The Art In Investing

We tend to look at a company mainly through its financials. And there is a good reason why. That is because financials are numbers and ratios which we can quantify, rank and compare. Yet, some say that investing is a combination of both art and science. If looking at the company financials is the science, what is the art in investing?

Finding the Da Vinci’s of companies

Looking at the management of a company is part of the art in investing. It is quite difficult to give a quantifiable number or ratio on the quality of different managements. This difficulty in quantifying it is one reason why many investors tend to overlook this portion of analysis sometimes.

In a way, the type of management a company has might sometimes be even more important than its financials. For example, when OSIM International Ltd. (SGX: O23) fell into financial losses back in 2008 due to its investment in Brookstone, the management reacted fast and was able to refocus the company on its growth path in Asia. If the management has chosen to stick with its investment in Brookstone and tried to save the failing retailer, it might have a different outcome for OSIM International. To be able to admit its mistake and refocused its attention on the bigger picture of the company required an above average management team.

On the other extreme, if you have invested in companies like Eratat Lifestyle Limited (SGX: FO8), where despite having great financials, the company’s top management disappeared suddenly together with the supposed cash in the bank. After the news broke, the other managers of the company ended up quitting. As an investor in Eratat, you would have ended up with an empty shell of a company overnight.

Foolish Summary

Although it is almost impossible to rank managements quantitatively, the quality of the management team is still very important to the future of the company.

The bottom line: any good analysis of a company should never exclude a thorough investigation of the company’s management. In many cases, the management team might be the deciding factor on whether you end up investing in the company at all.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim does not own any companies mentioned.