Wednesday 18 May 2016

Idiot-Proof Businesses

While it may be tempting to invest in companies with great leaders, such as Tesla with Elon Musk at the helm or Mark Zuckerberg at Facebook, we should instead be looking out for companies that can be run by fools yet still deliver good profits year after year. A company could always do better with good rather than poor leadership, but a company that needs a superstar management team to keep in business may not survive after management changes over time.

“Invest in a business any fool can run, because someday a fool will.” - Warren Buffett


When analyzing a company, the question of management is one that should pop up. Is the company run by a visionary leader or by mediocre management? Then the question of succession of the management would follow up. Can the company continue to run without any member or members of the management team and profitability still intact, or is it dependent on the ability and leadership of one person?

I'm not saying that good leadership is not important in the company, on the contrary, for the short- to medium- term it is usually very important. But when we look at companies that have become synonymous with their leaders, such as Jeff Bezos and Amazon and Jack Ma and Alibaba, we should think if they are able to continue to do well and prosper after their leaders have stepped down or is there a proper succession plan to ensure that the company will continue to have good leadership for the foreseeable future.

If this is not really clear, then we should look at the business itself. Will it be able to do well even if management is sub-par. An example of such a business brought up by Warren Buffett is a monopoly newspaper in the past which had the pricing power. Or another example would be credit rating agencies Moody's and Standard and Poor's, which run a duopoly to a certain extent due to their competitive position (people generally trust their ratings). These companies are unlikely to fail due to poor management, while a company such as Apple, which is in a very competitive industry with short product life cycles, needs good leaders and designers for it to maintain its position and remain profitable

"Idiot-proof" businesses would therefore make better investments than those that need a good management at the helm to continue growing and remain profitable, especially in the long-term

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