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Fortune 500 CEO career path via finance

Vandelay Industries wrote:
Why is the intangible approach wrong? if the market is perfectly efficient and one cannot gain any sort of insight from fundamental or technical analysis, all that leaves us with is subjectivity

I doubt there are many people here who believe the bolded.

^ Even if they did believe markets were efficient, picking stocks on solely on voodoo feel still would have no value.

“I can no longer obey. I have tasted command, and I cannot give it up.”

geo wrote:
^ Even if they did believe markets were efficient, picking stocks on solely on voodoo feel still would have no value.

It’s a legitimate approach. Looking at numbers can  only tell you so much about the business. You learn alot about what will make a successful company by going out and experiencing and dealing with it. It’s very similar to the Balance Scorecard approach, which im sure many of you are familiar with

^ Disagree. All that really matters at the end of the day is cash flow. Obviously qualitative factors impact cash flow, and should be considered (a la Balanced Scorecard).

That said if you visit five different fast food joints and invest based on which one was nicest by feel, you’re an idiot. (A) the sample size is too small to even be considered, (b) you’re likely to select one with a higher cost structure due to higher service quality and (c) you haven’t factored in the price you’re paying for cash flows.

It may be a nice business, but paying 10x what its worth is stupid. Where as you can perhaps buy some slumlord REIT at 3/4 its value. Whatever, you get the point.

Just investing on hype and feel might be promising during a bull run, but you’ll get absolutely demolished when the tide goes out.

“I can no longer obey. I have tasted command, and I cannot give it up.”

geo wrote:
^ Disagree. All that really matters at the end of the day is cash flow. Obviously qualitative factors impact cash flow, and should be considered (a la Balanced Scorecard). That said if you visit five different fast food joints and invest based on which one was nicest by feel, you’re an idiot. (A) the sample size is too small to even be considered, (b) you’re likely to select one with a higher cost structure due to higher service quality and (c) you haven’t factored in the price you’re paying for cash flows. It may be a nice business, but paying 10x what its worth is stupid. Where as you can perhaps buy some slumlord REIT at 3/4 its value. Whatever, you get the point. Just investing on hype and feel might be promising during a bull run, but you’ll get absolutely demolished when the tide goes out.

I dont always select the one with the highest cost structure. i take into account the margins and the customers service experience. Ie my investment in southwest airlines. If you fly with them, you have to realize they make a killing. High turnover, expensive price relative to the apparent low expenses… older fixed assets. While others are pouring over the statement of cash flows and balance sheet, I am out perceiving and sensing great business models.

Same with my investment with chipotle. Going there and talking to college students and understanding just how much people like it makes it a no-brainer. When you see how many people go there, how passionate and prideful their fans are, the nice environment, quality management, clean-cut employees, expensive price that people have no problem paying, small CAPEX due to such small locations…

Knowing the cash flows arent going to help me any. The stock will just have a price that represents whatever pricing multiple analysts perpetuate is the right one for the industry.

The key is comparing my perception of the company to the P/E ratio in the relative industry. Ie burger king once traded at a higher multiple than chipotle. I knew this was insane because chipotle was clearly the superior business. I knew it was only a matter of time that chipotle would seriously grow

That’s fair to some degree.

Southwest Airlines, by the way (and not unlike other airlines) is a horribly low margin business. They make about $5 per passenger. If you talk to a flight attendant, you pretty much cost more than the revenue you’re bringing in. Airlines are cutthroat.

“I can no longer obey. I have tasted command, and I cannot give it up.”

Vandelay, you remind me of myself in my college days. Juss keep trying to learn and here are a few pointers.

1. earnings are not very useful, it is never consistent (shiller tried to fix this by doign 10 year average, but i dont think it is usefull for a singular company), it is easily manipulated.

2. Cash flow, especially now, is very important, since management typically increases their dividends or buybacks. Just try to make sure they arent trying to be an acquirer of a merger.

3. Historically speaking, companies with increasing capex typically outperform, as companies have to be fiscally responsible and only spend when there is demand.

4. The most important part in what you mentioned is when customers are willing to pay “an expensive price”. Premium products are important since they are one of the best signs of a competitive moat. Just make sure their moat is durable and long lasting. Phones for instance change rapidly, remember the razor, sidekick, blackberry, and most likely iphone now

5. Multiple analysis is important. you are looking for SOTP through EV/Ebitda (ebitda is decent proxy for cash flow). Relative value investing is the only way to go. Historical value investing is okay. Juss try to never overpay for a company.

My best advice though once you screened a company for its metrics and you love it, listen to Q&A section of a conference call. Sometimes you can easily predict whether sell side research will bump their target price or do an upgrade based on this section alone. Of course it is only a good idea to do an action when the stock remains flat or goes down in value during the release of results. Alpha is a zerosum game. for someone to outperform someone has to underperform, and only the best outperform because they understand that price is everything.

BTW burger king is trading at a high multiple because their entire business is based on royalties. They changed the whole business model when some 3g guys took over the company and literally refranchised all their operating units during the past 2 years. CEO is 3g capital through and through. If they were company operated, they would have a lower multiple. Chipotle trades at a high PE because people see it as a trendy growth stock which will dive if growth ever slows. Having said that, chipotle is amazing.

I love my cheese. I got to have my cheddar.

How has nobody replied to this?  This is gold.

Prophecy wrote:

Since there is no randomness in the stock market, i also don’t believe there is any randomness in our daily lives.  

…because it makes sense to draw controversial conclusions about the stock market and apply them to daily life.  For example, stocks can be divided into three categories and so can daily life.

Prophecy wrote:

Many things happen to us because they are bound to happen.  We simply can not control those things. If we know, then we can prepare.  Sound familiar?  We know booms and busts recur.  When we have a boom, what is inevitable?  No matter what we do, what must occur?  An inevitable bust.  The key word is inevitable.  Things happen to us because they are inevitable. 

Checkmate athiests.

Prophecy wrote:

  Ever wonder why some men peak and never peak again?  Other men peak and continues to peak.  What is so special about these men? I can see a lot of these similarities in the way stocks move as well.

When I was little, I used to peak at my neighbor tanning in the back yard.  Why, just today I peaked at a woman’s butt at the gym.  I peaked early, I peak often and I will continue to peak for the rest of my life.

you basically need to come from a target school pedigree/work at prestigious firm in the US/have a really good connection.

- AF hivemind

Neryblop wrote:

Vandelay, you remind me of myself in my college days. Juss keep trying to learn and here are a few pointers.

1. earnings are not very useful, it is never consistent (shiller tried to fix this by doign 10 year average, but i dont think it is usefull for a singular company), it is easily manipulated.

2. Cash flow, especially now, is very important, since management typically increases their dividends or buybacks. Just try to make sure they arent trying to be an acquirer of a merger.

3. Historically speaking, companies with increasing capex typically outperform, as companies have to be fiscally responsible and only spend when there is demand.

4. The most important part in what you mentioned is when customers are willing to pay “an expensive price”. Premium products are important since they are one of the best signs of a competitive moat. Just make sure their moat is durable and long lasting. Phones for instance change rapidly, remember the razor, sidekick, blackberry, and most likely iphone now

5. Multiple analysis is important. you are looking for SOTP through EV/Ebitda (ebitda is decent proxy for cash flow). Relative value investing is the only way to go. Historical value investing is okay. Juss try to never overpay for a company.

My best advice though once you screened a company for its metrics and you love it, listen to Q&A section of a conference call. Sometimes you can easily predict whether sell side research will bump their target price or do an upgrade based on this section alone. Of course it is only a good idea to do an action when the stock remains flat or goes down in value during the release of results. Alpha is a zerosum game. for someone to outperform someone has to underperform, and only the best outperform because they understand that price is everything.

