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stock ownership
The History of the Stock Market: A 5-Word Story
The entire history of the stock market fits into five simple words: it goes up and down. We can’t know the schedule ahead of time, and this can stir up some stress in the short term. But it seems reasonable to guess this whole “up and down” thing may persist.
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What Rough Seas Wash Up
Back in the snowbird chapter of my life, we learned that looking for shells was always more fruitful when the weather had been rough. The world situation and our markets have been nothing if not stormy this year! What has come out of the churn so far?
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The Magic Pie: What stock ownership actually means
Duck Season! Rabbit Season! Earnings Season!
Maybe you’ve seen the classic cartoon that goes like this: Bugs Bunny and Daffy Duck, chased by the hunter Emler Fudd, start arguing over which animal Elmer is supposed to be hunting.
“Duck season!” Bugs yells.
“Rabbit season!” Daffy insists. And they continue back and forth until Bugs cleverly switches his response to “Rabbit season!” At this point Daffy Duck counters with the only logical response… “Duck season!”
And Elmer promptly shoots his foolish prey.
There is another, equally confounding (and sometimes comical season) you may have heard about: “Earnings season!”
Every company that issues publicly-traded stock is required by law to report about its financial wellbeing to investors and regulators, once every quarter. While every company has its own fiscal calendar and different companies report at different times, most companies stick to straightforward calendar quarters so major earnings reports tend to bunch together every three months.
In theory, the effects of this should be simple for investors: a company that posts a good performance should logically see stock gains, and a company that posts a poor performance should see stock losses.
But investors tend to view earnings reports through the lens of their expectations. A company that does well might be seen as a disappointment by investors who expected even better from it. And even when a company beats consensus expectations, some investors may second-guess the consensus and bet on an even bigger blowout.
All of this is to say that earnings season can be a very volatile time. Stock prices often swing wildly up and down in response to earnings reports, often in ways that are confusing or counterintuitive. If you listen to market commentary you may hear many different (often contradictory) explanations for why a company dropped on seemingly good earnings or rose on seemingly bad earnings.
It is a confusing experience, and trying to make sense of stock moves during earnings season might make you sympathize with Elmer Fudd.
While it can be alarming to witness stocks jump like this in the middle of earnings season, over the long run, much of that volatility will be forgotten. Ten years from now, do you think you will remember what one of your stock holdings did in response to one earnings report many years ago? The big investment news stories worth remembering will be about bigger news than a quarterly earnings report.
We already know stock investing involves volatility—and some of it comes around like clockwork every three months. Clients, if you are ever wondering about sudden market moves, give us a call before anybody goes daffy.
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Play the audio version of this post below:
Duck Season! Rabbit Season! Earnings Season! – 228Main.com Presents: The Best of Leibman Financial Services
This text can be found at https://www.228Main.com/.
The Twenty Stock Concept: A Deep Dive
Clients, you know that our communications are you-centric: we prefer to focus on the situations, challenges, and concerns facing you. But from time to time it makes sense to talk about the tools and techniques we use to meet those issues. Let us give you some background and then introduce a strategy that’s become an important tool in portfolio reviews: the Twenty Stock Concept.
There are many ways to invest for the long haul, and we strive to participate in the growth of the economy over time. Many people’s financial objectives require the growth of capital, whether to improve their financial position, build toward retirement, or preserve purchasing power.
We manage individual stocks for people (which, by the way, is one of the services that sets our shop apart). Because we prefer to invest in the ownership of carefully chosen companies rather than buy investment products made of hundreds of holdings, it’s become more and more important for us to develop a systematic and efficient way to monitor and adjust portfolios over time.
At any given time, our Buy List includes 30 to 35 equity opportunities, which we supplement with more diversified ballast holdings. Client accounts may then wind up with even more names in them, as sometimes positions are held even after they’ve rotated off the Buy List. Doing it this way creates a lot of moving parts…
… which is where the Twenty Stock Concept comes in! This strategy helps us pare things back to only those parts of our investment philosophy that we feel are most fundamental. This list of holdings becomes the template from which we work for new portfolios and for reviews of existing portfolios.
