Skin in the game (The Financial Athlete #36)

Few things are more inspiring to watch in sports than a team with less talent and experience defeat a superior team by these measures. Coming into the NFL’s Super Bowl XLII (42) of February 3, 2008, the New York Giants played well in the playoffs. Nevertheless, low expectations were set for them to defeat the seemingly invincible New England Patriots which entered the game with a perfect 18-0 record. The Giants played with more intensity and no fear throughout the game. Every play mattered. They were hungrier to win and pulled off victory like the proverbial magician who pulls a white rabbit out of his black top hat.

How do investors gauge the CEO’s hunger to succeed? To start, investors review his history of experience and education. This at least shows a history of ambition with previous accomplishments, but who is to say the CEO has not grown complacent? Next, investors listen to the tone of his voice in Conference Calls, interviews, and private conversations. Often, the tone of voice conveys more than the words spoken. And finally, investors look for “skin in the game”.

Investopedia.com defines and explains “skin in the game” well:

“A term coined by renowned investor Warren Buffett to refer to the situation in which high-ranking insiders use their own money to buy stock in the company they are running.

Notes:
The idea behind creating this situation is to ensure that corporations are managed by like-minded individuals who share a stake in the company. Executives can talk all they want, but they have the best vote of confidence when their own personal money is on the line!”

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