[TOP STORY] Digging behind companies’ abbreviated results announcements

SIMON BROWN: I’m chatting now with Keith McLachlan. You’ll find him at Integral Asset Management. Keith, I appreciate the early morning time. We are back in sort of earning season for the companies’ reporting periods to February. When they send out their Sens announcements, they’ve always got a couple of highlights from the results, and we need to be clear – [those are] the highlights the company wants you to look at. The lowlights they’ve buried somewhere else.

In the full results I’m going to read the numbers before I read the narrative. What I mean by that is management get to write and get to wax lyrically on their view of things. All of that is being read through the lens of understanding management’s incentives, how they are portraying these things, before I circle around and read the narrative, because the narrative, often looking at the facts, will either add to them or detract from them. But you’re at least now armed with facts before you’re reading what is effectively a subjective view of the business.

By the way, something that’s quite useful to do if you’ve got the time, is to go back into prior periods and read management’s prospects or forecast or outlook section, depending on what they call it, so that you get what they think the future is. So we’re not just getting a sense [of] the business, we’re getting a sense [of] the custodians of capital that are running this business. What are their incentives and why are they shifting the gold posts, and the like? That often comes down to bonuses. [Chuckling]

KEITH McLACHLAN: Definitely. So we’ve got to distinguish between owner managers – these are guys that own over 50% in their own companies, and you’ll find them scattered across the small caps. There aren’t many of them in the large-cap area, but you’ll find them scattered across the small caps. These guys are aligned with shareholders.

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