A New Broom Sweeps Clean

Probably generally true, but the results may not become apparent immediately. Any time there is a significant change at the top, new president, new governor, new CEO or new coach, change is almost certain, but investors should consider the presence of a “lag” factor. Governments, businesses and athletic teams tend to have a built in momentum and it usually take time for a new leader to effect changes and often longer for these changes to begin to affect outcomes.

A new college football coach inherits his predecessors recruiting successes or failures and it takes several years and as many recruiting classes for the team to fully reflect the new coach’s philosophy. Likewise, newly elected governor or president may have a grand vision but will first, for better or worse, have to work through the legacy of his predecessor.

Investors should recognize that it can take time, sometimes a long time, for a new CEO to right a sinking ship. Consider Ford Motor Co. Alan Mulally joined the company in September 2006. Shortly thereafter, the industry went through a very difficult period with the company’s major domestic competitors going through bankruptcy. Only in the last few years has the efficacy of his strategy become evident, with a much strong balance sheet and an acclaimed new product line.

Change is often, not always, good. But even positive changes can take time to mature.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA