Sep
24
The Essence of Success, from Richard Owen
September 24, 2013 |
Charles Dow used to counsel that no individual should ever be promoted if they hadn't made a large error at some point. Phil Fisher used to insist only in investing in those stocks that had management teams willing to make big mistakes. If they didn't make mistakes, they wouldn't also take the risks required for success. Is this the essence of success? How does a corporate management team, upon the fruition of such errors, survive being "stopped out" of their positions in today's hair twitch paradigm? Is being expropriated from your career rather than your capital not the bigger risk today? And thus can it only be stocks with founder, family or veto shareholdings that make for truly great growth stocks today? Should not Tim Cook undertake an LBO with the Qataris?
anonymous writes:
Does modern risk management preclude financial Darwinism?
Steve Ellison writes:
Having worked in the technology industry, it has long seemed to me that many companies are never again the same when founders are replaced by "hired gun" CEOs. My best guess on why this might be is that hired managers don't fully understand non-financial aspects of the founders' visions that prove to be critical to success. As I posted in 2010, this study found that founder-led companies outperform others:
"Eleven percent of the largest public U.S. firms are headed by the CEO who founded the firm. Founder-CEO firms differ systematically from successor-CEO firms with respect to firm valuation, investment behavior, and stock market performance. Founder-CEO firms invest more in R&D, have higher capital expenditures, and make more focused mergers and acquisitions. An equal-weighted investment strategy that had invested in founder-CEO firms from 1993{2002 would have earned a benchmark- adjusted return of 8.3% annually. The excess return is robust; after controlling for a wide variety of firm characteristics, CEO characteristics, and industry affiliation, the abnormal return is still 4.4% annually. The implications of the investment behavior and stock market performance of founder-CEO led firms are discussed."
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Since virtually every firm is initially led by its founder, I wonder if this study demonstrates selection bias toward younger firms that are more likely be in a high growth stage.