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I am very wary of contacting the management of a business for the following reasons:  

  1. There is a high risk that management will be far too optimistic about the business’s outlook.[1] Most managers are too optimistic about their businesses because they are optimistic by nature and suffer from an ‘illusion of control’;[2] 
  2. Management is likely to tell me what I want to hear. Thus, I risk suffering from ‘confirmation bias’; 
  3. I risk giving management’s views a high weight because managers are usually confident and come across as ‘authority figures’;[3] 
  4. Managers do not like to admit that they have fallen short of stated goals, so they characterise most setbacks as temporary; and,  
  5. Sometimes management will lie, and I am unlikely to know they are lying. 

 Montier shares these doubts when he asks:  

“When was the last time a business arrived at your office and started to confess that they were a dreadful business with disastrous management, and had little or no hope of ever actually improving? Of course, it never happens. Instead, businesses turn up and tell you that they have had a rough time, but whatever the problem was (be it unexpected inventory build, or gross margin pressure), it is now been solved and everything will now be going forward.”[4]   

Thus, I only contact a business’s management if I have specific questions about how they are going to deal with problems the business has. I am also very sceptical about their answers! 


 

[1] In addition, management is usually more optimistic about the outlook for their business, than the economy as a whole. See P76, ‘Behavioural Investing’, James Montier, 2007.  

[2] See P143, ‘Behavioural Investing’, James Montier, 2007.  

[3] Montier points out that we should not confuse confidence with ability. He says: “All too often, we work on the basis that confidence is a good proxy for ability. The more confident a presenter, the more the audience are likely to believe the message, even if it is logically flawed. We need to break this imagined correlation. It simply does not exist.” P528, ‘Behavioural Investing’, James Montier, 2007.  

[4] Ibid at P151.

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