As an investor, it is not easy putting your hard-earned money into a company that you are not sure about its management. Even if you are confident of the company’s financials, it can be scary witnessing the management selling their shares or Insider Trading frequently happening in the company.
In general, you do not need to be worried when CEOs sells shares: it could be that they need the money to pay some bills. However, if the CEO or Management are selling over 20% of their Shares, it is a red flag, and it is time for you to search for the reason. There are few reasons for heavy selling, such as the management know the stock price is going down or the company is going bankrupt.
There is no perfect way to gauge Insider Trading. Although insiders have access to information before the Shareholders do, they are still obligated to report any trading to the SEC. If they know that the stock price is going down, they will start selling their shares. However, more than usual – it is normal, and there is no reason to be concerned.
Using common sense is the best way to gauge insider trading. Company strong financials are a good indication for a prosperous company. It gives the Shareholders confidence that the CEO is not going to betray the owners. The company Growth Rates, such as Equity Growth, EPS Growth, Sales Growth, and Cashflow Growth of over 10%, with a consistent increase over the last ten years, show a company’s financial strength, and it is unlikely that it will go bankrupt soon.
One of the easiest ways to check a company’s strength is the ROIC, which you can review on every financial website. If a company has a consistent ROIC of over 10%, it is a good indication of a successful company.
To invest in a company, you have to learn what is illegal about Insider Trading, What Makes a great CEO, and how to assess management before buying stock.
Should you be worried about illegal Insider trading?
For insider trading to be illegal, the Insiders have sold shares and did not report it to the SEC (Securities of Exchange Commission) within 48 hours. The SEC monitors illegal trading by comparing sales volumes. If sales increase suddenly before any public news – it is considered a red flag – and the SEC will investigate any possible illegal activities.
Anyone in the company who has access to non-public information can be called an Insider. If an investor outside the company knew something before the public, he is also considered an insider.
What Makes a Good CEO?
The following are qualities a CEO must have for you to buy the stock.
1- Owner-Oriented
See how Phil Town and Warren Buffett describe what an Owner-Oriented CEO should be like:
“An Owner-Oriented CEO is one who has his personal interests directly aligned with the shareholders of the business – the Owners. “
Phil Town in his best selling book “RUIL #1”
“My message to [the CEOs] is simple: Run your business as if it were the only asset your family will own over the next 100 years”
Warren Buffett in his 2004 shareholder letter
So an Owner-Oriented CEO is someone how puts the company’s interests above his.
2- Goal-Driven to Achieve Sucess
A Goal-Driven CEO is a CEO with a goal to achieve through the company that will benefit the greater good. It is good to invest in a company where its leader plans to change the world or improve the company earnings to achieve success. It is an indication that the CEO is not lazy and is willing to improve the company and increase its earnings.
3- Honest to Shareholders
There is nothing scarier than a shady CEO who is not honest to the shareholders. For example, if the CEO’s letters to shareholders do not explain why are the company sales down or how they are planning to reduce their debts in the next quarter, it is a red flag and a sign of a shady CEO.
4- Able to Protect the Company Moat
Protecting the company moat, such as its trading secrets against other companies, ensure its competitive advantage. Failing to protect the company Moat is an indication of an incapable CEO. Learn more about the company’s economic moats here.
5- Have Plans to Increase Company Earnings
Increasing a company’s earnings attract more investors, and it drives the stock price up. If the CEO plans to increase the company earnings in the next twelve months, it reflects well on the CEO.
6- Have Plans to Reduce or Eliminate Company Debts
You might think that you should only invest in companies that do not have debts. But there are not many debt-free companies. And usually, companies need to go into debt to finance their upcoming projects. Therefore, it is good to invest in a company that can pay its debts within three years. CEO will usually address the company plans to pay the debts in the annual reports.
7- Act for the Benefit of Shareholders
CEO who uses the company’s free cash flow to finance new projects that can increase future earnings, or pay dividends to shareholders while maintaining strong growth rates, are signs of a CEO who acts for the benefit of shareholders.
On the other hand, using the company’s free cash to renovate that company office or pay dividends regularly while the company struggles financially shows a CEO who is not acting for the benefit of shareholders as it will reflect negatively in the balance sheet.
8- Has a good History in the Company
It is preferred to invest in companies where the CEO is the founder, but usually, the CEO is only an employee with a salary. Therefore, finding the CEO’s achievements duration the time he worked in the company can help you decide about the CEO’s character and whether you should invest in this company.
9- Able to Make Good Decisions During Hardships
The leader resolve is shown through hardship
When CEOs make unwise decisions that can cost the company its competitive advantage, it is probably time to take your money elsewhere.
Steps to Assess Management and CEO Before Buying a Stock.
1-Checking the Comapny Growth Rates
The company growth rates are Equity Growth, EPS Growth, Sales Growth, and Cashflow Growth. It is recommended to invest in companies with growth rates over 10%, with a consistent increase over the last ten years.
2- Read The CEO Letters’ to Shareholders
Reading the CEO letters to shareholders helps you understand how the CEO plans to increase future earnings.
3- Search The Internet for Anyting Bad About the CEO
Research the CEO for any bad publicity or news. It will help you understand the CEO as a person.
4- Research CEO Salary compare to market
Usually, It only takes you one Google search to find this information instead of looking through the annual reports. Most CEOs have low Salaries compared to their compensations. CEOs are more likely to be Owner-Oriented when they have stock ownership in the company.