BTW burger king is trading at a high multiple because their entire business is based on royalties. They changed the whole business model when some 3g guys took over the company and literally refranchised all their operating units during the past 2 years. CEO is 3g capital through and through. If they were company operated, they would have a lower multiple. Chipotle trades at a high PE because people see it as a trendy growth stock which will dive if growth ever slows. Having said that, chipotle is amazing.

Thanks for the thoughts

^^ Awesome post by BWYF.

Sweep the Leg: "I’m tired."
KMeriwetherD: "Well, you were basically Legolas in the Battle of Water Cooler."

I’m thinking I should drop the CFA and take some philosophy courses.

Phophecy, is that you ***********?!

geo wrote:

Prophecy wrote:
Someday you’ll get it.  Rather than lyao, why not enlighten a level 1 candidate why is it such a mystery in picking stocks?  In your experience, why have you failed and others succeeded?

Why have you succeeded with this simplicity, when the vast majority of professional asset managers cannot beat indices despite all the resources in the world to do so?

Nothing is simple my friend.  When you study and research, and keep studying, you turn something that’s complex into something that’s relatively simple.  I am talking about the economy.  And that’s not even my area of expertise.  

All the resource in the world is not going to help you understand.  Picking stocks and trading are very similar.  Entries don’t matter much.  Exits are where to make or loss money.  Picking the right stock doesn’t matter much.  You have to sell it for a profit/loss someday.  Exits are important.  But you have a bunch of guys doing the same old things.  How are a bunch of guys doing the same old things going to beat each other?  The smart ones are laughing their way to the bank! LOL.  Remember in wall street, people usually don’t promote things that work.  Things that actually work are kept hidden.  

@ brain_wash_your_face  Controversial?  It is only controversial because you are clueless.  
 
 
 
 
 

My jaw dropped to the floor reading this thread. 

Wow. Just wow. 

You want a quote?  Haven’t I written enough already???

Prophecy wrote:

geo wrote:

Prophecy wrote:
Someday you’ll get it.  Rather than lyao, why not enlighten a level 1 candidate why is it such a mystery in picking stocks?  In your experience, why have you failed and others succeeded?

Why have you succeeded with this simplicity, when the vast majority of professional asset managers cannot beat indices despite all the resources in the world to do so?

Nothing is simple my friend.  When you study and research, and keep studying, you turn something that’s complex into something that’s relatively simple.  I am talking about the economy.  And that’s not even my area of expertise.  

All the resource in the world is not going to help you understand.  Picking stocks and trading are very similar.  Entries don’t matter much.  Exits are where to make or loss money.  Picking the right stock doesn’t matter much.  You have to sell it for a profit/loss someday.  Exits are important.  But you have a bunch of guys doing the same old things.  How are a bunch of guys doing the same old things going to beat each other?  The smart ones are laughing their way to the bank! LOL.  Remember in wall street, people usually don’t promote things that work.  Things that actually work are kept hidden.  

joke post?

Back to the original topic, I read somewhere (I think HBR) that most CEOs that are not founders come from marketing and sales, because growing the top line is one of the most valuable activities for a company. 

After that, CEOs that come from operations seem to be the most common. 

Fewer CEOs come from finance, although that is different with banks and asset managers. 

You want a quote?  Haven’t I written enough already???

bchad wrote:

Back to the original topic, I read somewhere (I think HBR) that most CEOs that are not founders come from marketing and sales, because growing the top line is one of the most valuable activities for a company. 

After that, CEOs that come from operations seem to be the most common. 

Fewer CEOs come from finance, although that is different with banks and asset managers. 

Interesting. I can certainly believe that.

Some of the things said in this thread are truly mindblowing.  The denial that there is randomness in markets, in particular, although it is also comical to hear “it’s easy to pick stocks.”  In a market that has been going up and up and up for 5 years, of course it looks easy to pick stocks, because even when you’re wrong, most of the time you make money anyway because most stocks move together over the medium to long term.