The foundation of the Twenty Stock Concept is great companies trading at fair prices. These are usually blue-chip companies that dominate their sectors. They are our first picks, and we expect to hold them for a long time. We usually have 10 to 12 of these blue chips on our list.
To round out the list, we select what we perceive to be the best opportunities from the rest of the Buy List. These will include cyclical companies that we hope and believe we are purchasing at favorable points in the cycle. The rest of the opportunities may include other bargains from anywhere else in the investment universe.
Because the Twenty Stock Concept is a starting place, a template, not all of our holdings are fundamental enough to make the cut.
What gets left out? Our main investment approach also includes a handful of speculative growth-seeking holdings. Some of these may be smaller, unproven companies that we see explosive potential in. Others are regional or sector plays in areas that may or may not pan out. We think there is a place for these holdings—otherwise we would not have them to begin with. But some clients may not need or want the turnover and volatility they bring.
As an in-house system, the Twenty Stock Concept serves two functions for us: it allows us to provide a focused offering for those who prefer to own a smaller number of names, and it gives us a consistent approach that we makes our services available to smaller accounts than we would otherwise have the capacity to manage.
No guarantees, of course. We base our work on our opinions; no matter how carefully we do our research, sometimes the future confounds us.
But it is intensely interesting, and often rewarding. Clients, if you would like to talk about this or anything else, please email or call.
Investing involves risk including loss of principal.
No strategy assures success or protects against loss.
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Play the audio version of this post below:
The Twenty Stock Concept – 228Main.com Presents: The Best of Leibman Financial Services
This text is available at https://www.228Main.com/.
Defining Our Terms: Who Is “the Investor Class”?
Theorists who study classes—whether they are economic, social, or political classes—have to be particular about the definitions and assumptions that inform their work. Without getting on the same page first, phrases like “middle class” would tell us practically nothing (except that maybe members are above some lower class and below some upper class?).
We’ve recently been reminded of a term that’s now a few decades old: people talk about “the investor class,” or the group that has access to and takes advantage of stock ownership.
In the past, the push to grow this “class” had political motivations. (The thinking went that if more of the electorate participated in the stock market, those voters would develop a new appreciation for certain policy goals regarding wealth and business.)
So what defines this group, today? Who is “the investor class”?
We can’t speak for all shops, but we already know who our clients are. The portion of the “investor class” we work with is made up of, well, retirees and workers and truck drivers and executives and nurses and engineers and young teachers and former teachers and accountants and statisticians.
They are married couples and widows and single people. They live in the Midwest and outside the Midwest.
Some went to college. Some went beyond college. Some are high school graduates.
Some start their investment journey with traditional pension plan contributions. Some start later in life when a sudden windfall arrives.
Some like saving. Some like spending.
At first glance, this may seem to be a poorly defined group. But hey… we’re talking about the work of growing your buckets, not anthropology or sociology.
One characteristic does give structure to our definition of “the investor class”: this group’s members are those people in the best position to profit from it over the long haul. In this niche market of the mind, we share a desire to own a piece of the action, in the form of shares of common stock, from nearly all sectors of the economy.
Interested in this special but not-so-exclusive club? The barriers for entry have never been lower, and we’re glad to try to help anybody who wants to be here.
Let’s talk: please email us or call.
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A Share of What?
Some people invest in common stock without even knowing what the company does. To them, a stock is price on a screen that can be bought and sold minute by minute—day-trading, they call it. Those people study price charts, not financial statements.
At the other end of the spectrum, investor Warren Buffett understands that a share of stock is a piece of a business—a share in an enterprise. He once said it would not bother him if they closed the stock market for ten years: he is happy to own percentages of businesses.
We suspect that many of you have an understanding that is somewhere in between these two views. We would like to offer you a little more perspective on what ownership is, and what it means.
Recently, in analyzing a company many of you own, we broke it down to what $1 invested represents. We’ll call it Company X, the leader in its industry, a blue chip company.
$1 invested today, whether you just bought in or paid half that amount some years ago, represents a certain amount of revenues—sales of goods by the company. It also represents a share of income and dividends (cash paid to shareholders).
Each dollar of ownership value in Company X represents 32 cents worth of revenues this year. After expenses, the company’s net income for the year will be between seven and eight cents per dollar of today’s stock value. If the Board of Directors continues to approve quarterly dividends at the recent rate, each dollar of stock value will get close to 3 cents in cash dividends.
