Does management have an excellent track record?
The best indicator of future performance is past results. Great management tends to produce great results for everyone involved, including the shareholders, employees, directors, executives, and customers. If a company has encountered significant problems for consecutive years while the industry in which it operates prospers, it is likely that management has been unwisely retained. In such cases, you and your pocketbook would be better off ignoring the empty promises of executives who are only interested in keeping their jobs.The quality of management question is perhaps one of the most important an investor must pose to himself. Coca-Cola is an excellent example of how good management can make a great company even better. A stellar performer for generations, it wasn't until Roberto Goizueta became CEO that the business became a truly global powerhouse, throwing off cash to its stockholders faster than they could gulp it down. Between 1984 and 1993, Coca-Cola acquired 570 million shares of its own stock through its stock repurchase program, reducing the shares outstanding from 3.174 billion to 2.604 billion. This 21% reduction resulted in significantly higher earnings-per-share for each of the remaining shares of common stock, bolstering already mouth-watering operating results.
Are you financially able to wait out the storm?
After you've determined that the problem is temporary, management has an excellent track record, and the business possesses excellent economics, there is still one question remaining before you take out your checkbook and purchase a seemingly undervalued stock. Are you financially able to wait out the company's troubles? What are the odds that you will be forced to sell your stock to meet another obligation?If there is even the slightest chance of a forced sale due to a personal need for cash, don't even think about buying the stock. "But it's a wonderful investment opportunity!" you may protest. Yes, it may turn out to be one of the best investments of your life. However, if you do not have the luxury of waiting for the company's intrinsic value to be reflected in the share price, you are gambling. As investors, we know that a good company will eventually be recognized by the market; we don't know when. The moment you fail to make that distinction, you become a speculator. In the short run, anything can happen. There is nothing to stop an undervalued stock from falling significantly further in price. You must have the time to wait for the inevitable result of wise investing, regardless of whether it takes a week, month, or several years. In the end, your sound analytical judgment and unshakable patience should be handsomely rewarded.
