Wednesday, January 30, 2013

Rittenhouse, Investing Between the Lines

L. J. Rittenhouse spent ten years as an investment banker at Lehman Brothers (1981-1991) before leaving Wall Street to found her own firm, Rittenhouse Rankings, an investor-relations firm that advises businesses on improving valuation through candid assessments of corporate strategies, investor perceptions, and corporate communications. She is the author of two previous books: Do Business with People You Can Tru$t and Buffett’s Bites. Her latest book is Investing Between the Lines: How to Make Smarter Decisions by Decoding CEO Communications (McGraw-Hill, 2013).

The basic premise of the book is that high levels of executive candor are linked to superior market performance. On the one hand are the annual shareholder letters of Warren Buffett, the gold standard of executive candor. On the other hand are “FOG” communications, ones that abound in “fact-deficient, obfuscating generalities.” (p. 97) They use weasel words, clich├ęs, jargon, and hyperbole. Their explanations may be incomplete, their grammar awkward. They often foreshadow subnormal, even disastrous returns.

Rittenhouse offers page after page of detailed analyses of corporate communications. These analyses are not always intuitively obvious. But the author is adamant: “When people tell me they don’t believe that they are smart enough to uncover the truth about executive FOG, I conclude that they either are lazy or lack the confidence to use their common sense.” (p. 271) Well, I guess that put me in my place!

I think back to Brand Blanshard’s 1953 lecture On Philosophical Style, the classic presentation of the thesis that profundity and clarity are not opposed philosophical virtues but rather required companions. Blanshard bemoaned the fact (in private 1980 correspondence) that “most writing nowadays is exceedingly shuffling, muddled, and ponderous.” By contrast, he noted in his lecture, John Locke and John Stuart Mill “each had the enviable faculty of making people say: ‘If he is not right, at least he deserves to be; he puts all his cards on the table; he keeps nothing back; he fights, thinks, and writes fairly, even to the point of writing clearly enough to be found out.’” For Blanshard, as for Rittenhouse, candor is a virtue.

The unfortunate reality is that good writing, whether in philosophy or in business, is a rarity. As Blanshard concludes his lecture, “We may have to agree with Professor Raleigh that ‘to write perfect prose is neither more nor less difficult than to lead a perfect life.’”

I’ve gone off on a tangent and I’m not quite sure how to bring this post home. Is it the case that for a CEO to write good (or at least candid) prose is neither more nor less difficult than for him to lead a good (or a profitable) company? I doubt it highly; in fact, the very suggestion sounds downright silly.

But a CEO has limited opportunities to communicate with shareholders, and shareholders have limited opportunities to find out how management views the company’s performance and its prospects. Rittenhouse works both sides of the street. She tries to help companies communicate better at the same time that she informs investors on how to decode these communications. It might be viewed as a conflict of interests, but I for one am grateful for her efforts.

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