For long term owners, this year’s results are of interest but the outlook for the future has a large impact on how the stock price will change. For this reason, we seek to understand the relative value today, but also the potential for the company to reap its share of future growth in the American or global economy—to increase its revenues, income, and dividends.
This work is totally captivating, if you are us. Clients, many of you have told us this is why you hire us—your interests lie elsewhere. They say it takes all kinds to make a world; we’re glad to know your kind. If you’d like to talk about this or anything else, please call or email us.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Stock investing involves risk including loss of principal.
The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.
Heavy is the Head that Wears the Crown
Pop quiz: if Joe Smith from Detroit works for General Motors, who is at the top of his chain of command? His boss’s boss’s boss’s boss, in other words? (I pick GM as a random example, but this exercise is true of any publicly traded company.)
If you own any shares of General Motors, the answer is you, personally. Makes you feel pretty important, right?
Of course, there are some caveats. General Motors has over 1 billion shares of stock floating around, and this is not an unusually large amount for an exchange-listed company. If you only own, for example, 1 share of GM stock you have less than a one-billionth part of the collective ownership authority over the company. Still, as a stockholder you are entitled to a have a proportionate voice in how the company is run, however small that voice may be. It is a powerful idea, and this idea of shared ownership is a cornerstone of our modern economy and way of life.
The most visible parts of your rights and responsibilities as a shareholder are, inevitably, the proxy voting materials that you may periodically receive as a stock owner. Your shares entitle you to vote on the company’s board of directors, as well as other significant decisions that the company may make from time to time.
For smaller investors such as you or I, shareholder materials can sometimes be more of a nuisance than anything else. Even if we got together with all of our clients and voted together as a bloc, we still would not command enough shares to influence a shareholder vote much. Moreover, we would generally want to stick with the default recommendation of the company management. If we disagreed with the job management was doing, we would not want to invest in the company in the first place! There are sharks out there in the investment world that look to gobble up companies and take over their management, but in here we are all pretty small fish—we just look for successful companies that we can swim along with. Most of the time, we are content to leave shareholder decisions up to the big fish.
That said, it does happen occasionally that a vote or shareholder election comes up that may have some effect on you personally. We keep an eye on what shareholder materials get sent out so that we can get in touch if something comes up that you ought to act on.
The bottom line is that the privileges of stock ownership can wind up translating into a lot of mail, and it can be difficult to sort through it all sometimes. Clients, if you receive any shareholder communications that you do not understand, please do not hesitate to pick up the phone or email us for help making sense of it.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Stock investing involves risk including loss of principal.
Renting the Oil Company
We all seem to know intuitively that rent on a residence covers all the expenses of ownership, plus a profit for the landlord. Hence most people prefer to own their homes rather than pad the landlord’s wealth.
And yet when we buy a gallon of gasoline, we are paying all of the oil company’s expenses plus a profit for their owners. We pay the cost of refining crude oil into gasoline, transporting it to retail locations, or running the store at which we purchase the gasoline. Not to mention the cost of exploring for and pumping the crude oil and shipping it to refineries.
But if we own a piece of the action (in the form of shares of common stock) in an oil company, we indirectly own a share in the oil wells and refineries and transportation and everything else needed to put a gallon of gasoline within our reach. Own or rent? We prefer to own—and by the way, if you prefer to rent, thank you for doing business with our oil company!
We and our clients own phone companies and clothing manufacturers and car makers and raw material producers and major retailers and airlines and nearly every other segment of the economy. From the time we wake up and brush our teeth, put on clothes, go to factories and shops and offices, use energy through the day… we are doing business with ourselves. We are owners, not renters.
It is our opinion that a person who owns no common stock or other business rents everything: the refineries, auto manufacturers, food distributors, trains and planes, communications networks. They are paying rent for everything that goes into their life, without receiving any benefits of ownership.
Rent or Own? You might want to own shares of companies for the very same reason you prefer to own your home. We are available to discuss whether this philosophy fits into your plans and planning—call or write.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Stock investing involves risk including loss of principal.
Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.
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