On evaluating management

I asked about this before with no reply, so I’ll try again. There’s an inconsistency about your analysis that bothers me…In the Knowledgebase, quoting ptheland: “So I’d say the first step in evaluating a business is to look at their management. Honest management will give honest financial statements. Dishonest management will give dishonest financial statements - even if those statements follow GAAP.”

Yet here, in discussing what’s to like about SHOP, nowhere do you say that you believe Shopify management to be honest or trustworthy or exhibit integrity. It would seem it would at least rate a mention. I’d actually expect some evidence for said belief as well, given the care put into providing meaningful evidence of financial performance…I’d appreciate it if you would explain.
IGU

Hi IGU, That’s so far out that it’s hard for me to tell if you are kidding or serious. Perhaps you’ve noticed that I don’t specifically say anything about the integrity of management for any of my other companies either. I’m not an accountant. I usually don’t even read the SEC submissions. If you are waiting for evidence for my beliefs in management you’ll wait a long time.

The quote from the Knowledgebase is taken way, WAY, out of context. It was from a discussion, NOT about management and honesty, but about GAAP vs Adjusted Earnings, and the quote was that crooked management could even give false GAAP results, and the point was that if you have confidence in management you should accept their Adjusted numbers. That has nothing to do with your point.

If I lose confidence in management I usually get out, or stay out. Here are some examples:

Ubiquiti - A few years ago, the CEO and major stockholder was spending all his time with his NBA team and treating Ubiquiti as a sideline. He acted annoyed when analysts asked questions on the conference call, he didn’t know the answers. He was busy firing his basketball coach and trying to coach himself, also challenged pro players to 1-on-1 basketball games. (Was he off his medicine?) I got out. Nothing crooked or dishonest, just wasn’t focussing on the business. The business stagnated for a couple of years. (This is no longer true of course).

Synchronoss - Here’s what I wrote at the time:
After a long wait, they finally turned the corner. Their cash cow activation business had slowed down but was still raking in the dough. Their cloud business had become over 50%. Their new enterprise business… was finally bearing fruit. Earnings had taken off again after several quarters of flatlining. All they had to do was sit back and rake it in.

So what did they do?

1. They sold their cash cow, which was guided to be $74 million for just the next quarter, and 37% of their total revenue for the quarter. That’s wrong! You keep your cash cow legacy business until it becomes a small enough part of your total that you don’t miss it.

2. They are taking on new debt of $900 million which is roughly half their capitalization.

3. They are acquiring a company that they clearly didn’t need (based on the “sit back and rake in what you have earned” scenario). This is a huge acquisition. This acquired company is almost half their size, is losing money, and has grown revenue VERY slowly. Why is SNCR doing this?..

4. The CEO that has made them so successful is choosing this crucial moment, with everything in flux, to remove himself from the day to day running of the company.

5. And who is replacing him? The CEO of the slow growing, money-losing huge acquisition. What a great choice.

This is no longer the company I was invested in. It’s barely recognizable. It’s an unknown quantity, with a huge debt load, less revenue, and a CEO who is also an unknown quantity. It may do fine, but it will do it without me.

I thought that the CEO was doing a favor for an old friend or something, bailing out his friend’s business by buying it with stockholders’ money, and then installing the old buddy as CEO of Synchronoss. Just my suspicion. I have no evidence for it. Maybe he was just incredibly stupid, but I doubt it. I sold at about $30 as I remember, and rising. The current price is $9.

Elon Musk and Solar City
I really like Elon and feel he’s doing a great thing in making electric vehicles mainline. Buying Solar City was something else. The way I figure it, Elon had gotten his cousins into Solar City, but conditions changed and they could never make a profit and were going downhill fast. I’d guess Elon felt responsible and decided to bail them out (with Tesla stockholders’ money). Not really dishonest, but not really ethical either. Who knows, it may work out in the end.

Amazon
This has nothing to do with crooked or not crooked, but because Bezos had no interest in making a profit, just growing a business forever at breakeven, that wasn’t my thing. When they started showing positive Cash Flow, and then even positive earnings, I got on board and rode it from $540 to $970 or so, but I exited when it became evident that any profit was just an accident.

