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Ch3. Point 15: does comp have mgmt. of unquestionable integrity? Surprised that this is at the very end, though I suppose he wanted to close the chapter on a high note. Author claims there are infinite ways mgmt can legally put themselves ahead of shareholders. Want to make sure that mgmt. has a true fiduciary internet to the shareholder. I’ve seen this one first hand with nepotism and it can kill culture quickly.

Ch3 Point 14: mgmt’s openness when disappointments occur. This boiled down to how transparent and forthright mgmt is. Excellent companies will be open/honest and have a plan when they face setbacks. How mgmt. reacts in the face of hardship is a valuable clue to investors as to their temperament.

Ch3 point 13: will the company require future equity financing that would cancel existing stockholder’s benefit from appreciation. Boils down to capital structure. Look for names which can either self finance or rely on debt finance. He also suggests that you account for convertible securities and options/warrants when calculating shares outstanding. He Stresses you shouldn’t buy solely on financial strength.

Ch3 Point 12: short or long term view on profit. Author suggests the long term investor should focus heavily on the companies with a long term mindset with respect to profits. This makes sense, as a long term view means you’re more strategic in thinking and planning and this can manifest in long term earnings growth which would drive long term stock outperformance in theory.

Ch3 point 11: are there aspects the comp is good at that give clues to relative strength. This one meandered a bit. However the discussion on patents vs continuous development was interesting. Essentially, this builds on qualitative analysis of finding things the company exceeds at that may not appear directly important to the industry in order to get a better sense of how the company compares to competition.

Ch3 point 10: cost analysis and accounting controls. Author makes the point that management should be very good at breaking down cost in detail to inform good decisions. States it is hard to truly gauge strength of control environment. I felt this was a weaker point of advice. Not that these topics don’t matter, but the author doesn’t give much guidance on what to look for.

Ch3 point 9: depth of management. Essentially this boils down to making sure the company has appropriate amount of management/executives, and is thinking of the future in developing talent.

Ch3 point 8: good executive relations. This was interesting, as it didn’t focus on the incentives for management as I expected living in the post-80’s world. He discussed the need to foster a culture of internal promotion, on merit, and pay “in line with the standard of the industry. He also emphasized corporation and reducing friction/factionalism to a minimum.

Ch3 point 7: does comp have good labor relations. Highly reflective of a time when labor unions and organized strikes were far more widespread than today. Still, two thoughts: first, we should consider that labor dynamics can/do change. That unions were on the rise in the 50’s and then declined doesn’t mean they can’t return today. Second, the overall principal still applies: personnel turnover is costly.

Ch 3 point 5: what is company doing to maintain or improve margin. Author (rightly) points out it is the future, not the past, profit generation/margins which matter to investors. He gives some examples of threats to margins and examples of how companies can maintain/improve margins beyond simply raising prices. He encourages direct inquiry from the company on areas of cost cutting or cost reductive development

Ch 3, point 4: does the company have a worthwhile profit margin. Basic accounting here of earnings relative to sales. Argued against “marginal” companies as long-term investments unless there is reason to believe a significant improvement in profit margin.

Ch. 3 point 4: does the company have an above average sales organization. We’re building a foundation of: unique/good product/service which should drive above average sales for the foreseeable future, a focus on developing new products/services which will further grow sales, and a sales organization which can expand new and current products/services. Author cited Dow and IBM as examples of sales orgs

Ch. 3, point 3: how effective is R&D relative to company size. Author encourages you to look more qualitatively at research spend than simply research spend in relation to total sales. Focus on whether it is genuinely new innovation, how focused mgmt. is on this development, etc.

Ch. 3, point 2: essentially recommending to determine if the company’s management focussed on continuous development and improvement. New products/services on top of improving existing ones in order to further grow sales.