Beginning investors are always told that it’s vital to assess the quality of a company’s management, especially the ethics of senior executives, before buying a stock. But what does that mean in practice?
John Hempton of Bronte Capital has written a hilarious account of his experience with Rent-A-Center Inc., a Texas-based chain of rent-to-buy stores. Rent-A-Center is in the business of selling low-income customers a variety of furniture and electronics at fiendish mark-ups.
Let’s say you’re one of those customers and you want to buy a sofa. As Hempton explains it, Rent-A-Center will “rent” it to you for 48 monthly payments that total 400% of the wholesale price. If you make all the payments, title to the sofa passes to you. But miss one payment and the sofa gets repossessed.
Remember: this is a rental contract, not a purchase, so if you make all your payments for three years, then miss one, you have no equity built up. The store takes back your sofa and you’re left with nothing even though you’ve already paid multiple times what the sofa cost wholesale.
As you might have gathered by now, this is not a business for the soft-hearted. It seems to take advantage of people without much money. For all those reasons (and others) Hempton started out thinking it would be a good candidate for shorting.
Then he visited the company. Here’s how he describes his experience:
“This was a business where if Jesus was alive he would pull down the Temple over them..it offended my decency. But the people were lovely. I met management and a store owner – and – frankly they seemed exactly the sort of people you would like to have Friday drinks with. I liked them.”
Hempton wonders how you are supposed to assess a situation like this. He winds up concluding that the best policy may not be to judge management by its likability, but by its unlikability—in particular, by its tendency to be cheap, smart and opinionated. As he notes, that’s how Warren Buffett assesses managers and his method appears to have worked pretty well for him.
Freelance business journalist Ian McGugan blogs for the Financial Post