Finding Good to Great Companies

SpiderI’ve been reading the book, Good to Great, Why Some Companies Make the Leap and Others Don’t by Jim Collins this month.  This book was written for company executives and entrepreneurs who want to build truly great companies.  It looks at past success stories like Walgreens, Wells Fargo, and Fannie Mae and the factors that allowed them to become astounding, market dominating companies.  These are the Michael Jordans and the Wayne Gretskys of business world.

While the book was written for a different audience (I have no intentions of getting on the executive track), the book is actually very useful in helping to find the kind of companies for my strategy of investing, which I call serious investing.  Rather than trying to time the market, or find stocks that do well for a short period of time, sell them, and continue the process, I find stocks that I think have great long-term growth potential and buy them for decades.  The kind of companies I’m looking for are the good to great companies profiled in the book.

According to Collins, the good to great companies had average returns of seven times the market over the next fifteen years after the turning point occurred.  Given that the market return about 10% per year, this means they were returning annualized rates of 70%!  That is the kind of return that turns ten thousand dollars into a million.

In the book, he describes the research that he and his team did to determine what caused some companies to be “great” companies, while comparison companies were merely “good.”  The first aspect he talks about is what he calls “First who, then what.”  Apparently a turning point often came when the leadership at the company decided to find the best people they could for the work needed and get them into the right positions.  They wanted self-motivated people who were the best at what they did.  Rather than worry about the direction of the company or developing a business strategy, they concentrated in getting the right people.  In the words of Jim Collins, “Getting the right people on the bus, and the wrong people off of the bus, before worrying about where to drive the bus.”

As an aside, I’ve often wondered why companies don’t take this approach to hiring more often.  Usually, a company will post a job listing where they are looking for people with very specific experience and specific skills.  Usually human resources is tasked with cutting down the stack of candidates using key words and other factors before management even sees any resumes.  Instead, I would find the best and brightest, hiring as long as I could generate enough work for them to do, and let them develop the specific skills/tools needed later.  I’ve found that the right people can learn to use your tools, while the wrong people who know the tools but lack the right inspiration and work effort will only drag you down.

So in looking for companies that are good serious investments, one step might be to look at the management and the board of directors.  Companies that have a lot of nepotism – the hiring of lots of family members – may be bad choices because they are not necessarily staffing based on skill and ability.  The book also found a negative correlation between the “rock star,” high ego CEOs and company performance.  Instead, they had leader that were tenacious, but always put the company success ahead of their own and were quick to give others credit for the successes and accept the blame for the mistakes.

Note, Home Depot went from a rock star CEO, who ran the company mostly sideways through most of the 1990’s and into the early 2000’s, to a more soft-spoken CEO about four years ago.  Some that time, the company ahs climbed from $30 per share to over $130 this week.  Maybe looking for companies that are changing out high ego CEOs is a good way to start.

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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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