SKIN IN THE GAME
Skin-in-the-game investing is paramount to success. Following this principle is an important part of risk management: investing in companies in which management and directors are also heavily invested substantially improves probabilities of success. In effect, management and the board are thus making investment decisions with their own money. We can presume that they will be more cautious, more thorough and more diligent. We can also assume that when things get difficult, management will work harder to better things up.
Following this principle, you will automatically improve the fabric of your portfolio. That’s because you will be surprised to realize that commodity-sensitive companies are rarely managed by people with much skin in the game. Look at mining companies for example: few are run by people with large equity investments. Stock options don’t count as investments since options only carry upside, no downside. Yet, these people routinely bet billions of shareholder money on projects based on heroic long-term assumptions on variables on which management has little control. Worse, they generally only launch these huge investments at cycle peaks since this is when they have profits and access to capital…
Commodity prices are extremely volatile, highly cyclical and terrible investments in the long run.
Successful investing in commodity-sensitive companies requires unusual capabilities to accurately and repeatedly forecast things like economic cycles, supply-demand trends for many commodities in many countries, foreign exchange fluctuations, etc., all things on which managements have little or no control. You may be lucky during one cycle, but if you miss a beat…
No wonder executives in these sectors generally only have stock options, upside with no downside. Here’s the CRB Index over the last 20 years which include the extraordinary Chinese boom years: see anything fundamentally appealing in there?
FYI, note that Bearnobull is my personal blog:
This blog contains facts, views and opinions posted essentially for my own personal needs. In effect, all the work behind this blog is for my own needs for pertinent facts, thorough and objective analysis and appropriate risk assessment. In effect, I post my own research, analysis and investment views since doing so requires me to be thorough, rational, honest and logical.
My skin is totally in here…
Frank Holmes, CEO and Chief Investment Officer at U.S. Global Investors wrote a good piece on that last week: Skin-in-the-Game Investing: Why It Matters
- The man behind the Apple Watch As it makes a bid to enter the luxury market with the 18ct gold Apple Watch, the brand’s British design visionary, Jony Ive, gives a rare interview to Nick Foulkes.
While we’re into that:
Pichai On Google’s Vision, Mobile Revenue, Apple and China Sundar Pichai, 42, has risen through the executive ranks at Google at dizzying speed. In October, CEO Larry Page made Pichai his de-facto No. 2, at least when it comes to product. Pichai’s portfolio includes Chrome, Android, search, ad technology, maps, social, commerce and infrastructure. That’s just about everything Google does outside of YouTube, Google X, Nest, ad sales and a few other projects. Ahead of the Mobile World Congress in Barcelona next week, where Pichai will give a keynote, he granted an exclusive interview with Forbes, his first since he became Google’s product czar. In the conversation, Pichai laid out his vision for Google products and touched on everything from search to Android, Google+, China and Google Wallet. Below is an edited transcript.