Taste companies before buying

The best way to understand if a company is a good investment is to get your hands dirty, says Gary Lisenbee, CEO and CIO at Metropolitan West Capital, and manager of the Renaissance U.S. Equity Value Fund.

“When we’re looking at a business we go to the physical facility,” he says. “We spend time with management, not just the CEO or the CFO, but perhaps also the head of sales or IT.”

He compares his approach to someone who wants to buy a restaurant. He should go to the restaurant, taste the food, speak to the chef, speak to the manager, and contact suppliers.

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When researching a business, Lisenbee also talks to the competition. “Sitting down with other businesses helps us to learn more about the industry and see the investment from a different perspective.”

This level of scrutiny is uncommon.

“It’s a private equity approach in the public markets. Retail investors, particularly in mutual funds, often focus on shorter-term returns. That’s the wrong way to do it.”

Usually investors examine the most recent six- and twelve-month returns.

But focusing on three-to-ten-year periods, and the teams who achieve them, is a better bet. This works for both companies and mutual funds.

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Just like you wouldn’t buy a restaurant with an unproven chef, “Look at the fund’s [or company’s] managers and make sure that same team was at the helm generating that [long-term] return,” says Lisenbee.