"One way to think about an investment in a public company is as a combination of two bets: a bet on the company’s future and a bet that shareholders will get their share of said future despite a lack of control." That last part seems to be what most people overlook, you are (as Whitman called it) OPMI -- Outside Passive Minority Interest, so you are in a disadvantaged position from the get-go.
I agree with the idea of alignment. That said, not all owner operators treat outside shareholders fairly. I've always wondered why, if this was a persistent factor, nobody had built successful investment products around it. I know of one ETF and I don't think it's outperformed.
This is an interesting idea but I'm not sure I understand the paper. Half of the market value in the US is in the S&P 100, the largest 2% of companies (5,000 or so listed companies in the US?) That means investors as a whole have half their money allocated to just 2% of stocks. So why would it be surprising that 4% of stocks account for all of the return? I feel like I'm missing something obvious...
Yeah, it would be nice to overlay the distributions of returns and market caps. Don't think the dollar value skew is as interesting as the mere fact that 58% of stocks destroyed wealth (though the table with dollar returns by company is also worth reviewing). It's just something to keep in mind when making the choice to actively pick stocks. And I think it's important to remember before 'mentally marrying' any stock the way compounder/quality-focused investors may do. The forces of capitalism are conspiring against your long-term returns on multiple levels.
Sobering. Reminds me of the thought exercise Buffett performs with Todd Coombs. I think you highlighted it once before. There really are only a handful of companies that can compound above 10% for a meaningful period of time.
Munger once commented that if he were to teach at business school, he would do it through charts. He would “try and relate the changes in the graph and in the data to what happened in the business.” That’s a very useful idea and I am surprised there is no central repository with the charts of failed companies
William O'Neill and his disciples (Qullamaggie, David Ryan, Mark Minervini are famous ones) started backwards. They picked the charts of the stocks that made lots of money, quickly and asked: what happened for these charts to be what they are? Fundamentally and 'technically'. And they reverse-engineered the investment method.
And they did the same with stocks that got obliterated, in order to stay away, improve their risk management.
"One way to think about an investment in a public company is as a combination of two bets: a bet on the company’s future and a bet that shareholders will get their share of said future despite a lack of control." That last part seems to be what most people overlook, you are (as Whitman called it) OPMI -- Outside Passive Minority Interest, so you are in a disadvantaged position from the get-go.
Better to use OPM than be the OPM..
Hence why study after study has shown companies run by "owner-operators" have outperformed. OPMI interests become aligned with the managers.
I agree with the idea of alignment. That said, not all owner operators treat outside shareholders fairly. I've always wondered why, if this was a persistent factor, nobody had built successful investment products around it. I know of one ETF and I don't think it's outperformed.
Great essay. Thank you.
Thank you, Paul!
Great essay and could be the title of a book!
Thanks! I'm not sure people like being told they're the patsy but perhaps a title for a chapter 😉
This is an interesting idea but I'm not sure I understand the paper. Half of the market value in the US is in the S&P 100, the largest 2% of companies (5,000 or so listed companies in the US?) That means investors as a whole have half their money allocated to just 2% of stocks. So why would it be surprising that 4% of stocks account for all of the return? I feel like I'm missing something obvious...
Yeah, it would be nice to overlay the distributions of returns and market caps. Don't think the dollar value skew is as interesting as the mere fact that 58% of stocks destroyed wealth (though the table with dollar returns by company is also worth reviewing). It's just something to keep in mind when making the choice to actively pick stocks. And I think it's important to remember before 'mentally marrying' any stock the way compounder/quality-focused investors may do. The forces of capitalism are conspiring against your long-term returns on multiple levels.
Sobering. Reminds me of the thought exercise Buffett performs with Todd Coombs. I think you highlighted it once before. There really are only a handful of companies that can compound above 10% for a meaningful period of time.
Yep, tough to find those persistent outliers. And even the wonderful companies eventually decline or stumble.
Munger once commented that if he were to teach at business school, he would do it through charts. He would “try and relate the changes in the graph and in the data to what happened in the business.” That’s a very useful idea and I am surprised there is no central repository with the charts of failed companies
William O'Neill and his disciples (Qullamaggie, David Ryan, Mark Minervini are famous ones) started backwards. They picked the charts of the stocks that made lots of money, quickly and asked: what happened for these charts to be what they are? Fundamentally and 'technically'. And they reverse-engineered the investment method.
And they did the same with stocks that got obliterated, in order to stay away, improve their risk management.