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Why you need to be able to trust your shares’ management

Rating management is one of the most underrated parts of investing. It’s actually a key part of a business’ success. If you have a bad captain at the helm of your ship (share) it’s more likely to crash.

Perhaps they don’t care about the financial side of the business, maybe they’re just interested in lining their own pockets instead of sustainably growing shareholder value. Perhaps they want to ‘empire build’ and take unnecessary risks.

It’s very hard for most investors to get a reading on management, it’s not like every investor would be afforded a one-on-one chat with the CEO.

So, one of the only ways to judge is by what management say and do. For example, Elon Musk may be a visionary of today, accelerating the change to electric vehicles, but shareholders should be a bit worried. He’s doing great things for the planet, but when an analyst asked about its latest US$1 billion cash burn and large loss, Mr Musk said “Excuse me. Next. Next. Boring, bonehead questions are not cool. Next?”

A company’s finances are ultimately what drive valuations higher. If earnings nor the balance sheet are getting stronger then neither will the share price.

One of the key things investors should look for is if management and shareholder interests are aligned. For example, TPG Telecom Ltd (ASX: TPM) and Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) management are very aligned with shareholders because they themselves are large shareholders.

The same can be said of some investment firms. Chris Mackay is the main person operating globally-focused listed investment company MFF Capital Investments Ltd (ASX: MFF), he and his family own almost 61.5 million shares of MFF Capital, which at $2.33 per share means over $120 million of his family’s wealth is invested.

Foolish takeaway

Sometimes management can make accidental mistakes, but it’s better having someone you trust in charge who wants and is rewarded with the same outcome as you – growing shareholder returns.

One business that has management with excellent reputation is this high-flying stock, which is predicting profit growth of 30% this year.

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It's been a nail-biter of a reporting season here in the first half of 2018.

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Tristan Harrison owns shares of Magellan Flagship Fund Ltd and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Tesla. The Motley Fool Australia owns shares of and has recommended TPG Telecom Limited and Washington H. Soul Pattinson and Company Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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