I'll come right out and say it: Out of all my holdings, JPMorgan Chase & Co (JPM) is the stock I understand the least in my portfolio. Sure, I did my due diligence before staking my money down on it - read the annual reports, crunched the numbers, researched the headwinds facing the banking industry, familiarized myself with the company's multiple business segments, the whole nine yards. Even after all that, the realm of things I didn't know about banking was still vastly larger than the realm of things I did know.
I got a good enough handle on the business for me to feel confident investing in it, but I was under no illusions. Banking is an opaque, complex industry, one where even the professionals who make their living operating in it don't completely understand the million little moving parts inside its guts. Any investment in a bank is necessarily a risky one, a risk multiplied by the sheer amount of leverage these institutions employ for their daily operations. The less you can trust your own analysis of a company, the more you have to trust management to be able to do the right thing and make the right moves to generate consistent shareholder returns.
Good management is important for any company, but it is absolutely critical for a bank, where the shareholder's relative ignorance of the business must be compensated for by the executive team's mastery of it. Legendary investor Warren Buffett, who cited excellent management as one of the driving forces behind his investment in Wells Fargo (WFC), once said,
In looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if they don’t have the first, the other two will kill you.
JPMorgan's strong financials and exceptional performance during the financial crisis brought the stock to my attention, but it is CEO Jamie Dimon's embodiment of these three crucial leadership qualities that convinced me to pull the trigger.
Integrity, Energy, Intelligence
Let's start with integrity, Buffett’s most important trait. Other executives like to focus on the good parts and downplay the bad when addressing shareholders on company performance. Those who want an example need look no further than Citigroup's (C) self-congratulatory annual letter in 2009, a year when the stock price got sliced in half and shareholders suffered 500% dilution. Dimon, on the other hand, holds himself and his team accountable when they make mistakes.
In his 2007 letter to shareholders, penned right as the crisis was beginning to unfold, Dimon admitted that they "underestimated the size of the housing bubble," "misjudged the impact of more aggressive underwriting standards," and that they should've "imposed tighter controls over the outside mortgage broker business." Where shareholders may stand to lose, Dimon pulls no punches. He tells them exactly how much is at stake, with precise figures that can come only from a complete mastery of his business. In JPMorgan's latest quarterly conference call, investors worried about the company's exposure to Europe were not given buzzwords like "challenging environment" and "risk management," but an exact figure: Dimon told them that if they lost it all, the bill would come to $3.5 billion.
Words can be reinterpreted, but numbers can't be redefined, which is why most executives prefer the former to the latter. Dimon is the rare executive who admits to his errors, quantifies them, and then stands behind his statements, a testament to his integrity as a banker.
Let's move on to energy, where evidence for Dimon's passion can be found in his annual letters to shareholders. Though the shareholder letter contained in the annual reports of most companies is generally filler, consisting of little more than standard corporate boilerplate, Dimon's letters are comprehensive thirty pagers that break down, dissect, and analyze every part of JPMorgan's yearly business results in accessible language that shareholders can understand. His enthusiasm for communicating with his shareholders shows that for Dimon, his work is not an obligation, nor a means to an end, but a fulfilling pursuit to which he applies himself entirely.
And he’s shown us that he’s very good at what he does, demonstrating his intelligence in spades. Under Dimon’s leadership, JPMorgan was the only bank in its peer group to never post a quarterly loss throughout the worst of the financial crisis. Dimon’s conservative and disciplined approach steered his company away from the brunt of the mortgage meltdown - JPMorgan began dialing back exposure to subprimes and CDOs as early as 2006 while its competitors continued to rush into the market recklessly.
However, Dimon has shown that he can also act quickly and decisively when opportunity arises, as demonstrated by JPMorgan’s whirlwind acquisition of Bear Stearns right before the investment bank was set to implode in 2008. Dimon’s accomplishments have earned him the respect of businessmen and leaders around the world. Buffett said of Dimon, “Jamie is a banker from head to toe.” President Barack Obama endorsed JPMorgan Chase as an example of a well-managed bank and praised Dimon for doing a “good job,” at the same time acknowledging him as a “savvy businessman.”
Level 5 Leadership
A good leader drives his company to success, but a great leader understands that his company’s ability to succeed must transcend himself - Jim Collins identifies this as the difference between a Level 4 and Level 5 leader in his book Good to Great. Despite his personal successes and the respect he commands in the industry, Dimon understands the dangers of an organization that revolves around a single person. When JPMorgan’s Jes Staley, then head of Asset Management, approached Dimon about acquiring Highbridge Capital, Dimon shot down the proposal, on the grounds that hedge funds are too dependent on their founders. According to Dimon, once the founder departs, the company is worthless.
Though Staley eventually sold Dimon on the acquisition, this incident shows how important it is to Dimon that companies endure even after their leaders retire. A Level 5 leader through and through, Dimon is already laser focused on setting his bank up for greatness. Though he has no plans to retire any time soon, Dimon revealed to shareholders in his 2009 letter that he already has a succession plan in place. Dimon’s strategy is to groom his most trusted lieutenants by rotating them across all of JPMorgan’s lines of business, so that whoever takes his place at the helm of the bank will possess hands-on, comprehensive knowledge of all its operations.
It is this kind of dedication and long-term thinking that makes me confident that JPMorgan will prosper and grow with Dimon at the helm, and continue to do so long after he retires. While the bank is the holding I understand the least relative to all my other long positions, it is also one of the largest holdings in my portfolio. Call it bold. Call it stupid. But make no mistake - a bet on JPMorgan Chase is a bet on Jamie Dimon. And Dimon has proved himself time and time again to be a leader worth investing in.
Disclosure: I am long JPM.