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Author: captainccs Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 41614  
Subject: Debunking Stock Market Myths Date: 8/25/2007 7:37 PM
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First of a series...

Invest like an owner

That sure sounds grand. As an owner you not only put up your money, you also put up your expertise, your Rolodex, your club memberships, your Alma Matter connections, even your church and your political party.

Now, let's see, I'm buying 200 shares of Coca Cola. How can I contribute to the company as an owner? The other day I saw something that was bothering me and I fire off an email to investor relations. Nine out of ten times I'm ignored and the tenth time I'm brushed off with some inconsequential reply. So much for my expertise, Rolodex, club memberships, Alma Matter connections, church and political party.

Very often management is accused of ignoring the long term and focusing on the most recent quarter under pressure from the market for the stock to perform. Clearly, if the market would just not focus on the near term but in ten years out, management would be able to do a better job of managing. Maybe so and in the mean while the stock languishes and I'm happy contemplating the future that might never arrive. Sure! Not even employees who get stock options think as owners. They see the options as a reimbursement for services rendered, otherwise they would not flip them on receipt.

There is a fundamental difference between a hands-on owner and a provider of capital. Capital is just one more input like coal, labor, or real estate. Each provider wants to get paid for the product or service rendered and capital is no different in that respect. The one difference is that most providers submit an invoice for the product or service rendered but shareholders cannot except at IPO. At all other times, the shares are just playing musical chairs and the trades have no effect on the company the exception being when a shareholder accumulates sufficient shares to make the BOD uncomfortable because he is now becoming a "real" owner as opposed to just a provider of capital. For this audacious fellow there are poison pills, golden parachutes and other gimmicks to keep this barbarian from storming the gates.

Odd as it may seem, when you buy a few hundred shares of a company, you are not affecting the company in any direct way. All that you are doing is building up a reservoir of capital that any company can drink from at the right price. And the BMW Method says it implicitly, as soon as the shares get to the right level, flip them! What you are interested in is your personal CAGR, nothing more, nothing less. Leave "ownership" to the fellows with sufficient money to get a seat on the BOD.

Denny Schlesinger
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Author: BuildMWell Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26543 of 41614
Subject: Re: Debunking Stock Market Myths Date: 8/25/2007 8:02 PM
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"Now, let's see, I'm buying 200 shares of Coca Cola. How can I contribute to the company as an owner?" - Denny Schlesinger

Denny, I look at my ownership position as that of an absentee owner. I am too busy and my time is too valuable to get involved with the day-to-day operations. I pay the Board and CEO to handle the mundane, boring details for me. I know the business would be better off if I ran things but, I need my space. After all, I am retired.

"The other day I saw something that was bothering me and I fire off an email to investor relations. Nine out of ten times I'm ignored and the tenth time I'm brushed off with some inconsequential reply." - Denny Schlesinger

I ran into this with Duke Energy. I live just a short distance from the headquarters building and was silly enough to think that because I personally know some Duke executives that I might get a reply to my letter. Of course none of my acquaintences works in investor relations. After two follow-ups, I just gave up. This led me to realize that I was definitely an absentee owner. They certainly can do without my guidance. That is good because the younger chaps need to learn to fend for themselves. Duke seems to be doing quite well without my help.

If I get really pissed off I will sell my position and really show them by unleashing the wrath of The BuildMWell Company's powerful influence. But, for the time being I will ride Duke's CAGR gains.

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Author: zenbro Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26547 of 41614
Subject: Re: Debunking Stock Market Myths Date: 8/26/2007 7:52 AM
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First of a series...

Keep 'em coming, Denny.

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Author: MadCapitalist Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26552 of 41614
Subject: Re: Debunking Stock Market Myths Date: 8/26/2007 12:11 PM
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First of a series...

Invest like an owner


The advice should be "Think like an owner" instead of "Invest like an owner."

Here is what the world's greatest investor (Warren Buffett, not BuildMWell) had to say:
“The art of investing in public companies successfully is little different from the art of successfully acquiring subsidiaries. In each case you simply want to acquire, at a sensible price, a business with excellent economics and able, honest management. Thereafter, you need only monitor whether these qualities are being preserved.”
1996 Letter to Berkshire Hathaway shareholders
http://www.berkshirehathaway.com/letters/1996.html

Think about it.

