I often take the Amtrak train back to my hometown in New England and sometimes I’m fortunate to sit beside some pretty interesting people. Incidentally, on one trip the Deputy Comptroller of Citigroup sat beside me for nearly 6 hours and for a good 5.5 hours of that trip we were talking. At the time I was working at AIG and I mentioned that I was an equity analyst. The next thing he said was the main thing I remembered about that 5.5-hour conversation: “What is the most important thing to consider when buying a company’s stock?”

Now this question took me aback because I never thought to consider one end-all, be-all answer to evaluating a stock. There are tons of ratios to examine, charts to ponder, earnings results for the past few years – how could I arrive on one single factor? 

Before I could conjure up an answer he gave me the answer: “Management.” He was referring of course to the CEO and all of the upper executives, but what exactly about them? He said, “You need to know and understand the competence of the company’s management; if they are incompetent then the company is doomed no matter how good the company looks on paper.”

I didn’t fully believe this until I saw it put in action.

During a large investor conference in Dallas, I met the management team of a particular real estate company involved in the branding and expansion of malls. The company itself was not very large compared to its competitors and so managers made a massive push to add as many new retailers as deals were made available. One of the stores they talked about adding was a mid-grade retailer that I knew for a fact was a lousy store and could not believe they were thinking about adding one of those stores. One of the other analysts in the room asked, “So what does that store sell?” The CEO laughed and threw his hands in the air and said, “How the heck should I know?”

At this point I smacked my palm into my face. Was I the only one in the room to understand how dumb and unsettling that statement sounded? If this CEO doesn’t even know what this major anchor store sells, what ELSE doesn’t he know about his own company??