We are always learning. It is the process of life and a subset of modern life is investing. In the investment world, there are many criteria critical to a company’s success. Securities research and analysis for Mach 100 LP is not only quantitative but qualitative. For us, the single most important fundamental criteria, for consideration of a security in our portfolio composition is a qualitative factor. The management team and board. To quote others before me “it’s the jockey not the horse.” Behind every ticker symbol on a screen are real human beings running the company, determining its success. Businesses can “pivot” 180 degrees, the company can develop new products, terminate old business models and create new ones, the company can go public, merge or integrate an acquisition. No matter what, the one constant that determines which companies succeed and those which fail, is management and its board. At Mach 100 LP we quest to understand which companies’ board and management are likely to succeed and which are likely to fail or at least never create significant shareholder value. Phenomenon to avoid: Management teams and/or boards that have never succeeded before; questionable backgrounds (legal, regulatory, etc.); arrogance (arrogance often gets people broke in America and in other countries gets them killed or exiled); related party transactions, companies who report late with their filings (reflects lack of organization and discipline); complicated capital structures (shows company’s inability to run business judiciously and make prudent decisions about financings); consternation between board and management (a recipe for destruction), constant inconsistencies in the company’s filings, investor presentations and messaging; unwillingness to communicate with the “Street;” excessive salaries as defined by correlation to operating results and market capitalization; and an unwillingness to listen to and at least consider investor perspectives, suggestions and desires.
While great or at least good management teams and boards are the opposite of the aforementioned, here are a few additional positive characteristics worth mentioning: Leadership that has credibility with Wall Street. Think financial conservatism. Under-promising and over delivering; Command of the company’s operating results and detailed knowledge of its financials and ability to explain the drivers of the business; Expertise to provide some level of guidance to investors to understand where the business is going, not just quantitatively but qualitatively; The ability to either make forward looking statements that are relatively accurate, or at least explain that the industry does not lend itself to visibility and the reasons for such (e.g. raw materials and manufacturing suppliers); hiring executive management and board that are as good or better than the incumbents. Surrounding one’s self with people smarter and more capable than you, only makes you better; Creating a corporate culture of freedom of ideas, collaboration and appreciation; ability to delegate and empower (the board empowering its executive management and executive management empowering the entire staff of the company).
Possessing a deep understanding of the management team and board positions us for both high conviction long positions and short positions. Finally, we are activists to micro-cap companies in a supportive role to the management team and board and not creating undue publicity. We choose not to spend years at a time being adverse to management teams and boards. Adverse activism may be noble but can take years and has proven as a broad portfolio management strategy, except in isolated cases, to create low annual investment returns. So our activism, with select portfolio companies, is supportive and requires that we truly understand the management team and board. If/as/when we determine a negative change in the behavior of the management team or identify an unfit management team, we exit the long position or initiate a short position.