In investing, we spend enormous amounts of time studying numbers — revenue growth, margins, debt, cash flows, return ratios and valuations.
But one of the most important variables cannot easily be put into a spreadsheet:
The people running the company.
A promising business can survive temporary setbacks. Valuations can correct. Growth can slow and recover.
But when trust in management collapses, shareholder wealth can disappear remarkably quickly.
A recent incident reminded me why, for more than two decades, I have followed one stubborn rule:
Never blindly trust the management of a new company.
A Conversation I Still Remember
Some time ago, I wrote something negative about a company.
Soon afterwards, I received a direct message from a renowned investor who wanted to speak to me about what I had written.
We got on a call.
He passionately explained why he believed I was wrong. More importantly, he spoke at length about the promoter — how genuine, hardworking and trustworthy he was.
His conviction was extraordinary.
He trusted the promoter’s character so deeply that he told me he could think of investing only with someone like him.
Eventually, he convinced me to delete my post.
Then, a few days ago, something extremely unfortunate happened involving that company and its founder.
The stock nosedived and went into a series of lower circuits.
I remembered our old conversation and messaged that investor.
His response was heartbreaking.
He told me that the incident had made him start hating people, society, social media — and even himself. He had trusted the founder more than anything and said he could never have imagined, even in his wildest dreams, that something like this could happen.
That conversation reinforced something I have believed throughout my investing journey:
Management needs to be time-tested.
You Cannot Judge Integrity From an Interview
Management quality is very different from the other factors we analyse.
Revenue can be measured. Debt can be measured. Margins and return ratios can be measured.
Integrity is much harder to measure.
A promoter may appear humble, intelligent and hardworking. He may speak brilliantly in interviews and conference calls. Investor presentations may contain ambitious targets and exciting plans for the next five years.
But none of these things proves how management will behave when circumstances become difficult.
What happens when growth slows?
What happens when debt rises?
What happens when management has to choose between its own interests and those of minority shareholders?
These situations reveal far more about management than a polished interview ever can.
That is why trust should develop gradually.
I Have Missed Multibaggers Because of This Rule
There is a cost to being conservative about management.
I have missed many multibaggers because I wasn’t willing to develop high conviction in a relatively new management team quickly enough.
Sometimes a stock doubled or tripled while I was still watching.
And I am perfectly comfortable admitting that.
Because the same rule has also saved me from losing a substantial amount of capital.
Investors naturally remember the stock they considered at ₹100 that eventually became ₹1,000.
What we often forget are the companies we considered at ₹100 that eventually became ₹10.
Avoiding a disaster can be just as valuable as finding a multibagger.
You don’t need to own every winner to create wealth in the stock market.
You do, however, need to survive your mistakes.
Stories Are Easy. Execution Is Difficult.
Markets love good stories.
A company is entering a huge new market.
Revenue will double in three years.
A new factory will transform profitability.
Exports will take off.
Margins will expand.
Debt will fall.
The opportunity is enormous.
Promoters can tell compelling stories about what their companies might become.
But there is a huge difference between telling a growth story and executing one.
Over the years, I have seen companies make ambitious promises only for reality to turn out very differently.
Expansion gets delayed. Margins fail to improve. Working capital balloons. Debt rises. Cash flows don’t support reported profits. Earlier targets quietly disappear from presentations.
And in more serious cases, allegations of fund mismanagement, questionable related-party transactions or siphoning of money can destroy both businesses and shareholder wealth.
This is why I don’t take management at face value.
Trust is earned through execution, not words.
Let the Numbers Validate the Story
One of the simplest ways to judge management is to compare what it promises with what subsequently happens.
If management says revenue will double in three years, remember the promise and watch the numbers.
If it promises to reduce debt, check the balance sheet later.
If a major expansion is supposed to improve margins, see whether margins actually improve once the project becomes operational.
If management repeatedly talks about strong cash generation, look at operating cash flow.
Of course, businesses operate in an unpredictable world. Targets can be missed for genuine reasons.
One missed target doesn’t necessarily make management unreliable.
What matters is the pattern over time.
Does management generally deliver what it promises?
Does it acknowledge mistakes?
Does it allocate capital sensibly?
Do reported profits eventually translate into cash?
Do words and actions broadly match?
A few quarters can demonstrate growth. Several years begin to demonstrate character.
Start Small and Let Conviction Grow
This is why I prefer to start with a small allocation when investing in a relatively new company or a management team without a long public track record.
There is no rule saying you must build your entire position immediately.
Start small.
Then watch.
Let management execute.
Let the numbers validate the story.
Let cash flows support profits.
Let capital allocation demonstrate discipline.
Let them walk the talk.
If management consistently delivers over several years, confidence can gradually increase.
And so can your allocation.
Yes, you might have to buy additional shares at a much higher price.
That’s perfectly fine.
Sometimes paying a higher price after gaining greater confidence is preferable to taking a large position early based primarily on faith.
Don’t Borrow Someone Else’s Conviction
The incident I described also taught me another important lesson.
Never allow another investor’s conviction to replace your own due diligence.
A famous investor may own the stock.
A respected fund manager may praise the company.
Someone may personally know the promoter and tell you he is one of the most trustworthy people they have ever met.
Listen to them.
Consider their arguments.
But don’t outsource your judgement.
Experienced investors can be wrong.
Analysts can be wrong.
Fund managers can be wrong.
And, of course, we can be wrong too.
Personal reputation should be one input in your assessment — never the foundation of your investment thesis.
Position Sizing Protects You From What You Don’t Know
Even after extensive research, outside shareholders can never know everything happening inside a company.
That makes position sizing extremely important.
You don’t have to choose between investing nothing and putting 10% of your portfolio into a stock.
Start with 1% or 2% if the opportunity looks interesting but management still needs to prove itself.
If execution improves and your thesis strengthens, increase the allocation gradually.
If something goes wrong, the damage remains manageable.
The purpose isn’t to eliminate risk. That’s impossible.
The objective is to prevent one mistake from seriously damaging your portfolio.
Capital Protection Comes First
There is another reason I remain conservative about management risk.
Making money takes years. Losing it can take days.
The mathematics of losses is unforgiving.
A 20% loss requires a 25% gain to recover.
A 50% loss requires a 100% gain.
And if you lose 75% of your capital, you need a 300% return merely to get back to where you started.
This is why protecting capital matters so much.
Investing isn’t simply about maximising your upside.
It is also about avoiding situations capable of permanently destroying capital.
Conclusion: Let Management Earn Your Trust
That conversation with the investor stayed with me.
Here was an experienced investor who had extraordinary confidence in a promoter’s character. He trusted him deeply.
Then something happened that he said he could never have imagined.
It reminded me why I have remained stubborn about this rule for more than two decades:
Management should be time-tested.
Yes, this approach means you will occasionally miss multibaggers.
That’s okay.
Investing isn’t about owning every winner.
There will always be another company and another opportunity.
What matters is protecting your capital and staying in the game long enough to benefit from them.
So don’t blindly trust management because a promoter sounds intelligent, humble or hardworking.
Don’t trust simply because a famous investor vouches for him.
And don’t let an exciting story substitute for evidence.
Start small.
Watch.
Let management execute.
Let the numbers validate the story.
Let them walk the talk.
And as the evidence grows, let your conviction and allocation grow with it.
You don’t have to trust management blindly. Give them enough time to earn your trust.
Because making money takes years.
But losing capital can happen in a matter of days.
