Three Longs & Three Shorts

Why investors want to bet on humble CEOs?

Author: Matthew Kassel
Source: The Wall Street Journal ( )

Earlier this month, we featured a piece on how there is increasing research from psychologists on the trait of humility and how it can be potentially inculcated through training. It is often said intellectual humility is perhaps the most important personality trait for an investor. A new study shows how investing in companies run by humble CEOs can be lucrative as well. Psychologists rated a sample of 185 CEOs on various measures of humility and found that shares of companies run by humble CEOs are likely to outperform by atleast 7% annually. And this the article attributes to the low balling of expectations and the eventual underestimation of earnings by the analyst community, which then raises the probability of the company beating estimates consistently. In our own experience at Marcellus, we have found management teams which exhibit a degree of humility often bordering on paranoia are likely to take initiatives to tackle disruptive forces as opposed to their brasher counterparts.
“A new study accepted for publication in the Strategic Management Journal found that analysts tend to significantly underestimate the earnings potential of companies run by humble chief executive officers. That leads to artificially low earnings forecasts from the analysts, which the firms can then more easily meet or beat.
While humble CEOs aren’t any more or less capable leaders than their more brash peers, they tend to benefit from an “expectation discount,” which can lead to increased market returns for their companies following earnings announcements, says Federico Aime, a professor of management at the Oklahoma State University’s Spears School of Business and one of the study’s authors.
The paper found that the magnitude of the boost depended on how humble the CEO was, but that the effect could result in at least a 7% increase in total shareholder returns annually.”