People who made money shorting stocks in this environment are the ones that are impressive, because it’s a high hurdle to overcome to make money by shorting in an upwards-rocketing market.  So congrats bromion and congrats numi.  But neither of them would say “it’s easy.”  Maybe it’s not impossible, but it still takes a fair amount of work and a stomach for waiting out risk.

Now, what about randomness in stock markets.  One could say at a philosophical level, perhaps all fate is determined by physical laws interacting, and that the course of events in the past and in the future is the only possible course of events that can possibly take place.  In that sense, you might say that there is no randomness in markets, but the truth is that we still experience the world as if we had free will.  We do not have enough information to predict whether Putin will invade all of Ukraine in a week, or not.  Whether ISIS will get their hands on a nuke from somewhere and drop it on TelAviv.  Whether Obama will keel over from a heart attack tomorrow, whether Pfizer’s Viagra will suddenly develop unexpected side effects and expose the company to enormous lawsuits.  Whether a clean source of energy to displace fossil fuels will be developed, whether an earthquake will level Silicon Valley or Los Angeles.  Whether Ebola will spread to China… etc.  Whether a pension plan will go bankrupt tomorrow and suddenly need to be liquidated, etc..

The market reacts to existing information, and the efficient market hypothesis (if you believe it) says that the market price is a best estimate of future earnings based on currently knowable data discounted to the present at the discount rate of the marginal buyer. 

But one of the reasons that prices change from day to day is that new information comes to light.  Maybe Ms. Sam Walton dies of a heart attack and her billion dollar estate needs to be liquidated to be divided amongst heirs.  Suddenly that changes demand.  Or new news comes in and adjusts expectations. 

The reason that most financial models have a random componenet is that we don’t know what future events and newsflow will be, but we do know that a lot of it will affect our estimates of what earnings may be or affect how much risk we are willing to take with our investments for a given rate of return.

One interesting thing is that if you take a random number between 0 and 1, and then add another random number between 0 and 1, and keep adding so that you get:  1/N * Sum of N RAND() #s, you’ll get something that approximates a bell curve.  Or you can flip a coin and add 1 for heads and -1 for tails and take the sum over 1000s of flips…  you’ll get a distribution that looks like a bell curve.

The reason it makes sense to model stock prices with a normal curve is because every day, there are a million little random things that can happen or don’t end up happening and they sum to change the stock price.  That’s like adding up a million coinflips every day and seeing what they add up to.  In practice, you get a distribution that is not truly normal (or lognormal) because some events have much bigger effects than other, and there are more ways that things can go wrong than things can go right (principle of entropy).  But the point is that there’s a reason why it makes sense to model the future with randomness in it, even if you believe the deterministic view of the world. 

Randomness deals with the fact that we aren’t able to know everything or predict everything.  At best, with analysis, you can reduce the effect of randomness, which is how some fund managers may be able to squeeze a stronger sharpe ratio out of their capital than others.  But none of them can eliminate randomness (and therefore risk), and if they could, they should be earning no more than the rate on treasurys anyway…

Nassim Taleb has good stuff in Fooled by Randomness.  It basically points out how people often attribute things to skill that are better described by randomness, and conversely ascribe to randomness things that may be random, but may be the result of bad decisions.  The examples are truly mind-opening, and cover many areas of life, so as much as the guy irritates me, I have to respect that book.

I also like Michael Mauboussin’s “The Success Equation” which talks about separating skill from luck and what kinds of things help managing that.

You want a quote?  Haven’t I written enough already???

mygos wrote:

Vandelay Industries wrote:

Why is the intangible approach wrong? …

No investment approach is either totally wrong or right as a permanent or only approach. Each may prove to be the best in specific context of who is the investor, purpose of investment (long term/short term) and what is the goal/target. That is one reaps the harvest while another goes bust.

To quibble with mygos here a bit, there are approaches that can be totally wrong.  But I do agree that no investment approach is totally right (if by totally right you mean it performs well in all macroeconomic environments).

As to what’s wrong with tthe intangible approach?

