We spend thousands of hours debating the Federal Reserve’s next move, plotting the yield curve, and agonizing over macro-economic forecasts. Yet, when it comes to the people actually stewarding our money—the corporate executives, the private equity sponsors, and the mutual fund boards—we rarely apply the same level of scrutiny.
Today’s wisdom focuses on the critical, yet often ignored, qualitative assessment of alignment and character in the people we trust with our financial futures.
The Wisdom Bite:
“Tomorrow, make sure you get on the right bus.. Tomorrow you're gonna start driving your own bus and only let good people on your bus. And if you get on someone else's bus, make sure they're good people, and those buses will take you to places that you would never go alone.” – Coach K
Warren Buffett has always stressed that buying a stock means buying a piece of a business, and he insists on partnering with managers who are "able and trustworthy". He famously operates on the "Eddie Bennett" batboy model: to be a winner, you simply have to hook up with the cream of those on the playing field.
However, the modern capital markets frequently resemble a bus driven by individuals whose interests are radically divorced from the passengers. Look at the explosion of "dividend recaps" in the private equity world, where sponsors force companies to borrow massive amounts of debt simply to pay themselves an immediate dividend. This financial engineering supercharges the sponsor's reported Internal Rate of Return (IRR) and extracts their risk, but leaves the underlying company heavily indebted and incredibly fragile. If you get on a bus driven by short-term financial engineers, do not be surprised when it drives straight off a cliff during the next credit crunch.
The Wisdom Bite:
“I don't really know where we should take this bus. But I know if we get the right people on the bus, the right people in the right seats, and the wrong people off the bus then we'll figure out how to take it someplace great.” – Jim Collins
The lack of alignment extends to the very governance of our investment vehicles. Consider the mutual fund industry. Fund directors are supposed to police management fees and ensure they are fair. Yet, mutual fund boards consistently approve fees that are significantly higher than what institutional accounts of the same size pay, simply because those fees align with the "industry average". They keep the wrong people in the right seats, allowing the management company to extract wealth from the individual investor.
The Financial Takeaway:
Whether you are investing in a public company, allocating to a private fund, or choosing a wealth advisor, your paramount duty is to evaluate character. You are looking for fiduciaries who prioritize a "seamless web of deserved trust" over maximizing their immediate fee extraction. If the drivers of the business are focused on salesmanship rather than stewardship, get off the bus immediately.
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