March 1, 2012

Trust the CEO, Buy the Stock

Laura Rittenhouse is president of Rittenhouse Rankings, which ranks annual CEO letters to shareholders for candor. She’s the author of an upcoming book, Investing Between the Lines.

Why read a CEO’s letter to shareholders? The annual shareholder letter helps you decide whether a company’s financial statements are trustworthy. The letters offer an insider’s view of the corporate culture, and the quality of that culture influences decisions made throughout a company—such as when to count incoming and outgoing cash or how to book expenses. If the culture is one of honesty and trust, employees will likely be more forthright in their accounting judgments and the financial statements are more likely to be trusted. I’ve found a strong link between corporate candor and stock performance.