Recipe for a ‘Perfect Business’ and Tasty Stock

Recipe for a ‘Perfect Business’ and Tasty Stock

A recent article in MarketWatch discusses the components necessary for a “perfect” business and offers strategies for meeting the challenges in finding them.

Strong businesses require “no incremental capital, yields functionally infinite returns and has capital allocation acumen and management recruiting astuteness” and need strong management with the skills to lead. While finding all ingredients in one operation can be difficult, the article argues, the likelihood of success improves when managers invest heavily in the company. Such “faithful stewards,” it explains, “reduces turnover, adds stability and sustains culture,” thus forming what the article describes as a “virtuous circle.”

To maintain the circle, businesses must meet the following criteria:

  • Generate above-average returns, and be understandable, direct, and under the operator’s influence.
  • Maintain “both decentralization and its organization-wide culture, raising a threshold question about the division of responsibility on these subjects between directors and managers.” That is, issues of structure and culture should be shared by directors and managers alike.

Risks to such an operation, the article contends, come in the form of “people issues” rather than “business issues,” citing the example of CEO succession, which can be mitigated by the business’s ability to develop group leaders. Strong companies, it concludes, should want strong directors “but only those aligned with its culture—a strong contrarian director is a disaster.”

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