Businessman Investor

Touching base with the rational business psyche of stock market investors

Sunday, August 28, 2011

Enabler Which Makes Stocks Passive: A Management In Place

Let Management do the heavy-lifting. Publicly-listed companies already have that bonus of having management teams run the business. An owner/entrepreneur should aspire the same thing for his private business to free him up from the day-to-day grind of operations, and make him focus more on being an investor concerned of profitably allocating capital.
How many times have we seen thriving businesses which come to be just that—small businesses? The owner/entrepreneur's time has been so caught up with active involvement in the day-to-day operations that overlooked are the possibilities of automation and delegation. Other opportunities of profit-making ventures are neglected, too.

Virtues of industry and hardwork are important. But if one intends to make a business expand, prosper and make a lot of dough in the process, there should also be that added element of delegation. One can be business-minded, conscious, and concerned about his company's operating realities, but it does not mean he has to be necessarily actively and always engaged in its day-to-day operations.

Because while businesses are alive, operating entities, they eventually ought to run by themselves and be passive—we can’t call it a money machine anyway if your toil and labor involvement are always required! While we are businessmen, we are also an investors, and that being the case, we should aim to focus and allot more of our time on profitable capital allocations as our founded/acquired businesses run by themselves...

Yes, stocks, while true businesses, should be viewed as passive sources of incomes. If we start thinking of businesses this way, we begin to appreciate the importance of that part of the “quality business” equation which is: having a capable, talented, credible management in place (this is crucial because your time and energy is valuable). Management is that enabler which makes a business a passive source of income (that which makes it a passive equity bond, if you may). If businesses are sought to be setup this way (i.e. making the various operating facets of the business defined, more systematic and easier to duplicate, allowing ease of delegation to managers and have the now scalable business run by itself), it would free up the precious time of the businessman investor to let him focus on more important things—deploying those loads of extra cash generated by his money-making businesses, and making them work for more money!

And these are the joys of investing in the stock market: What's slated to us are businesses which can be likened to passive equity bonds that yield money like machines which require not our present. We buy, we hold, we own, we get paid. Among these listed firms are hidden gems which we would want to uncover. Definitely, what we are after are quality businesses that already have excellent, credible management in place (that's the bonus!); and most definitely, we wouldn't want to go into the trouble of meddling—why would we want to disrupt this balance, anyway, when it's already unselfishly rewarding us with more wealth? Just let management do the heavy lifting work.

Warren Buffett the Master Delegator

Can you just imagine how Warren Buffett runs his $382.7B behemoth holding company that is Berkshire Hathaway? He does it by delegating the nitty-gritty operations of his subsidiary businesses to his CEO managers. He was a passive investor—he focused more on influencing the reallocation of his subsidiaries' extra cash in more profitable investments, was not active in the managerial-operational sense, and did not meddle with management—he mentions in the Berkshire Annual Report as he discusses how he and his partner, Charles Munger, manage the company:
"Charlie and I are the managing partners of Berkshire. But we subcontract all of the heavy lifting in this business to the managers of our subsidiaries. In fact, we delegate almost to the point of abdication: Though Berkshire has about 257,000 employees, only 21 of these are at headquarters."
Such was his management-style that he once wittingly remarked that after touring around the company of his good friend Bill Gates, he now knew more about Microsoft than his other own companies! I can also recall Buffett and Munger responding to a question about how they go about choosing the right people for the top jobs; quipping, they "cheat" by buying excellent businesses that already has credible and talented management in place; as much as possible, they wouldn't want to go into the trouble of headhunting and overhauling the organizational structure—well understandable especially Buffett who had experience on failed turnarounds. Hence, the filter of buying an excellent, understandable business with quality management in place, at a bargain price.

1 comment:

  1. Warren Buffett is really a good investor and very successful.Managing and having plan is one of the best strategy to makes your stocks passive.



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