Halo effect- A cognitive bias in which our judgements of a person’s character can be influenced by our overall impression of them.
A MUST READ for everyone who is interested in Analyzing companies or understanding what drives business performance because “We most likely don’t know”. I would have been a much better analyst had I read this book earlier and maybe I would have given better arguments why the company/stock will do well. The booked was mentioned as best book ever by Fund Manager Samir Arora (Voracious reader) in Sept -2020 tweet and mentioned it as 1 of 3 books which he likes to read repeatedly.
The Author Phil Rosenzweig writes about the Halo effect on analyzing companies where stock market or profit performance leads to making impression of everything that Corporates/CEOs do is good or bad. The author brings about the argument very strongly how most analysis and research focused on understanding what drives business performance are more likely correlations; which are being represented as causality. Many bestselling books like “In search of excellence” and “Good to great” attempted to analyze successful companies to prove drivers of business performance and have come up with Focused approach, Good place to work/ Good HRM, Strong corporate culture, Listening carefully to the customer, Visionary leadership etc. The analysis is questionable because mostly they analyzed successful companies and what was said about them in magazine and awards. People always like to say good things about successful companies and great performing companies always are good places to work or customer friendly. Well performing companies are good places to work because the good growth and profits means more rewards from employees as bonus or offsites and also how could a company be successful and not listen carefully to the customer. (Exception being APPLE/ Steve jobs – We built [the Mac] for ourselves. We were the group of people who were going to judge whether it was great or not. We weren’t going to go out and do market research.”)
Investment community – Tail wagging the Dog.
Evaluation of company strategy is directly corelated with stock performance. I have seen this behavior in work myself in the investor community as stocks seeing good returns are marketed by analysts as good Leadership, Good strategy, Good products etc. etc. and the same arguments are turned upside down for companies whose stocks are not doing well. Also, in order to prove a SELL argument, an analyst will start questioning a company’s business policies or corporate governance when the only argument should be the “Valuations are expensive”. A company like Page industries (Jockey) which has been a favorite company of mine, I went completely wrong with valuations as I wasn’t able to explain the expensive valuations so I had a SELL rating for a long time. But this never meant I questioned the companies Accounting or Strategy or Corporate Governance to support my SELL rating.
Corp governance -Always a function of stock performance
The downside of being a Media analyst was that every investment pitch meeting involved regular cross questioning on corporate governance (CG) policies of the companies. While, I could provide a somewhat objective view of companies of CG practices but it would be fair to say they ranged from Bad to Worse. However, the Fund managers opinion of a Media company CG was always a function of what they owned or didn’t own. When I was Pitching ZEE entertainment to a top Indian FUND house – the Fund manager quipped that how could I recommend a stock with such a poor CG track record. Sad to say, the same fund manager had been a Long-term investor in Deccan chronicle (after the companies’ issues were in limelight) and biggest owners of TV18 group stocks.
Corporates tend to publish awards and accolades achieved during the year. Awards and accolades are generally a function of stock or reported profit performance. Please do remember Satyam computers had won the coveted Golden peacock global award for excellence in Corporate governance for 2008. Manpasand Beverage was given the award of Food and Agri company of the year 2018 by VcCircle.
Some of the favorite Quotes / lines from the book:
When times are good, we lavish praise and create heroes. When things are bad, we lay blame and create villains.
To be excellent, you have to be consistent. When you’re consistent, you’re vulnerable to attack. Yes, it’s a paradox. Now deal with it.
To revise a well-known phrase – Nothing recedes like success.
How little we know, how much to discover. How little it matters; how little we know. – Frank Sinatra song.
PS: Genreally after reading a Good book ; You get ideas about reading other books . In this case I am forced to not read many books analyzing business perfromance. Next book is Azim Premji – The Man beyond the billion By Sundeep khanna and Varun Sood. A Leader on whom I see the Halo.