Jockey versus Horse – Management or Business?

When we invest in stocks, we are putting our hard-earned money into the hands of management of the business. Would you want to invest in a company if the company is run by unscrupulous individuals? Of course not! Also, the leaders of the company spearhead where the business should go towards into the future. They also allocate capital and have to do so prudently. The management is akin to a jockey.

On the other hand, the business behind the ticker symbol is also important. If the business is not creating a steady stream of cash flow due to a presence of a wide moat, shareholders will not get much returns from holding the stock. For example, Coca-Cola has been creating tremendous shareholder value and this has translated into a higher stock price and increasing dividends over the years. The business is akin to a horse.

Now the question is, which is more important? The management behind the business or the business itself? Do we bet on the jockey or the horse more?

To answer this question, let us take a look at what Charlie Munger, Warren Buffett’s partner, has to say. In his speech entitled “A Lesson on Elementary, Worldly Wisdom As It Relates To Investment Management & Business”, he gave a very interesting quip:

“So you do get an occasional opportunity to get into a wonderful business that’s being run by a wonderful manager. And, of course, that’s hog heaven day. If you don’t load up when you get those opportunities, it’s a big mistake. Occasionally, you’ll find a human being who’s so talented that he can do things that ordinary skilled mortals can’t. I would argue that Simon Marks—who was second generation in Marks & Spencer of England—was such a man. Patterson was such a man at National Cash Register. And Sam Walton was such a man. These people do come along—and in many cases, they’re not all that hard to identify. If they’ve got a reasonable hand—with the fanaticism and intelligence and so on that these people generally bring to the party—then management can matter much. However, averaged out, betting on the quality of a business is better than betting on the quality of management. In other words, if you have to choose one, bet on the business momentum, not the brilliance of the manager.”

If you look at airlines businesses, this rings very true. No matter how good the management of an airline business is, fundamentally, an airline business is a lousy business to get into. This is mainly due to the dynamics of the industry itself.

Warren Buffett also tends to agree with Charlie Munger. He once said, “I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.”

Therefore, the business fundamental is more important than the management. Bet on the horse more than the jockey. However, if both the jockey and the horse are good, then you have got a hog heaven day!

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