Thus, as you can see, I exit when I lose confidence in management, not when I have “evidence” of crookedness or lack of same. It happens that I have a lot of confidence in Shopify’s CEO and major stockholder, but I have no evidence for that at all (except perhaps his ski-boarding story). I just like him. I can assure you I’ve never examined the company’s books, and never intend to. I definitely don’t retract myself to companies where I have “evidence” that the management is honest. What I do do is get out when I’m dissatisfied with management for whatever reason.

I hope that this helps,

Saul

For Knowledgebase for this board,
please go to Post #17774, 17775 and 17776.
We had to post it in three parts this time.

A link to the Knowledgebase is also at the top of the Announcements column
that is on the right side of every page on this board

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I definitely don’t retract myself to companies where I have “evidence” that the management is honest.

My spell checker must have gotten overactive. That should read:

I definitely don’t restrict myself to companies where I have “evidence” that the management is honest.

If I lose confidence in management I usually get out, or stay out.

I get that. What I understand now from what you write is that you believe in management by default – if the company is doing well and there’s no obvious reason to think management isn’t honest, then you’ll assume they are. I prefer to be convinced before I invest, but admittedly that is difficult and quite subjective.

The way I figure it, Elon had gotten his cousins into Solar City, but conditions changed and they could never make a profit and were going downhill fast. I’d guess Elon felt responsible and decided to bail them out (with Tesla stockholders’ money). Not really dishonest, but not really ethical either. Who knows, it may work out in the end.

Well, that just shows how subjective it all is. The way I figure it, the only thing that had changed is that Solar City was subjected to badmouthing and a bear raid. They were making a profit and doing just fine, but their profit was tied up in a long term income stream. Basically the attack was to suggest that if there was a recession and everybody decided to stop paying their electricity bills that the company was screwed – they had no backstop. Of course the chance of this happening was minuscule, but credit dried up and the company couldn’t really function without credit. Elon claimed that Solar City would be accretive to earnings and quite profitable to take over, which might be true now that it is essentially immune to credit problems. It’s a bit hard to tell though as the structure of the business is being changed to revolve around solar roofs rather than only panels, and include home energy storage.

So it’s complicated and opaque, and if you don’t trust Elon you have no business investing in it. I trust Elon completely at this point. From years of watching what he says and how he executes and driving his cars, I have an excellent model of how what he says maps to the truth. It’s really quite good except that you need to stretch out most of his time estimates a fair bit. There isn’t an unethical bone in his body.

So, subjective.

-IGU-
(seriously invested in only two companies, Tesla and Apple)

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I get that. What I understand now from what you write is that you believe in management by default – if the company is doing well and there’s no obvious reason to think management isn’t honest, then you’ll assume they are. I prefer to be convinced before I invest, but admittedly that is difficult and quite subjective.

Innocent until proven guilty.

Tesla - Solar City, smells like nepotism. Since day one I pointed out why Solar City’s business model was deeply flawed. It’s the same business model that destroyed S&Ls, relying on short term credit to finance long term obligations. When interest rates rise the business model goes KAPUT.

Denny Schlesinger

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Since day one I pointed out why Solar City’s business model was deeply flawed.

I found the post, January 4, 2014, four years ago

In my view, the biggest risk at SolarCity is the spread. They guarantee to the customer electric power at 10% or so discount on the utility company rate for a period of 20 years. Since they don’t have the capital they borrow to build their installations. Forget the electricity for a moment and think of them as a bank. They borrow money to build the installations and lend it to their customers. This is great as long as their cost of money is less than what they charge the customers. But what would happen if interest rates go up and fossil fuels go down? In effect they would be in a spread squeeze like the one that broke the S&Ls.

SolarCity investors are exposed to long term credit risk. SolarCity would be a lot safer if they raised more capital and relied less on borrowed money. I have not studied their Balance Sheet but risk averse investors should examine it carefully. The long term debt must be paid back but the “Cumulative Energy Contracts” might or might not perform as expected based on the uncertainties named above and they are locked in for a very long time, 20 years.

http://discussion.fool.com/in-my-view-the-biggest-risk-at-solarc…

Denny Schlesinger

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I think I held Solar City for a while.

Your post or one like it set the stage for my exit. What really made me move was when someone passed a law that the utilities would no longer be forced to deliver electricity on demand and buy electricity at retail when demanded.

Even a simpleton like myself understands a business cannot make money buying at retail and selling at same price. It is like slavery.

When the CEO of Solar City said that without that they did not have a sustainable business model, I believed the CEO of Solar City. I immediately sold my Solar City stock.

