This Often Overlooked Trait May Help You Pick Winning Companies

What if you've been investing the wrong way for years? It's likely you are. But it's not your fault.

Investors listening in on their first company quarterly conference call immediatelyget a clear sense of how Wall Street is focused on factors with little relevance to making a buy or sell decision. You hear arcane statements from analysts like "We are modeling gross margins at X%" and questions asked of executives such as "What comprised the $Y billion of impairment charges you accrued in the quarter?"

This sort of relentless focus on near-term metrics is pervasive in all areas of finance. No wonder regular investors underperform the market, too.

These sorts of questions carry little weight when investing for the long haul. Ask yourself this: "Should I care about what the company's earnings -- or whatever financial metric -- are over the next few quarters if I'm holding the stock for the next five to ten-plus years?"

Here's a better question to ask those execs: What is the company culture like?

An executive who can deftly answer that question and successfully alignthe company's culture with its overall mission could reward patient investors handsomely.

The case for investing in cultureIn it's purest form, a good culture is a combination of values and behaviors that contributes to the company's mission for the greater good. The greater good is what ties it all together and must be present. Enron, for example, had a very strong culture, but no one argues that the company left a lasting, positive impression on the world.

Now, a wealth of studies exist on how company culture affects stock returns. Let's look at just a few.

1. The Harvard Business School completed a landmark study in 1992 highlighting the benefits of a performance-driven culture. Notably, stock growth skyrocketed 901% for companies with a strong culture, compared with 74% for those without the same. I've included additional results in the following chart.

Credit: (details here).

2. produced a similar study on culture in 2015 showing that a portfolio of companies with strong cultures -- as measured by Glassdoor's "Best Places to Work" survey -- outperformed the S&P 500 by a wide margin. In fact, $1,000 invested in the companies ranking highly in 2009 would be worth $3,470 in 2014, compared with $2,210 for the S&P 500 group.

The list of studies goes on and on, and it quickly becomes clear that company culture should be on the minds of investors when hitting the buy button.

What gives?With the pile of evidence stacking up, why then do companies dismiss the importance of culture aligned with a company's mission, and why don't investors pay closer attention?

I blame inertia and the intangible nature of measuring culture.

It takes a deliberate and conscious effort to break bad habits. From the way educators traditionally teach finance to what Wall Street and the financial media focus on, near-term quantifiable metrics get the spotlight while more important but less quantifiable ones -- factors such as culture that can actually boost your portfolio's value in the long term -- take a supporting role. Playing in that sandbox may work may work for traders, but those metrics just aren't that relevant when holding stocks for the next decade.

Companies that fit the billFor those wondering which specific companies put culture ahead of financial performance, here are some on my short list and why:

  1. T-Mobile-- CEO John Legere is one of the most inspirational leaders around today. He is disrupting a stodgy industry with a die-hard focus on the customer experience that is built into how he is turning around the company.
  2. Middleby -- Frankly, the company sells boring products such as commercial kitchen equipment. But, it's visionary leader focused on taking care of employees while knowing positive financial results will follow.
  3. Google-- It's recent move to separate out businesses under the Alphabet name is telling of what makes Google's culture so unique. Leadership believes in hiring the brightest minds around, then giving them autonomy to do what they do best. This decentralized approach to culture makes a company like Google flexible, which is important as bureaucracy slows decision making -- a certain downfall in the tech industry where innovation is sprinting forward.
  4. Netflix-- Sure, Netflix pays above market rates and offers cushy benefits such as year-long maternity leaves. But what really sets the company apart is its focus on increasing the density of high-performing employees throughout its ranks. This presentation deck tells you everything you need to know about its culture and why executives make decisions based upon it.
  5. Costco-- In a low-margin industry like retail, companies are known for skimping on employee-related costs. Costco takes a different approach, and is consistently ranked as a top employer.

The article This Often Overlooked Trait May Help You Pick Winning Companies originally appeared on

Nathan Hamilton owns shares of Google (A shares), Middleby, Netflix, and T-Mobile US. The Motley Fool owns and recommends Costco Wholesale, Google (A shares), Google (C shares), Middleby, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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