You May Never Buy A Stock Again After Reading This
By Mike Williams, editor, True Income
Shareholders have been forgotten.
I would know... I grew up in America's Fortune 500 corporations.
I started my career in a multinational bank, picked up the Treasury trade in a multinational manufacturer and a global mining company, and then learned the asset-management business in one of the world's largest oil companies, Standard Oil (which is now part of BP).
I spent 20 years dealing in all sorts of corporate finance - and another 16 years managing pension funds for these sorts of companies. I was in thousands of meetings with managers, senior executives, and board members. They were some of America's finest financial engineers and corporate managers.
Not once in one of these meetings - with all those corporate professionals - did I hear the word "shareholders."
You would think, in all that time, it would be normal to hear the interests of the shareholder discussed at least occasionally. But never once did I hear the chairmen, presidents, executive vice presidents, senior vice presidents, vice presidents, or treasurers speak about the interests of shareholders.
The collective owners of large public companies, the shareholders, have become the "forgotten class." But if shareholders are the owners, how is this possible?
Here's a major reason the shareholder has become invisible in today's world: Corporate managers don't really work for shareholders. It all comes down to incentives...
Managers want to grow a company so they can collect extravagant option packages and bonuses based on the company's share price. This can work well in some cases, but it also encourages managers to make reckless moves with their shareholders' capital. Instead of looking at things like a business owner with his own money on the line, these managers overpay for acquisitions, expand into niches they know nothing about, and operate with a short-term focus... all in the name of growth.
After 40 years of investing, I can tell you operating a company for short-term gains - and blindly focusing on growth - is a terrific way to run it into the ground.
But the individual shareholder has virtually no way to improve this situation. The company has no obligation to pay you, and you have no control over the actions of its managers. The only options you have are to buy or sell the stock. And if the managers get the company into trouble, you are the first in line to lose your investment and the last in line to be paid.
But you have an alternative to being the bagman... Put yourself first in line to get paid. Own the company's bonds.
When a corporation needs money to pay bills, expand, or upgrade equipment, it can use cash coming in the door, issue stock (also called "equity"), or issue debt (also called "bonds").
As an owner of a company's common stock, you "share" in its future profits. If a company you own stock in grows its profits by a factor of 10 over a few years, your stock will probably be worth a lot more than your original purchase price.
Now, as a bondholder, you have no claim on the company's profits. You are simply loaning money at a set rate for a predetermined period of time. But you are entitled to get all your money back or more (if you buy below face value) plus interest payments according to the terms of your agreement.
Most people find it incredibly difficult to consistently select stocks that grow their profits (and stockholders' equity) over a long period of time. For every huge success like Starbucks or Home Depot, there are scores of bankrupt dreams. And when a company goes bankrupt, the stockholders can lose every cent they have in the company.
I love being a bondholder. In the event the company gets into trouble, the bondholders are at the head of the line when it comes time to pay bills or creditors. And in the event of an all-out bankruptcy, the assets of the company are sold, and the proceeds are paid to the secured creditors and bondholders.
The managers cannot get around this. The company must pay you, or you can declare a default and put it into bankruptcy. No matter what happens to the company, every day you earn interest. Twice a year it must pay you.
I think most stock investments are far too risky for the average investor. I don't gamble with my retirement... and I don't think you should either. Most of the time, it's not worth joining this "forgotten class."
I much prefer to know when, how, and exactly how much I'm going to get paid. I also like to have a great deal of certainty I'm going to make outsized returns year after year. That's why I buy bonds.
Good investing,
Mike
Editor's note: Mike Williams is a Chartered Financial Analyst who has helped thousands of regular Americans secure more money for retirement. But Mike hasn't bought a stock in 13 years.
By Mike Williams, editor, True Income
Shareholders have been forgotten.
I would know... I grew up in America's Fortune 500 corporations.
I started my career in a multinational bank, picked up the Treasury trade in a multinational manufacturer and a global mining company, and then learned the asset-management business in one of the world's largest oil companies, Standard Oil (which is now part of BP).
I spent 20 years dealing in all sorts of corporate finance - and another 16 years managing pension funds for these sorts of companies. I was in thousands of meetings with managers, senior executives, and board members. They were some of America's finest financial engineers and corporate managers.
Not once in one of these meetings - with all those corporate professionals - did I hear the word "shareholders."
You would think, in all that time, it would be normal to hear the interests of the shareholder discussed at least occasionally. But never once did I hear the chairmen, presidents, executive vice presidents, senior vice presidents, vice presidents, or treasurers speak about the interests of shareholders.
The collective owners of large public companies, the shareholders, have become the "forgotten class." But if shareholders are the owners, how is this possible?
Here's a major reason the shareholder has become invisible in today's world: Corporate managers don't really work for shareholders. It all comes down to incentives...
Managers want to grow a company so they can collect extravagant option packages and bonuses based on the company's share price. This can work well in some cases, but it also encourages managers to make reckless moves with their shareholders' capital. Instead of looking at things like a business owner with his own money on the line, these managers overpay for acquisitions, expand into niches they know nothing about, and operate with a short-term focus... all in the name of growth.
After 40 years of investing, I can tell you operating a company for short-term gains - and blindly focusing on growth - is a terrific way to run it into the ground.
But the individual shareholder has virtually no way to improve this situation. The company has no obligation to pay you, and you have no control over the actions of its managers. The only options you have are to buy or sell the stock. And if the managers get the company into trouble, you are the first in line to lose your investment and the last in line to be paid.
But you have an alternative to being the bagman... Put yourself first in line to get paid. Own the company's bonds.
When a corporation needs money to pay bills, expand, or upgrade equipment, it can use cash coming in the door, issue stock (also called "equity"), or issue debt (also called "bonds").
As an owner of a company's common stock, you "share" in its future profits. If a company you own stock in grows its profits by a factor of 10 over a few years, your stock will probably be worth a lot more than your original purchase price.
Now, as a bondholder, you have no claim on the company's profits. You are simply loaning money at a set rate for a predetermined period of time. But you are entitled to get all your money back or more (if you buy below face value) plus interest payments according to the terms of your agreement.
Most people find it incredibly difficult to consistently select stocks that grow their profits (and stockholders' equity) over a long period of time. For every huge success like Starbucks or Home Depot, there are scores of bankrupt dreams. And when a company goes bankrupt, the stockholders can lose every cent they have in the company.
I love being a bondholder. In the event the company gets into trouble, the bondholders are at the head of the line when it comes time to pay bills or creditors. And in the event of an all-out bankruptcy, the assets of the company are sold, and the proceeds are paid to the secured creditors and bondholders.
The managers cannot get around this. The company must pay you, or you can declare a default and put it into bankruptcy. No matter what happens to the company, every day you earn interest. Twice a year it must pay you.
I much prefer to know when, how, and exactly how much I'm going to get paid. I also like to have a great deal of certainty I'm going to make outsized returns year after year. That's why I buy bonds.
Good investing,
Mike
Editor's note: Mike Williams is a Chartered Financial Analyst who has helped thousands of regular Americans secure more money for retirement. But Mike hasn't bought a stock in 13 years.
No comments:
Post a Comment