The Bottom Line
No matter how profitable you believe a venture to be, if your business partner, manager, or employee is unethical, the potential liability could be financially fatal. This is true whether you are operating a single-location retail shop or investing the common stock of an entity such as Krispy Kreme. Graham pointed out in the 1940 edition of Security Analysis that an investor should avoid all commitments to a company if serious accounting issues arise – even the first mortgage bonds. He understood that if someone is wiling to lie to you once, there is a high probability that they will do it again.
Keep an Eye on Cost
Think back to what you learnt in one of our time value of money articles. Small increases in the rate of compounding, given enough time, can result in breathtaking differences in wealth level. If, for example, all you managed to do was add 3% per annum to your company’s return on equity for the next 50 years, your business would be worth 3 times what it would otherwise. A tripling in net worth is not something to disregard!The easiest, safest, and least complicated way to accomplish this incremental return is to be an absolute tyrant on non-essential costs. One famous, well-regarded media tycoon once refused to paint the back of his buildings because he understood what that cash would do if it was reinvested in the business, not paid out to the hardware store.
The Bottom Line
A tight control on costs can be a good barometer for managerial talent and an insight into how the executive team views shareholders; as merely a necessary evil or the true owners of the business, to whom they are accountable. If excessive stock option grants, floral budgets, and private jets are buried in the 10K and proxy statement of a potential investment, you should raise an eyebrow.
