When I first got started in the investment management business I called up my father for some advice. He was a former bank president, and he had been working in the banking industry from the time I was born until he retired. What I was looking for were some ideas about what to look for when purchasing a stock. Buying a stock is not something you do because you heard something on the news. It’s something you do with careful study of the business. No one does a more careful study of a business than a banker who is going to lend the bank’s money to a company. So I called him and asked “What is the first thing you look for when you’re considering a loan to a company?”. I was expecting something about assets, or cash flows, or years they’ve been in business. So his answer surprised me. He said “Do you trust them?”.
It’s kind of obvious if you think about it. Yes, sometimes we spend so much time looking at the numbers we forget to see what’s right in front of our noses (this was my father’s specialty, seeing the forest for the trees). Recently I was researching a stock and all the numbers were really, really good. In fact too good. And they didn’t add up. Mind you, these guys weren’t being sued, and the stock was listed on a major stock exchange. But I heard my father’s voice in my ear “Do you trust them?”, and I realized the answer was no. I think some day soon this is something that will end badly for the current shareholders.
It’s a hard thing to research, about trust. But it’s the single more important question you have to ask and answer about any stock you’re thinking of buying. Thanks Dad.