One of our longest-running clients could almost have been my college roommate...

Before I ended up at DePaul University studying accounting, I thought I wanted to be an engineer.

And two schools topped my application list: Worcester Polytechnic Institute ("WPI") and Rensselaer Polytechnic Institute ("RPI").

I was always interested in processes and building things, hence my decision. I started my college career at WPI. I studied there for a year before I realized it would be decades before I'd be allowed to design a plane's engine or anything else material. I knew I wanted to do something where I could impact the world sooner. So I shifted gears and schools... and began my accounting journey.

I've never regretted it. However, it did mean I had to wait an extra two decades or so to meet Dave Daglio...

Dave, like me, went to school to be an engineer. He went to RPI. Only, he stuck around and graduated with an engineering degree.

Eventually, he found himself working in finance, and we ended up working closely together. I believe our paths converged thanks to our shared interest in thinking about engineering and processes... and because of the importance we put on candor.

Candor goes a long way in life. For investors, it can determine whether or not you make money from your investments.

Dave's focus on candor as a core part of his investment process has led to impressive success...

Dave became a client when he was managing money for the Boston Company, aka BoCo, which was one of the most respected fund-management firms in New England. At BoCo, Dave's accolades were impressive, winning awards from AsianInvestor, Institutional Investor, Lipper, and Forbes with titles like:

Best Small-Cap Manager... Best Midcap Manager... Best Fund Over Three Years... Best Fund Over Five Years... and Top 20 Investors.

His track record was so strong that when BoCo merged with the trillion-dollar manager BNY Mellon, management tapped Dave to become its chief investment officer.

A core reason for Dave's success was his broad focus on a process-based approach for investing. The RPI engineer in him focused on making the things that work in his investing strategy reproducible.

He believes so strongly in a process-based approach that when he launched a new fund company himself, he named it after a well-known process in aviation – BC-GUMPS.

It's a popular mnemonic for landing a plane safely. It gives pilots an easy way to remember to focus on the controls, instruments, gas, landing gear, and other items to ensure they're not forgotten.

A key part of Dave's investment checklist at BC-GUMPS is knowing the financials cold – one reason he has been a client for so long.

Another part of our work also lines up with the heart of Dave's process. It is at the heart of our incentives dictate behavior analysis.

It's candor. Does management have candor in their presentations and communications?

Candor as a key to investing...

For investors, "candor" means looking for management teams who communicate to shareholders openly, honestly, and regularly. These managers are more likely to perform well in the long term.

This makes sense. Management teams with nothing to hide and who want to work with shareholders put all their cards on the table.

Too often, management teams speak with fact-deficient, obfuscating generalities, aka "FOG." They hide their real thoughts, and not just because they're worried about protecting competitive advantages.

FOG-filled communications often reflect managers who can't be trusted or don't know what's going on in their own business.

When management teams are open and honest, it represents a stronger foundation for all the other decisions they make. When they don't sugarcoat a down quarter or a down year, it ensures investors that they're focused on the long term.

Candor results in more than just trust...

Data back up these insights. Another colleague in the industry, Laura Rittenhouse, publishes an annual report that ranks companies based on candor. The Rittenhouse Rankings use public communications like shareholder letters and quarterly earnings calls to see how management communicates.

It turns out, companies with the most candid management teams – those with candor – outperform those that spew the most FOG.

If you're going to do research to choose individual stocks, you've got to make candor a part of your research checklist.

That starts with paying attention to earnings calls. Don't just read the transcripts... actually listen to the calls. And that goes for television interviews, quarterly webcasts, their SEC filings, and other forms of communication.

You are looking for management teams that take their lumps when they make mistakes. You are looking for leaders who can clearly explain what the company is doing and the metrics they judge themselves on. You are looking for high-quality "color" from management.

On the other hand, watch out for FOG.

Good tells are when management uses a lot of jargon... when management focuses on their industry and macro factors as opposed to their own strategy and execution... or when they just say a lot of "nothing at all."

They can sound good to the untrained ear. They can also come loaded with downside risk for investors.

Prioritizing communicative management teams focuses your investments on companies focused on the long term. More important, it might help prevent investing in companies that are hiding an unforeseen risk. If management speaks consistently and with candor, that's a sign that you're less likely to encounter risks or surprises down the road.

Wishing you love, joy, and peace,

February 24, 2023