I often take the Amtrak train back to my hometown in New England and sometimes I'm fortunate to sit beside some pretty interesting people. Incidentally, on one trip the Deputy Comptroller of Citigroup sat beside me for nearly 6 hours and for a good 5.5 hours of that trip we were talking. At the time I was working at AIG and I mentioned that I was an equity analyst. The next thing he said was the main thing I remembered about that 5.5-hour conversation: "What is the most important thing to consider when buying a company's stock?"

Now this question took me aback because I never thought to consider one end-all, be-all answer to evaluating a stock. There are tons of ratios to examine, charts to ponder, earnings results for the past few years - how could I arrive on one single factor? 

Before I could conjure up an answer he gave me the answer: "Management." He was referring of course to the CEO and all of the upper executives, but what exactly about them? He said, "You need to know and understand the competence of the company's management; if they are incompetent then the company is doomed no matter how good the company looks on paper."

I didn't fully believe this until I saw it put in action.

During a large investor conference in Dallas, I met the management team of a particular real estate company involved in the branding and expansion of malls. The company itself was not very large compared to its competitors and so managers made a massive push to add as many new retailers as deals were made available. One of the stores they talked about adding was a mid-grade retailer that I knew for a fact was a lousy store and could not believe they were thinking about adding one of those stores. One of the other analysts in the room asked, "So what does that store sell?" The CEO laughed and threw his hands in the air and said, "How the heck should I know?"

At this point I smacked my palm into my face. Was I the only one in the room to understand how dumb and unsettling that statement sounded? If this CEO doesn't even know what this major anchor store sells, what ELSE doesn't he know about his own company??

Incompetence at the management level is a serious problem among many publicly traded companies and more often than not results in weak performance of the company's stock. Nowhere is this more evident that Abercrombie & Fitch (ANF), which had suffered greatly after hiring Michael Jefferies at the company's CEO. Jefferies was, in my humble opinion, a lousy human being in addition to a lousy manager. The man is hideous-looking himself, and yet refused to address the issue that A&F's clothing was just too small and skimpy for most teenage girls. Instead of taking the opportunity to double the company's consumer base, he chose instead to say that it wasn't his fault that everyone is fat. On top of it, he would hire employees to go to local their local Salvation Army and collect all of the A&F clothing to ultimately be taken back to the company and burned because he could not stand the thought of his company's clothing on poor and homeless people.

Great guy, huh?

Well fortunately there is a God and the Board of Directors got sick of his BS and officially kicked Jefferies out as CEO. What a surprise: A&F's stock soared by over 8.0% that day.

Let this be a lesson to all investors: the company may have a great product or service, but if the CEO is an idiot, the company will be doomed unless someone new is put in charge. Pay attention to the business and personal actions of upper management in all of your stock holdings: if their actions look questionable, get out of that stock.