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The Human Element

|Includes: Gasfrac Energy Services, Inc. (GSFVF)

Companies & especially growth companies live and die by their management; if there is something I learned since I bought my first stock at the age of 17 is that management IS THE company; a company is not the brand, the name or the physical product or actual service they provide, a company is the embodiment of the people standing behind it; if you get the right people they will accomplish the impossible, and if you get the wrong people they will drive the best of products to the ground.

In my life I have came across many bright quantitative analysts; they can go through a balance sheet like going through a children book; within a couple of days of learning about a business they can quote you every ratio in the book, they will know the numbers better than the company CEO; but ultimately many of those people end nothing more than analysts because they can't turn their knowledge into profits.

One reason those quantitative analysts fail is because they are looking at the rear view mirror; they see what has been done, but they can't anticipate what will be; they can see how good a management team was, but they can't tell how good the new management will be; they can see how well the industry is doing, but they can't tell how it will do.

There is one thing quantitative analysts strive for, it is certainty; the numbers give them a sense of certainty, they don't have to guess, they don't have to wonder; it is all there for them to see; yet this certainty is a false one. Life by nature is uncertain; most of human endeavours are uncertain, for an investor to invest they need to bet on an uncertain future; piercing through the fog to get a glimpse of what to come.

Qualitative measurements are hard; judging people is not an exact science, such measurements for some people and investors are vague, unreliable, they want to see models; they want to dress an uncertain future with the appearance of certitude; every quarter analysts take their models and see how far reality has diverted from their vision of reality; in time they spend their days worrying more about the accuracy of their models than what is happening in reality.

I will not disclose what I have made in the markets, but I have made a fortune to retire many times over; yet I use no models, I don't care for models and I don't look for models. Once I identify an industry and a business I like, I follow this simple formula:

Who are the people behind the business?.

What are their intentions?

Can they execute on their intentions?.

For the first question, I check their history, for the second question I talk to them and hear/read what they have to say; and for the third I make a judgment and track their progress over a reasonable amount of time (minimum 4 quarters).

I am not looking for an exact number, or an exact target in terms of revenues and profits, I am looking to see progress; I want to see the company make more money in year two than in year one; I want to see the company with more customers in year two than in year one; I want to see them to sale more gadgets in year two than year one; as long as a company is executing and demonstrating growth, its value in the marketplace will take care of itself.

By the end of 2012, I don't know how many contracts Zeke and his staff will sign, perhaps one, two or three, I don't know if they will make $400m in revenues, $500m in revenues or more, I don't know if they will have $80m in ebitda or $100m in ebitda, I don't know if they will make 70c EPS or $1 EPS; at this stage this does not really matter; any of the numbers I mentioned will present significant progress in my book; and this is all what I need to see.

I only invested in Gasfrac after they hired a new management team, and through my conversations with them, they have passed my first two questions; now if they can really execute, investors in this company will be richly rewarded. There is no better value creation engine than a management team that can execute in a growth company.



Disclosure: I am long OTC:GSFVF.