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Investing Between the Lines: How to Make Smarter Decisions By Decoding CEO Communications Hardcover – January 8, 2013
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"On Warren Buffett's Recommended Reading List" --Berkshire Hathaway Annual Shareholder Letter, 2012
"...investors ought to pay better attention to the way CEOs, the stewards of their capital, express themselves. That idea is the premise behind a new book from McGraw-Hill that explores the relationship between stock picking and executive candor...worthy of investor attention." --Barron's
"Investing Between the Lines by LJ Rittenhouse, has a lot to say about communication in general and CEO communication in particular. [This book] stands out for its emphasis on research and data, rather than just opinion. [It] should be dog-eared, filled with flags, passages underlined and highlighted..." --IR Magazine
"Rittenhouse offers page after page of detailed analyses of corporate communications. These analyses are not always intuitively obvious. I for one am grateful for her efforts." --Seeking Alpha
About the Author
L.J. Rittenhouse was an investment banker at Lehman Brothers before founding her executive coaching and investor relations firm, Rittenhouse Rankings Inc. Her extensive research on the predictive power of CEO candor has been recognized by Warren Buffett and others for creating more trustworthy companies. A graduate of the Columbia School of Business, Rittenhouse speaks on corporate governance, trustworthy leadership and at investor conferences. She is also the author of Buffett's Bites (2010), Do Business with People You can Tru$t (2002) and contributed to Trust Inc. (2013) and Leading from Within (2007).
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Investing Between the Lines eloquently begins a discussion about transparency in corporate communications. In much of our discussion, transparency is non-existent. Obfuscation prevails in our political debate and is a way of life in many professions and for many CEOs. No doubt, it is difficult to know, let alone speak, "the whole truth and nothing but the truth." However, if we accept obfuscation for truth, we will lose ourselves as people.
How can anyone ferret out the truth about individual companies in order to make prudent, knowledgeable investment decisions? Who can the individual investor trust and how can he or she distinguish between those CEOs who rely on fundamentals to steward their investments and those that manipulate numbers to create an artificially high price for their stock?
In her timely and compelling new book Investing Between the Lines, Laura Rittenhouse tells us to trust ourselves and our own common sense. Rittenhouse also gives us the tools we need to do exactly that. When evaluating a company, Laura reminds us that earnings, revenues and price-earning ratios can be easily manipulated. Giving us a few simple rules to guide our thinking, Rittenhouse tell us to listen to what CEOs say and to hear their words critically. Are their shareholder letters and other corporate communications filled with FOG or facts?
Investing Between the Lines reminds us that trust is the foundation for success and that candor is the language of leaders who choose to be trusted. In parsing the words of CEOs in their letters to shareholders from Enron to DuPont to General Electric and many others, Rittenhouse demonstrates vividly how these communications either form the basis for such trust or sow the seed of doubt. Laura notes that it is often the CEO who reminds us of his or her mistakes that is most likely to be truthful about other matters. The investor who reads a letter to shareholders using the approach taught by Rittenhouse will quickly know whether to invest or not invest in that company. Investing Between the Lines will enlighten anyone involved in the world of investing.
By John Kukankos
Central to the book, and the decade-long effort behind the Rittenhouse Rankings, is the Mungeresque belief that you need several mental models to work out solutions to problems. If you don't have that you will end up in the trap of "to a man with a hammer, every problem looks like a nail". The Rittenhouse Ranking model centers around the seven different areas empirically deemed most important in a quest to analyze corporate communications. At its core, it is a point system that aims to grade a business's likelihood of having a successful sustainable business model by way of analyzing the worded communications out of a company - as opposed to the beaten down track of analyzing companies through the numbers. With a database of over 1000 painstakingly coded annual reports over the last decade, the Rittenhouse Rankings are alone in its kind. Investing between the Lines brings this effort to the public for the first time.
As the centerpiece in the construction of the model we find "Capital Stewardship", something that delighted John Bogle when he first studied the model: "Copernicus-like, it shows the true position of the sun!" Other factors that are used in the rankings are Strategy-Accountability, Vision-Leadership and Relationships-Candor. "We have bought into an illusion that the bottom line is the only thing that matters. But where does the bottom line come from? Accounting! Where does that come from? Judgement... What determines judgement? The company values and how they reflect the ethical attitudes of the CEO". It makes total sense, of course, but for some reason - finance's obsession with being regarded as a brethren of science - numbers have always been held in higher regard than words within the investment community. However, you would have had a harder time separating the year 2000 versions of Enron and IBM by the numbers, as opposed to a thorough read of the CEO letters. Out of all the critical things to look for in a shareholder letter covered by Rittenhouse, I would highlight a couple: How passionate is the company about meeting the needs of all stakeholders? Also, is the letter written holding candor and sincerity in high regard, or is it merely a long-winded feast of clichés? As they say - using common sense is all too uncommon these days, don't be afraid to trust yours! Finally: The obsession with formulating illuminating wording has been a common denominator of many great CEO letters, including Buffett's of course ("financial weapons of mass destruction"), but also those of Coca-Cola's Robert Goizueta - his 1995 shareholder letter is one of the all-time greats.
As the world is full of failed models but empty of fool-proof ones, this one also has its traps. Here an excerpt from one shareholder letter in 2004: "Generations of families have worked for XX. Similarly, we have customers and [partners] around the world whose parents, grandparents and great-grandparents have been our customers and [partners]. We look forward to serving their children and grandchildren too. Our customers choose us because they know we stand behind them. We must always live up to that promise and earn their trust". Johnson & Johnson? No, AIG. But again, the game of successful investing means finding tools in order to steadily improve one's batting average. It ought not to be a quest for The Holy Grail. One major piece of the puzzle, I believe, is to read (between) the lines of shareholder letters.
To omit careful examination of a CEOs message (or lack of) is lowering your odds of long term success. It is also an area where accumulated knowledge counts. So grab that marker...
This is a review by investingbythebooks.com