Companies like ARB Corporation Limited (ASX: ARB), Reece Ltd (ASX: REH), TPG Telecom Ltd (ASX: TPM) and Wesfarmers Ltd (ASX: WES) have something in common.
2 traits to look for in the best ASX shares
Last week, I showed how an investor can use a 'screen' to filter companies which have potentially bad traits. The filter was based on qualitative factors, not formulaic rules like 'exclude companies with a price-earnings ratio more than 20 times'.
Below, I offer two factors that I think will help you filter for potentially good investments.
Insider ownership
If the people who run the company in which you own shares (think: the CEO/MD, directors and senior managers) do not own shares in the company, something is wrong.
Your company's managers should have a majority of the personal wealth in the company's shares. Not stock options. But shares.
For example, the family behind Reece Ltd, the plumbing business, hold an enormous stake in the company. The Brown family at bullbar and 4×4 specialist ARB Corporation is much the same.
It doesn't need to be a family affair (see below).
Tip: Be concerned when management say they are selling their shares for 'diversification'. In my experience, it's proven to be complete BS.
Long-term management
Family management is great – they often think in generations. Founder-run management teams are the next best thing – they have something to prove to the world. Finally, management who think like long-term investors are invaluable.
Importantly, their time spent in the top job needs to reflect their goals and strategy. For example, a manager cannot announce a "long-term investment" and leave the company a year later.
The team at TPG Telecom, led by its founder; Wesfarmers, led by a team with a long tenure, and Washington H. Soul Pattinson & Co. Ltd (ASX: SOL) are perfect examples.
In fact, just recently, Soul Patts won a legal battle with a Perpetual, an investment company which appeared focused on short-term value.
These CEOs and boards run the company as they would a private business and often shun the media's spotlight.
Foolish Takeaway
If you sort businesses by insider ownership and long-term tenure, I believe you will improve your strike rate dramatically. But – and it's a big but – you need to be prepared to do the same thing: put some skin in the game and invest for the long-term.
Much of the time these businesses are already successful and their shares have a valuation to match.