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Author: captainccs Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26557 of 41614
Subject: Re: Debunking Stock Market Myths Date: 8/26/2007 6:19 PM
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Think about it.

MadCapitalist


Believe me, I have. Otherwise I would not have written the post. My standard procedure is to think first and write afterwards. Sometimes, after writing, I put the piece away to give me time to think about it some more before making it public. On occasion, after thinking about it a second time, I will tear up the draft or erase the file because the piece did not withstand my re-thinking.


“The art of investing in public companies successfully is little different from the art of successfully acquiring subsidiaries. In each case you simply want to acquire, at a sensible price, a business with excellent economics and able, honest management. Thereafter, you need only monitor whether these qualities are being preserved.”

Where does this quote say that you should think one way or the other, like an investor or an owner?

I have studied Buffett's management style where it comes to subsidiaries and he is, as the quote says, a very hands-off manager. But when it comes to buying subsidiaries, Buffett thinks like the owner of Berkshire Hathaway, in other words, like the master investor he is. Why do I say that? Because I'm convinced that Buffett's main goal is to accumulate "float" to use to invest in even more businesses. Buffett is hands-off in the daily running of the subsidiaries but he strips them bare of any unnecessary working capital so that he can use it to invest elsewhere. This is a lesson he learned from Berkshire Hathaway, the cotton mill. When the business went south, Buffett stripped it of working capital and used that money to make investments elsewhere. It worked so well that he has been doing it even since with every private acquisition he has made.

Interestingly enough, the buy side of the BMW Method is quite similar to the Buffett quote: "In each case you simply want to acquire, at a sensible price, a business with excellent economics and able, honest management." Where they part company is over the next sentence: "Thereafter, you need only monitor whether these qualities are being preserved." The BMW method, in addition, monitors the price to see when it is ripe for selling.

Denny Schlesinger

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Author: MadCapitalist Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26558 of 41614
Subject: Re: Debunking Stock Market Myths Date: 8/26/2007 6:22 PM
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I have studied Buffett's management style where it comes to subsidiaries and he is, as the quote says, a very hands-off manager. But when it comes to buying subsidiaries, Buffett thinks like the owner of Berkshire Hathaway, in other words, like the master investor he is.

The point is that Buffett values a company from an owner's perspective whether he is buying the company outright or buying publicly traded stock. I thought that it was pretty obvious from the quote, and if it wasn't, your research about Buffett should have told you that.

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Author: captainccs Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26559 of 41614
Subject: Re: Debunking Stock Market Myths Date: 8/26/2007 6:33 PM
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The point is that Buffett values a company from an owner's perspective
MadCapitalist


That's the conventional wisdom the Buffett arduously cultivates. I believe that Buffett's motivation is the accumulation of float as I said in my previous reply.

Denny Schlesinger

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Author: MadCapitalist Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26561 of 41614
Subject: Re: Debunking Stock Market Myths Date: 8/26/2007 7:23 PM
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The point is that Buffett values a company from an owner's perspective
MadCapitalist


That's the conventional wisdom the Buffett arduously cultivates. I believe that Buffett's motivation is the accumulation of float as I said in my previous reply.


While he takes advantage of float, that doesn't tell us anything about how he values businesses.

Since you are such an expert on Buffett, maybe you could tell us how Buffett distinguishes between acquisitions and buying publicly traded stocks in terms of his valuation process.

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Author: captainccs Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26562 of 41614
Subject: Re: Debunking Stock Market Myths Date: 8/26/2007 7:50 PM
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Since you are such an expert on Buffett, maybe you could tell us how Buffett distinguishes between acquisitions and buying publicly traded stocks in terms of his valuation process.
MadCapitalist


Plenty has been written about Buffett's valuation methods and I don't have anything fresh to add to that volume of lore. And I don't think that it makes any difference to the topic of this thread which is the myth: "Invest like an owner." When you buy an asset you have to put a value on it to determine if the ask price is "reasonable." Both owners and investors have to do that.

Denny Schlesinger

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Author: MadCapitalist Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26563 of 41614
Subject: Re: Debunking Stock Market Myths Date: 8/26/2007 8:15 PM
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When you buy an asset you have to put a value on it to determine if the ask price is "reasonable." Both owners and investors have to do that.

Denny Schlesinger


Yes, both owners and investors have to do that, but they don't necessarily do it with the same method. An owner values a business. Investors don't necessarily value a business unless they think like an owner.

