation they candidly admitted I was right but Wall Street demanded 12 month forecasts so we gave them what they asked for.  This was a very well run company that had many years of success but the fact was investment decisions were being made by the company and investors with far less information than was generally assumed.

So this is my point, no matter what investment you’re in, after you have addressed the few publicly available facts needed to follow the cash, your work has just begun.  Next you must gain access to the most important assumptions used to manage the businesses future.  And by the way, I would not stop there. Go ask the same of economists, your financial advisors, market prognosticators and most certainly our political figures. Tell them you want to see the devil and you don’t mean the details, because that is where the risk really lies.     

 ---The views expressed here are of the author, HUMMoney contributor Greg Lewin; currently a General Partner at TLF Capital, an investment management firm. During the past 26 years he has been a senior money manager or partner in Wall Street firms including Neuberger Berman, Charter Oak Partners and Sailfish Capital.