The Motley Fool Interviews LJ Rittenhouse

Who do you trust with your money?  David Kuo of The Motley Fool’s investing show MoneyTalk, challenged  LJ Rittenhouse to show how CEO shareholder letters can help investors make smart investing decisions.  LJ, who discussed her upcoming book, Investing Between the Lines, made it clear that investors not only had to read shareholder letters, but had to “read between the lines.”   For interview transcript click here.  To listen to interview click here.

Investing Between the Lines to be Released October 2012

LJ Rittenhouse’s newest book, Investing Between the Lines will be available for purchase in October 2012 (McGraw-Hill).  For those who are interested in learning more about LJ’s work, please visit for copies of her previous books, Do Business with People You Can Tru$t and Buffett’s Bites.


The “Individual Investor” columnist Jason Zweig (who has since moved from Time Inc. to The Wall Street Journal) interviewed me for a story in 2004.  He asked, why do you read CEO shareholder letters, the ones in corporate annual reports?  Aren’t numbers more important than words?

Absolutely, I said, numbers are important, but you want to know if they can be trusted.  That’s why I read executive communications.  You want to size up the values in the corporate culture.  Why is this vital information?  Because accounting numbers are based on human judgments.  Employees throughout a company decide when to count incoming and outgoing cash, where to book expenses, and how much to report. Over time, these decisions become the numbers we see in income statements and balance sheets.  Smart investors want assurance that these judgments are trustworthy.

Jason Zweig

How can you tell?  Examine the words of the CEO and ask yourself:  Are the executive’s communications candid or confused?  What does the CEO stand for?  What kind of corporate culture is he or she building?  What are the company’s values and do they inspire responsible or irresponsible behavior?  It’s not always easy to see.  Over the years I have developed a taxonomy and scoring system to help me analyze and quantify the presence or absence of candor in these communications.

I told Zweig that my CEO candor analyses show that leaders ranking high in candor will win investor trust and dollars.  He interrupted, “Could you repeat that?  “Why?” I asked.  “Because I’ve been trying to find someone who has been measuring that.”

I told him that my research shows a consistent link between measures of CEO candor and stock performance.  Each year the stocks of top-ranked companies in my annual CEO Candor survey have outperformed, on average, the stocks of those at the bottom.  This connection between candor and performance seems obvious.  Candid CEOs are going to encourage prudent judgments and actions, while discouraging reckless ones.  (BARRON’S REPORT)

It pays to know the difference.  When Enron’s shareholder letter was published in early 2001, the stock was trading at about $60 a share.  But that year’s letter revealed serious lapses in candor.  Just eight months later, the stock plunged to $0.60.  AIG is another example.  From 2005 to 2007, the company’s candor scores fell steadily, but the price of the AIG’s stock hardly budged.  In September 2007, the stock traded over $70 a share.  A year later, taxpayers ponied up $85 billion to save the firm.  The stock traded at $1.25 a share.

Over the next three months, CEOs and their investor relations and communication teams will be busy working on 2011 shareholder letters.  During this time, I will feature the Dynamic and Dubious Dozen, twelve companies that have investors on the fence.  I will show how each company’s CEO Candor Ranking is linked to its stock performance.  I will explain how to read between the lines in their shareholder letters.

When the 2011 letters are published, you’ll be ready to size up CEO Trust and Candor.

2010 CEO Candor Survey Results Released

Each year Rittenhouse Rankings publishes its annual benchmark rankings of CEO shareholder letters from annual reports. These rankings are correlated with stock price performance to show the dollar value of CEO communication. 

This year’s key finding: Top-ranked companies outperform bottom-tanked companies for 5th consecutive year.  To read this year’s news release click here. For a list of Top and Bottom-ranked 2010 Survey Companies click here.

CNBC Video Interview of L.J. Rittenhouse

“Is Buffett’s Image Tarnished?” CNBCs Squawk on the Street poses this question to L.J. Rittenhouse at the 2011 Berkshire Hathaway Annual Meeting.  Watch here.

American Capitalism Run Amok: 3 Questions That Won’t Be Asked at Berkshire Hathaway’s Meeting

This weekend, I am attending  my 14th Berkshire Hathaway shareholder meeting. Over the years, I’ve watched Berkshire grow from an upstart insurance/investment company to an elephant-sized conglomerate. By now I know the questions that will surface in Buffett’s six-hour Q&A-athon. I also can guess the questions that won’t be asked. Why? They expose the underbelly of American capitalism. Armed with my analysis of Berkshire’s economic principles (Buffett’s Bites, McGraw-Hill 2010), here are three leading candidates: Read More at the CommPro Blog

When Principles Trump Personalities

David Sokol’s departure refocuses attention on Berkshire’s succession horse race.  It also underscores a vital fact: at Berkshire, principles trump personalities.

Buffett’s moral standard has always been clear:  Never do anything that you would not want your family and friends to see on the front page of the local paper. This principle is reinforced at every Berkshire shareholder meeting with the screening of a 1991 film clip.  In it, Buffett testifies before Congress as the Interim Chairman of Salomon Brothers.  He wants to win back confidence lost after Salomon’s Treasury auction scandal.  Buffett repeats the caution he gave to Salomon employees: Lose money for the firm, and I will be understanding; lose a shred of reputation for the firm, and I will be ruthless.

David Sokol appears to have crossed this line and exercised poor judgment regarding Lubrizol.  He has stated [and Buffett has affirmed] that he wanted to leave Berkshire in the past, but was persuaded to stay.  Now Buffett has accepted Sokol’s resignation.  Did Buffett act ruthlessly?  No, he acted predictably on principle.  Should he have grilled Sokol who told him in “a passing comment” that he owned shares in Lubrizol?  Most likely, but Buffett operates on trust.  He trusted Mr. Sokol who has contributed immensely to Berkshire’s success.

Sokol’s departure raises an important question about Berkshire’s future. Widely regarded as a leading candidate to become CEO, Sokol had been acting as Berkshire’s Chief Operating Officer, an increasingly important role. Writing in his 2007 shareholder letter, Buffett reminded investors that earnings from non-insurance operating companies, were and would continue to exceed earnings from investments.  He wanted to buy companies outright.  But operating businesses require special management skills – the kind that Sokol displayed in his rapid turnaround of troubled Net Jets and leadership at Johns-Manville.  Buffett’s gracious comments in his press release credit Sokol’s contributions.

The succession question raised by Sokol’s departure is important:  who among the leading CEO candidates has the experience and skills to be the insider turnaround guy for businesses in trouble?  Anyone in this job is not likely to win popularity contests.  Perhaps Berkshire needs a triumvirate management model:  a CEO (Chief Capital Allocator and Chief Risk Officer, the principal roles played by Buffett), a Chief Investment Officer and a Chief Operating Officer.

This decision will be made by Berkshire’s board, which not only upholds fiduciary responsibilities to owner-partners, but also stewards Berkshire’s unique trust and principles based culture.  The current media frenzy shows how tough a job this is in a Twitter-fed environment where straight talk generates bigger headlines than blatant obfuscation.