The current negative market sentiment is a factor of geopolitics, much of which none of the participants have any control. The other huge overhang is the reality of an India market downgrade — A Clear Derating. Even this isn't something market participants have any say in or can do much about. The third spoiler is the resignation of the much respected Mr. Atanu Chakraborty (BSE filing). His resignation has brought into the focus the vexed topic of Quality of Management, and that is certainly something over which we as participants can 'exercise' our decision-making skills when one picks investments. In the immediate instance — to me, Mr. Atanu Chakraborty exhibited integrity — and that has to be applauded. For the participants as a whole his resignation seems to have caused jitters in the entire Banking 'space' and rightly so.

Think of it like this — when we buy the stock of a company we expect the company we have chosen to be 'well managed'. And, that means the promoters of the company, or their trusted lieutenants are people of integrity, and are also capable. We are in a way, hiring someone to do the 'heavy lifting'. The seminal Buffett quote is "In looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if they don't have the first, the other two will kill you." and you can add this remark of his as an addendum — "If you hire somebody without integrity, you really want them to be dumb and lazy, don't you? The last thing in the world you want from someone who lacks integrity is for them to be smart and energetic."

How do analysts proclaim that one company has good management but another does not? How do analysts know good from bad? The short answer is that analysts do not exactly have a good role model to choose from. In reality, "good management" means that the company has done well in the past. But nobody seems to ask the next question — is the past success due to a good business model, or did the management make the most of a lousy business. In other words, should the past success be credited to the horse or the jockey.

How good are we at judging the 'quality of management' of a business? Our evaluation depends on whether we are seeing a lady or a flower girl — evaluating performance is like asking someone to define 'good pornography' and the answer is — 'I know it when I see it'. And, if you know it when you see it — it's probably too late!

I would be the first to admit that management is 'better seen than heard'. Unfortunately, most of us don't get to 'see management'. So, how does a 'know-nothing' investor perform this function? More important is if this critical metric is at all 'knowable'?

Let me take a step back and answer those who think that management quality doesn't matter — the short answer is that it does, and should be used as one of the FIRST metrics BEFORE one invests. Why so? "We would argue that not only do companies get the investors they deserve, but investors also get the companies they deserve." (Source: The Rational Cloner, Nick and Zak's Adventures in Capitalism)

Here is Buffett again — as quoted by Howard Marks in Mastering the Market Cycle — "Warren Buffett once told me about his two criteria for a desirable piece of information: it has to be important, and it has to be knowable." This quote has special relevance to today's environment since all of us suffer from some form of an information overload and that isn't going to stop anytime soon.

What is knowable in our assessment of Management Quality? How should one form a 'ballpark judgement' on the 'Quality of Management'? I will share my thoughts in an upcoming post. For this post these quotes should set the table!