Analysing a company management (Compensation)

A company's management may not be important to short term speculators but it is definately important for long term investors. An excellent management can make the difference between a mediocre business and an outstanding one, and poor management can run even a great business into the ground. Basically, it is the best to find mangement teams that think as if they owned a piece of it (ownership) rather than as hired hands. Recently , I have came across a book authored by morning star and they have pin pointed some of the red flags we can look out for in a management... Basically management assessment process can be sub divided into three parts : compensation, character and operations.. They are ambiguous hence we must view them with our own judgement which i hoped it can be sharpened over time...

I will start with compensation which shoud be the easiest.. Basically, we have to find out how much does the management pay themselves.We should compare the CEO's earnings among different companies in the same industry and in general, the large the firm and the better it's financial performance, the more the executive should be paid but that doesn't meant that they have the right to print money just because they are managing a huge company, no matter how poor a job they are doing. Bigger bonueses will be better than big base salaries because this means that a big portion of the pay is tagged with the performance hence therotically at risk.

Conclusion, the executive's pay should be based on the performance of the company instead of a steady raise. Firms with good governance standards won't hesitate to pay managers less in bad times and more in good times..

My viewpoint on diversification

If you have been investing for a while or either reading up financial journals or books regularly, you will realise that it is a prevalent belief among people that diversification is essential to ensure above average returns and also to minimise risk. There is a saying that one should put the eggs in many baskets but I chose to believe that one should just put the eggs in a basket and watch it carefully. This is because a portfoilio which is heavily diversified will never give u an above average return whereby you may have better gains by just putting your funds into an ETF.

In my opinion, to achieve an above average return, one should remove their own obstacle of allocating a huge portion of his fund to a specific stock but in order to accomplish this, you will need a strategy and a system that suits you well else it may result a huge loss!

In my case, I realized two of my stocks from a portfolio of six and planning to top up the remaining stocks when a good opportunity aries. Pardon me but I will like to reiterate again because I think this is crucial to one's investment sucess. Over diversifcation don't always minimise risk but at times, it may also magnify your lossings so simply allocate your fund in a ETF if your dont feel comfortable to have a concentrated portfolio!