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Investing Between The Lines

The author shares a few ideas from a book that can help you decode CEO communication in this unit.


Capital Stewardship

Companies that earn superior long-term returns are concerned with stewarding or managing investor capital. Rittenhouse expresses himself as follows:


As an investor, the goal is to find companies led by leaders who are good managers of capital and hold themselves accountable for their actions. Capital stewardship reveals whether a CEO's actions are motivated by a desire to be entrusted with or entitled to investor capital.

To ensure the presence of capital stewardship, look for clues in shareholder letters and other executive communications about the following topics:


  • Capital discipline - Good capital allocators will typically comment on "returns on investment (ROI)," "returns on invested capital (ROIC)," or "returns on assets (ROA)." Commentary about "book or market value" expresses the strength or weakness of a CEO's capital discipline. 
  • Cash and cash flow - Strong recurring cash flows are critical for a company's long-term viability. Given its significance, investors may anticipate that each shareholder letter will include commentary on operating and free cash flow. However, most letters fail to mention this point. Most CEOs only give it lip service. Look for CEOs who place a high value on cash flows and have written extensively about them. Examine a company's balance sheet and cash flow financial statements to see if the cash flow numbers listed in the financial statements correspond to the numbers in the communication.
  • Operating and financial goals - Meaningful financial goal statements show that a CEO is serious about capital allocation efficiency. Good CEOs provide meaningful context that is quantifiable rather than making a subjective remark. Therefore, Capital stewardship is demonstrated by CEOs who publish meaningful financial and operational goals and focus on capital discipline, cash flow, and balance sheet management.


Candour is the language of trust, and it entails more than simply telling the truth. It entails being genuine with your words. Candid communication reduces the risk of self-deception. 


You don't need special access to "insider" information to evaluate the management's quality. The secret is written in black and white in every shareholder letter, annual report, and corporate correspondence you receive from management. You can make an educated guess about management quality and intentions once you learn how to read between the lines in the annual letter.


Keep in mind that analysing words is just as important as analysing numbers.

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