How to analyze a company's managers

Warren Buffett said he prefers terrific businesses that even mediocre managers can run. But, since not all businesses are terrific, shouldn't you require better than mediocrity in management? So perhaps besides businesses analysis, you should also do manager analysis.

But can this be done? After all, each individual is unique.

Luckily, even within uniqueness you can find key elements that can help you decide if a person is suitable for his or her job. You'd of course need to meet the person, or at least talk to him or her - but you know my view that those who hand their savings to managers whom they've never met or talked to, are like those who seek a mail order spouse: Don't be shocked by the results.

But is there a method for analyzing people's job suitability?

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The one used by many HR departments is the Myers-Briggs methodology. It focuses on four main characteristics: extroversion/introversion (E/I), fast/slow decision making (J/P), using intuition versus using facts (N/S), and reacting by thinking versus by feeling (T/F). The combination of these four categories yields 16 types, suited to different jobs.

Now, let me stress that an M-B category doesn't determine one's fate - it's just a collection of natural preferences; and even within a category there's enormous variety, based on courage, honesty, intelligence, creativity, leadership, etc. Nevertheless, in my experience even the rough M-B categories are useful for investors in two ways: First, finding out if key personnel in your portfolio companies are suited to their jobs can help you invest better; second, finding which category you fall into can help you focus on what you're best at, and avoid what you're worst at (or help you plug your soft spots with partners who have strengths you lack).

Let's take an example: an ESTJ, or an extroverted, fast decision maker who decides based on facts while ignoring intuition, is comfortable with thinking but not with emotions. Such executive types are often found in stable, structured organizations (or in surgery rooms), where facts, emotionless rationality and exactness are key.

On the other hand, an ENTJ - different by only one degree - is an intuitive, fast decision maker who tends to be uncomfortable in static organizations. Thus if a stable company previously run by an ESTJ promotes an ENTJ, the new CEO would likely push for growth and change. Not because these are always needed (in utilities or government they're not), but because that's how he or she is. Understanding this can often help you avoid an investment mistake.

An INTJ, on the other hand, is a scientific personality: An introverted, intuitive, thinking decision maker. INTJs are often found leading R&D-intensive companies or heading research labs. However, if the lab is large and needs much administration, an ESTJ might be better, whereas if it's fast growing, an ENTJ might be best. As you see, once you've analyzed the business type, knowing the CEO's type can help you better estimate future success.

How about an investor's characteristics?

The active, deal-making extroverted personalities who run hedge funds are often ENTJs. I bet that Warren Buffett is one, Cisco's John Chambers probably is too and in the political realm, I'd have put my money on Ronald Reagan (R.I.P.). On the other hand, traders and private investors are often ISTJs: fact-based, analytical, and decisive individualists, usually successful but on their own terms.

What to watch out for?

First and foremost is the lack of J in a CEO. Whereas an ENTJ is usually a great leader, an ENTP can be a mesmerizing speaker (Barack Obama is likely one, as is probably Benjamin Netanyahu in Israel), but may also find it hard to make decisions. So if you find a company's CEO - even a magnetic one - leery to make decisions, rethink your investment.

On the other hand, too many Js in a company without some balancing Ps (thinkers/analysts) may bring other risks: greater conflict and hasty strategies.

What of the people factor (E/I)? A CEO can be an introvert if the company is science- or tech-related, where most employees and clients are introverts too. But in most companies, a CEO better be an extrovert, or else he or she would be isolated - as would the company.

What about you? How can you use the M-B to invest better?

If you're an introvert, it's unlikely you'll do much sleuthing, because you'll prefer numbers and text, and resist visiting or talking to management. If so, don't fight your nature. Get an extroverted partner who'll get you the physical facts you can't seek. Ditto if you're a terrific analyst - probably an INTP or an ISTP - but weaker on deciding. Get a partner who's a smart decider, who'll buy and sell based on your superior research. Jimmy Rogers and George Soros were once such a winning team.

You can be, too. If you plug your own M-B soft spots, and analyze those of your investees' management, you'd have an edge over those who analyze businesses only.

If you want to know more about the M-B categories, look it up at: www.personalitytype.com.