What’s good for an investor is good for a business—and vice-versa!
Having invested in many companies and followed thousands more (plus the market as a whole) for over three decades, I have come to realize that what is good for a business is always what is good for an investor.
When I hear the management team of a company try to game investors to get their stock price up by either spinning bad news to make it seem “ok,” or by avoiding it altogether, it becomes obvious they view investors as a necessary evil or a tool to be used for their own advantage.
There are lots of examples of great companies, small and large, who have made it a part of their business culture to be aligned with shareholders. Some examples are,
- Wal-Mart
- Starbucks
- Kinder-Morgan
- Coca-Cola
- GE
Being aligned with shareholders isn’t just about communicating with investors, insider ownership or even compensation. There are many factors that create value for shareholders, from strategy to operations and marketing to finance, etc. The companies listed above have had great founder leaders like Sam Walton, Howard Schultz, Richard Kinder as well professional managers like Roberto Goizueta and Jack Welch. The common denominators of enduring success are less about the circumstances they found themselves in and more about their vision, leadership and operational skill. It is those latter qualities that allow businesses to bounce back from tough economic times as well as business missteps, which are likely to occur even in the greatest of companies. As examples:
- Berkshire Hathaway, led by Warren Buffet, has declined by more than 50% three times.
- Apple Computer, during the Steve Jobs-led turnaround, rose from @ $6 to $30/share only to decline to $12 after missing expectations. That was ok, as it then rose inexorably to over $700 per share to become the most highly valued company in the world.
- Amazon’s bubble was burst in the year 2000 and declined from over $100 to below $6, and is now trading $316 per share.
Spotting Good Investments
So how does one know when to hold and when to fold them? I personally think Phil Fisher, who probably had a better record of making those choices than any investor in history, said it all in “Fifteen Points to Look for in a Common Stock” from his book Common Stocks and Uncommon Profits. In fact, Phil said a company must qualify on most of the 15 points to be considered a worthwhile investment. The trouble is, few do.
In founding and leading Okyanos, I have kept these points firmly in mind.
Here are the 15 points to look for in a common stock:
1. Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years? A company seeking a sustained period of spectacular growth must have products that address large and expanding markets.
2. Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited? All markets eventually mature, and to maintain above-average growth over a period of decades, a company must continually develop new products to either expand existing markets or enter new ones.
3. How effective are the company’s research and development efforts in relation to its size? To develop new products, a company’s research and development (R&D) effort must be both efficient and effective.
4. Does the company have an above-average sales organization?
5. Does the company have a worthwhile profit margin? A company can show tremendous growth, but the growth must bring worthwhile profits to reward investors.
6. What is the company doing to maintain or improve profit margins?
7. Does the company have outstanding labor and personnel relations?
8. Does the company have outstanding executive relations?
9. Does the company have depth to its management?
10. How good are the company’s cost analysis and accounting controls?
11. Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition?
12. Does the company have a short-range or long-range outlook in regard to profits?
13. In the foreseeable future will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholders’ benefit from this anticipated growth?
14. Does management talk freely to investors about its affairs when things are going well but “clam up” when troubles and disappointments occur? Every business, no matter how wonderful, will occasionally face disappointments. Investors should seek out management that reports candidly to shareholders all aspects of the business, good or bad.
15. Does the company have a management of unquestionable integrity? “If there is a serious question of the lack of a strong management sense of trusteeship for shareholders, the investor should never seriously consider participating in such an enterprise.”
Let me know what you think!
Matt,
Good blog/article. Any an all information like this thst you can share is greatly appreciated. Thanks
Joe
Matt – Very informative article. I am taking a course in ForEx ( http://www.learncurrencytradingonline.com/ ) in order to increase my money flows, increase my income, etc., so as to have more funds available for travel, the finer things of life, church donations, etc. What is your opinion of trading currency in the foreign exchange markets (ForEx)? Cheers! {:-)) Steve Downing
Great article. I think it is very valuable to see these points highlighted as extremely important by someone who’s had success in the field himself (Matt Feshbach).