Leadership Companies Are Not Always Leadership Stocks

Spring is not only the season for sports and nature’s renewal, for some of us it is an extended season of poring over annual reports. From this exercise, I seek to get a fuller explanation, from a particular company’s point of view, of what caused the prior year’s financial results. I also scan for possible governance changes that might produce better results in the current year. Obviously the 2009 reports are most often laden with excuses caused by the economy. (When the numbers turn out well, they will be proclaimed the result of the hard working management.) Often I wonder why I feel compelled to spend so much time on the predictable. Occasionally I do get a worthwhile insight.

JP MORGAN’S “MOST VALUABLE ASSET”

I suggest that every leader in any field of endeavor (read: service to others), could benefit from JPMorgan Chase’s (NYSE: JPM) thirty-six page Chairman’s letter. In particular, I call your attention to the nine page section entitled “HOW WE MANAGE OUR PEOPLE-JPMORGAN CHASE’S MOST VALUABLE ASSET.” (click here for full letter to shareholders from the JPMorgan Chase Investor Relations Website, or email me aml@lipperadvising.com and I will send to you my marked up version of the nine pages.) In the letter, JP Morgan Chase CEO Jamie Dimon lays out how he is building a culture of leadership which can work well in any organized activity. Some of his points are:

• Being smart is not enough

• Leadership is an honor, a privilege, and a deep obligation

• Good people want to work for good leaders

• Leadership is like exercise, the exercise has to be sustained for it to do any good

• (Good leaders) Need to have a fierce resolve to act

• Driving change, fighting bureaucracy and politics, taking ownership and responsibility

• Leaders must set high standards of performance

• True leaders must set the highest standards of integrity

• (The) Best leaders kill bureaucracy

• Watch out for sidebar conversations

• Loyalty and respect are two way streets

• There is a lot of luck involved in anyone’s success

• Leaders work hard because they want to, they believe in something larger than themselves

• The CEO does not have to be the highest paid person in the company

ATTITUDE OF SERVICE

As these statements are similar to the principles espoused by the US Marine Corps, I ask, “Where do I sign up?” Jamie has described a culture that I would want to join. He also describes the attitude of service that I would cherish in a critical supplier or partner. Unfortunately, he and his fellow leaders do not produce a winning stock at all times.

VALUATIONS AND LEADERSHIP

The dynamic nature of markets causes various fundamentals to be priced everyday. At times the high quality culture produced by JP Morgan and some others are priced cheaply. One could buy great companies at relatively low valuations a year ago. Such a purchase or a decision to continue to hold JPM should have allowed a prudent investor to sleep a little better. Looking to the future, even at today’s more advanced prices, one could make the case that JPM and similar leaders have a place in a sound, long term portfolio.

The search for quality investments in the first quarter of 2010 has been frustrating. There are a significant number of managers that are addicted to buying quality. Their results in the quarter (and actually for the last twelve months) have been rewarded handsomely in terms of absolute gains. Unfortunately relative returns have been less good. If you will, absolute dollars of gain has been way above normal, but relative ranking has been disappointing. Stocks of companies who were far less focused than JPM on their prime asset of highly trained people, shot up as their layoffs accelerated. (Pundits have called this trend “hyper-efficiency.”) Those companies who barely escaped a near death (bankruptcy) experience, rose many multiplies of their bottom prices. Their cutbacks saved them at the most critical possible opportunity, allowing them to become leaders in their fields or in some cases reassert themselves as leaders. This dichotomy between the quality of leadership of a company and its stock price should remind us that often the only similarity between a company and its stock price is its name.

A NEW PHASE?

As an entrepreneur and personal investor, I am more comfortable dealing with quality individuals and quality companies. However, as an investment advisor with some performance-oriented accounts, I also need to produce competitive results and that has not been easy this quarter. However the month of March, 2010 appears to have been an awakening of the animal instincts to search out good investments. Time will tell whether we entered into a new phase.

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