If you can identify an intangible aspect that is a genuinely forward indicator of future performance, then you are likely to do well, since it will represent unique knowledge that can’t be mimicked by computers.

The problem is that long-term investment success requires a systematic approach so that it can work in expansions and contractions.  When interest rates are rising and when interest rates are falling.  When stock prices are rocketing and when stock prices are collapsing.  The problme with intagible investment strategies is that there is no way to systematize it.  And a big problem is that “lots of products/services sold” does not mean “lots of profit”.  In fact, if the cost of expansion is higher than your cost of capital, aquiring more customers and generating more revenue will destroy firm value and send the stock price down.  This is because each customer is increasingly expensive to service, and you cannot expand production to meet that demand without eating into earnings.

There are some people who may have their brains wired to do things by feel.  George Soros is reputed to say that he knew it was time to close a position because he would get an ache in his back, presumably from his stress and worry.  That’s investing by feel.  Unless you have a track record of success in many economic environments, most people who invest that way succeed for a season or a portion of a business cycle, and then get crushed when the environment changes, because they are overconfident and thus overexposed.  i.e. their feel only works in a particular part of the business cyle.

Peter Lynch of the Magellan fund did have an approach that wasn’t based intagible but it was based on buying what you saw being successfully sold.  However, that really seemed to be a strategy that worked best in the 1980s, before the world was globalized and when the US middle class was increasing its purchasing power via debt.  His “buy what you know” idea sounds like walking around looking at what’s being successfully sold in stores, but there was undoubtedly concrete modeling going on in due diligence.  The “walking around” was just a preliminary screen.  My own sense is that this was a style that worked best in the 1980s and 1990s, but isn’t very good for a deleveraging environment that we see now, because the purchasing power of the typical US consumer is on the way down.  One might be able to do some of this by shifting to consumer patterns in the emerging markets, but that requires a lot more knowledge of how consumer patterns change from society to society. 

In general, even if you have success in investing by intangibles, you will find it difficult to convince serious investors to invest with you, because they will want to know more about how your process works than “it just feels right.”

Finally, even if you can select stocks by feel, you still have to figure out how much of it to put into your portfolio.  This require decisions about how to balance the risks of being wrong (or simply having a client pull their funds because they can’t stomach a temporary low price, even if you are right in the long term), and the possibility for profit.  Many people get so excited by company stories that they forget that position sizing in a portfolio is also key to performance.

You want a quote?  Haven’t I written enough already???

I read nothing in this thread, but the thing you have to ask yourself is do you want to be a CEO of a F500 company?  I sure don’t.

CFAvsMBA wrote:

I read nothing in this thread, but the thing you have to ask yourself is do you want to be a CEO of a F500 company?  I sure don’t.

Truth. But this is Vandelay. He wants to be able to subtly mention his massive wealth, of course while not appearing douchey, to gain the admiration of men and women worldwide. A F500 CEO might be just the position he needs. Just a few resume tweaks and he will be rolling!

“I can no longer obey. I have tasted command, and I cannot give it up.”

Sigh, the paper chase.

This reminds me of a B School talk I was at.  At my hacksaw B School, a hacksaw company CEO came to speak to our class.  One of the fluffy questions was “What was your greatest failure in your career?”  to which the man said tongue in cheek, “Divorcing my third wife.” 

Now he got a nice chuckle from the room, but it begs the question to the ends you’d go to get that paper.  Sarcasm always has a hint of truth.  I for one like my work life balance and do not feel there would be value in a tradeoff of my time for more money. 

^true. I suppose it just strokes your ego to be CEO. Like mark cuban says, any fortune 500 CEO loves waking up in the morning, looking in the mirror, and saying “I ****ing made it.”

^ Before or after they drink half a bottle of scotch to calm their nerves about getting railroaded by angry shareholders, thrown in jail for fraud committed by their employees without their knowledge, fearing for the safety of their kids getting kidnapped for randsom, etc., etc.