As for Tesla, Solar City is a good fit. Solar City doesn’t have batteries, Tesla does. Today there are home brew battery pack builders building the equivalent of the Power wall. They are using old laptop battey packs. Ones that are degraded, but still functional. The cost is very low. If I ever settle down, I will build a system.

Eventually, Tesla will have a used battery product stream. Once that stream is place, the ability for solar installations to arbitrage electricity will be in place.

With Elon Musk’s back ground in banking, I expect for him to move into that business. It will be a money printing business on the order of Master Card.

Until that time Tesla is just a high capital high leverage high risk business.

Cheers
Qazulight

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seriously invested in only two companies, Tesla and Apple

there is something to beside for the Peter Lynch principle of investing in what you know, products where you may have more experience than analysts who look at the paperwork but do not know the products .
For computers and phones I look only at Apple iStuff, for cars I doubt if I will ever buy an ICE again and Tesla would always be my first look.

A little off topic; when do you think there will be a non ICE vehicle of a comparable size that will go where my 4x4 F150 will go and pull a comparable load?

Tesla has said that a pickup is coming.

No later than 2025

Apple Management:

AAPL “updates” the software ( throttles ) on all prior iPhones when a new model is introduced without regard to the battery condition of those phones? And, then if a new battery at $75 is installed it works normal again?

See the many negative comments in the WSJ article
Comment >>>>>>>>>>>>>>>>>>>>>>>

https://www.wsj.com/articles/apple-apologizes-for-handling-o…

“We know that some of you feel Apple has let you down,” Apple said in a note posted to its website on Thursday. “We apologize.”

Interestingly this isn’t the first time AAPL should have apologized. The iPhone 7 launched in the fall of 2016 was dual sourced with both Qualcomm and Intel modems. It so happens that Apple crippled the superior Qualcomm modem so that it didn’t outperform it’s Intel counterpart. I don’t believe Apple even admitted that “it let its customers down” last year, much less apologized for such.

Further, Qualcomm sued Apple this November of violating their Master Software Agreement, sharing proprietary code (source code) with Intel by copying an Intel engineer on an email request for proprietary information … rather than limiting access to a few designated AAPL engineers and safeguarding such as required by the agreement.

  • Apple crippled Qualcomm modem to make it work like Intel’s
    by Nick Farrell on 21 November 2016

Can’t have some working better than others

fudzilla.com

  • Bloomberg: Apple’s Chip Choices May Leave Some iPhone Users in Slow Lane
    It turns out not all iPhone 7s are created equal.

Nov 18, 2016

https://www.bloomberg.com/news/articles/2016-11-18/apple-chi…

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redfairway wrote
Apple Management…[quoting mostly a bunch of carp]

Yes, this is an excellent example of how not to evaluate management integrity. You have to start by ignoring most of the garbage that’s written about the company. You have to read the words (or watch the video) of the management team. You have to understand the company. When you’ve done that you can easily recognize the garbage you should ignore.

Having worked for Apple for many years (though I retired seven years ago), I have fairly good insight. I can tell you that Apple’s ridiculous level of secrecy causes no end of problems in terms of allowing lies to flourish. And nobody on Wall Street understands Apple at all, in fact they are constitutionally unable to understand it because Apple is not motivated by profit. That’s simply inconceivable to them.

What motivates Apple is shipping great products and making people’s lives and the world better. They care about profits because it provides the opportunity to do that sustainably and consistently. As it turns out shipping great products causes massive profits to happen when done properly (yeah, that’s hard), but profits are not and have never been the goal.

And yes, Apple is populated by humans, so they sometimes get it wrong. But when they do, they fix things as best they can.

Here’s a good example from a few years back of why I continue to believe in Apple:
https://arstechnica.com/gadgets/2014/03/at-apple-shareholder…
Tim Cook: “If you want me to do things only for ROI reasons, you should get out of this stock.”

Part of my attraction to Tesla is that I believe they have similar motivations, and similar ability to execute. In the next ten years they are going to grow to be bigger than Apple, although probably less profitable.

Note: So far as I understand, neither AAPL nor TSLA is a “Saul stock” so I don’t think this specific discussion really belongs here. What I have been trying to understand is how y’all evaluate the integrity of management, what priority it takes for you, and ultimately how you avoid investing in companies run by crooks.

-IGU-

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