Screening for "Quality" in People

Embrace it, to reap huge rewards from it.

Aug 21, 2022

“The bitterness of poor quality remains long after the sweetness of low price is forgotten.” —Benjamin Franklin

A friend of mine recently started her own Real Estate Brokerage business in Dubai and yesterday was the opening of it. I had a conversation with her about the horrible experiences I’ve had in my real estate deals and the losses incurred. And conversations around RE aren’t easy for me, and it can tick me in the wrong way, given my multibagger returns here, in reverse of course :(

I couldn’t attend the opening function but we had a good chat about the importance of quality advice, which comes only from quality people, with clear goals and long-term orientation. In this case, I’ve known her for over 10 years, seen her succeed immensely in her current business, and am super excited for her to hit home runs in her new venture.

On the same day, in the early morning hours, I finished reading ‘Book of Value’ by Anurag Sharma, and many chapters were dedicated to the importance of assessing management quality in the execution of the business affairs of any company, in my portfolio or my wishlist.

Both of them, the author and my friend, hinted at the same thing, but from very different perspectives. Both hinted at dealing with quality people, in their own respective domains. Both hinted at the importance of assessing quality in people, before making a decision to invest. Both emphasized this role of an investor, instead of relying on the hope that your hard-earned money will be taken care of.

If you are lax in assessing people, your money will bid you farewell. As Thomas Tusser would say "A fool and his money are soon parted”.

But is assessing people an easy task? Can you look at someone and know their hidden agenda? Can you read between the lines and what’s behind the pleasing personality? Can you tell who’s lying and who’s speaking the truth?

You aren’t God and you can save all time and energy in acing this skill. Please give up now if you still attempting. Stop.

But what you can do, is make an attempt at understanding the person by observing their communication, their responses to questions, their reactions to situations, and their demeanor in front of people, over a period of time.

Any person could fake a pleasing personality in that brief moment with you, just like our blind dates during college years. But their value system shows up when you see them in different situations, dealing with people, getting stuff done, or handling failures.

“Test a servant while in the discharge of his duty, a relative in difficulty, a friend in adversity, and a wife in misfortune.” - Chanakya

Getting good at assessing people is a goldmine of sorts. Finding a good Fund Manager could help you achieve your long-term goals. Finding a good partner makes life sweet, filled with cherishable memories. Finding a good friend makes life fun and exciting. Finding a good recruit goes a long way in building your business or career.

But getting good at this skill takes time, and you still might land up making mistakes. But it’s worth the time and energy investment, while in pursuit of quality people around you.

In Hollywood, every actor has to audition, irrespective of their past successes. You can check out Robert Downey Jr. auditioning for Iron Man, and what a home run it was for Marvel to have made the right choice. But choosing George Clooney as Batman, was a very bad choice for DC.

It’s not only Marvel and DC that have millions at stake when choosing actors for their movies, you also have millions at stake when choosing companies for your investments. But you aren’t choosing a company alone, you also are voting to go all in with the management team that runs the company.

Every founder is not Jeff Bezos, so you would need to let go of the utopian assumption of all management teams being shareholder friendly.

Gautam Baid warns about this tendency in his books Joys of Compounding - “Management red flags include exorbitant salaries, perks, and commissions (most worrisome if paid during a period of losses); a high percentage of insider holdings being pledged; promoters merging their weaker privately owned companies into their publicly listed company; engaging in significant related-party transactions; appointing relatives who lack adequate qualifications; using aggressive accounting practices; frequently changing auditors; changing the company name to include buzzwords from the hot sectors currently in high demand, and engaging in overly promotional activities.”

Crappy management teams aim for overwhelming you with decorative annual reports, an abundance of data, a nice demeanor on con calls, and leave you with the task to figure out where the dirty stuff is hidden. If you were to attempt reading an annual report, it could run into 100s of pages. I’ve seen some even cross 500 pages. Wow !!!

The very task involved is complex enough to overwhelm you with enough data points, eventually making you give up or make a bad choice based on incomplete analysis.

But if you were brave enough to take on the task of assessing “management quality”, then you could begin with seeking answers to a few important questions -

What did they say 3 years back and did they deliver?
Did they demonstrate in past the values that they espouse?
Have they been consistent in their communication?
Have they embraced the difficulty of sharing the bad news too, or do they only talk positive things, hoping the bad stuff doesn’t show up?

Unless, you haven’t been able to get a sense of the management’s responses/reactions/narratives/demeanor over a certain period of time, assessing them becomes almost impossible. This leaves you only with the lazy choice to go with what you feel about them. And as for us humans, our ability to feel good is so easy to be manipulated by someone.

So many books and seminars on how to make friends and influence people, get people to say yes, convert no to yes - enough and more people have been trained to leave a good impression on you. Sometimes just being nice is enough. In a world with lots of opinionated people, nice people feel like a breeze of fresh air.

But you will have to fight the urge of buying into your feelings or going with your gut. You will have to dig into one’s journey, their moves in response to market developments, their words as an expression of their intent, and their execution as an expression of their expertise.

Without getting a “fair assessment” of a story arc of management, how can you assess management quality? “Management” includes so many elements - strategy, planning, and execution. “Quality” includes results, efficiency, expansion, profits, and culture.

None of these can be left to feeling good about people when you’ve done only surface-level work.

You will need to get better at evaluating people as this skill will come in handy in many scenarios

Making investments
Hiring a team
Making friends
Finding a partner
Finding a Portfolio Manager
Funding a company
Partnering for business
Joining a philanthropy
Volunteering for a cause

The list is endless because we are not self-sufficient in any way. We will be working with people, needing people, leading people, and dealing with people all the time.

Since this is a necessity of sorts, how about we get better at the task that could reap huge dividends in times to come?

Where do you even start with this process?

Your goals are the first place, to begin with
Your requirements for standards from the people inside that goal
And then looking for evidence if someone meets those standards
If evidence isn’t there or you need more time, then take more time to accumulate evidence. Give that person a chance to show up and meet those standards, without you making demands of them or being disappointed if they slipped once in a while
Only when you have had enough time, enough situations, and enough opportunities - that’s when you could do a fair assessment of “people quality”

The same goes for investing in companies.

Take time with people because some of these decisions are irreversible. And if you do succeed at filtering quality people in your life, you’ll be surprised with the results coming your way !!

“Associate yourself with people of good quality, for it is better to be alone than in bad company.” - Booker T. Washington

Drops of Wisdom

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