“I can no longer obey. I have tasted command, and I cannot give it up.”

CFAvsMBA wrote:
I for one like my work life balance and do not feel there would be value in a tradeoff of my time for more money. 

I wouldn’t take another $250k a year if it meant being away from my son anymore than I am now. Not a chance in hell. Beyond that, maybe I’d consider it (factoring I’d be able to retire earlier and spend more time then), but it’d have to be damn lucrative. An hour a week with my kid is worth more than I could ever realistically be paid.

“I can no longer obey. I have tasted command, and I cannot give it up.”

geo wrote:
CFAvsMBA wrote:
I for one like my work life balance and do not feel there would be value in a tradeoff of my time for more money. 

I wouldn’t take another $250k a year if it meant being away from my son anymore than I am now. Not a chance in hell. Beyond that, maybe I’d consider it (factoring I’d be able to retire earlier and spend more time then), but it’d have to be damn lucrative. An hour a week with my kid is worth more than I could ever realistically be paid.

Great to hear, man. makes me happy for you!

geo wrote:
^ Before or after they drink half a bottle of scotch to calm their nerves about getting railroaded by angry shareholders, thrown in jail for fraud committed by their employees without their knowledge, fearing for the safety of their kids getting kidnapped for randsom, etc., etc.

LOL

bchad wrote:

To quibble with mygos here a bit, there are approaches that can be totally wrong.  But I do agree that no investment approach is totally right (if by totally right you mean it performs well in all macroeconomic environments).

As to what’s wrong with tthe intangible approach?

If you can identify an intangible aspect that is a genuinely forward indicator of future performance, then you are likely to do well, since it will represent unique knowledge that can’t be mimicked by computers.

The problem is that long-term investment success requires a systematic approach so that it can work in expansions and contractions. …. …

In general, even if you have success in investing by intangibles, you will find it difficult to convince serious investors to invest with you, because they will want to know more about how your process works than “it just feels right.”

Finally, even if you can select stocks by feel, you still have to figure out how much of it to put into your portfolio.  This require decisions about how to balance the risks of being wrong (or simply having a client pull their funds because they can’t stomach a temporary low price, even if you are right in the long term), and the possibility for profit.  Many people get so excited by company stories that they forget that position sizing in a portfolio is also key to performance.

Yes, agree with you in intutive approach is greatly a hidden process and to answer about “why?” and “How” may be difficult if not utterly impossible to justify. The process is more intuitive at later stage but to start with the intuition also has some basis specially as it requires a thorough and deeper understanding of the parameters affecting the outcome and this understanding (or feeling) is by definition intrinsic in nature. To be able to “identify an intangible aspect that is a genuinely forward indicator of future performance” may be uncommon in a common investor (as much as common sense is quite uncommon in common man) but not so rare too. Some people have inherent capacity to assimilate a huge amount of data in mind and mine it for arriving at a ‘intuitive’ solution to a problem. Benjamin Graham and Phillip Fisher (and more recently Buffett) had that ability. If one could analyse the human mind each intuitive thought is result of highly complex systematic analysis and process (that is why many great inventions are outcome of some apparently  ímmediate ‘intuitive’ spark).  So, in many cases it may not be totally wrong, as in many cases (you agreed to it that) it may not be totally right too.

I am inclined to agree with much of your exposition, so  restrain myself  from discussing it further. However, knowing your depth of understaning of anything regarding investment (which I admire greatly) I think you may enjoy reading the meaningful book “Active Investment Management” by Charles Jackson , specially the later part concerning the skills. Though it is like a text book but the ideas expressed are quite nice and touches on similar thoughts as ours.

geo wrote:
^ Before or after they drink half a bottle of scotch to calm their nerves about getting railroaded by angry shareholders, thrown in jail for fraud committed by their employees without their knowledge, fearing for the safety of their kids getting kidnapped for randsom, etc., etc.

Preach.

Being CEO of a giant organisation sounds great in theory, in reality it’s ****ing horrible, the company is your life.