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Author: ExtendedEffort Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26568 of 41614
Subject: Re: Debunking Stock Market Myths Date: 8/27/2007 2:03 PM
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There is a fundamental difference between a hands-on owner and a provider of capital.

Denny,

You may have elaborated more on this further in the paragraph but I wanted to add that even if you bought a huge amount of shares on the open market, you are not a provider of capital unless these are new shares. Your gazillion dollar investment does not go into KO's treasury. They got all the capital they would ever get when they offered up the shares.

You are right that once your holdings reach a certain critical mass, you may have voting powers, but let's not lose sight that investing in company shares does not add to their coffers. Put fresh money into their treasury and you may have more influence.


LNT

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Author: mklein9 Big gold star, 5000 posts Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26575 of 41614
Subject: Re: Debunking Stock Market Myths Date: 8/28/2007 12:31 AM
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but let's not lose sight that investing in company shares does not add to their coffers.

Not directly, but if their shares continue to be in high demand, then the company's cost of equity capital stays low, i.e. they can expect good prices for newly issued shares. This is a trivial effect when one individual investor buys a few hundred or thousand shares, but an important one when that is multiplied by many thousands of investors. And with micro caps, the effect may not even be that trivial. The impact of buying existing shares on lowering a company's WACC can probably be quantified by someone with better math than me, and probably has been done. It would be interesting to see how that looks vs. buying the same number of newly issued shares at the current market price.

-Mike

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Author: captainccs Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26576 of 41614
Subject: Re: Debunking Stock Market Myths Date: 8/28/2007 1:06 AM
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Mike:

The effect is dramatic when the company can buy other companies with overpriced shares. Cisco is an example of companies that grew like weeds by conglomerating with overpriced shares.

Denny Schlesinger

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Author: BuildMWell Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26580 of 41614
Subject: Re: Debunking Stock Market Myths Date: 8/28/2007 8:02 AM
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"The effect is dramatic when the company can buy other companies with overpriced shares. Cisco is an example of companies that grew like weeds by conglomerating with overpriced shares." - Denny Schlesinger

I agree. I believe the effect is the underlying force behind major mergers and acquisitions also. The size of the corporation is not as much of a factor as the relative positions of the CAGRs.

If company A has seen it's share price drop to ridiculous lows because Mr. Market has over-sold the shares due to some short-term problem, that company becomes a take-over candidate.

Mwanwhile, compnay B has seen Mr.Market bid up it's shares because management has over-sold the future earnings. How can management cover up their paux pas AND solve the earnings problem at the same time? Easy answer...they buy company A if the ability to improve their own CAGR existes. Earnings are earnings just as dollars are dollars.

So, Company B offers to buy Company A's stock at above the low price which immediately drives the price up, but not above the still too low CAGR level. Company A is already solving the management's dilemma that they created by over hyping the company to the unsuspecting public.

Now, the knowlegable owners of Company A will vote to decline the offer because they know that they are being robbed by the management of Company B. However, the scared and much poorer shareholders of Compnay A will almost always win and the deal will go through. I point to Doral as my first example. I can tell close to a hundred such stories, but you folks are lucky. Doral will also be my last example today.

Whenever I hear of such a deal, I merely draw the CAGR charts and the truth usually jumps out at me. COMCAST buying Disney comes immediately to mind. OOPS! That is another example and I was not going to go there.

The big question in these situations is, can Company A's real value really help to solve Company B's problems? It all depends on the real value of Company A. I will go into this in more detail at the Raleigh BMWM conference.

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Author: mklein9 Big gold star, 5000 posts Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26596 of 41614
Subject: Re: Debunking Stock Market Myths Date: 8/28/2007 2:03 PM
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The effect is dramatic when the company can buy other companies with overpriced shares. Cisco is an example of companies that grew like weeds by conglomerating with overpriced shares.

Yes, great point. Nobody had to buy newly issued shares to make that happen, and Cisco's WACC was insanely low.

-Mike

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Author: jfrich One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26637 of 41614
Subject: Re: Debunking Stock Market Myths Date: 8/30/2007 5:11 PM
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I agree. A shareholder is not in the same position as an owner, so I believe it is poor analysis to think like an owner. As a shareholder you have so little control over what the company does, unlike an owner, there are lots of other considerations you should add to the equation, like diversification. Also as a shareholder, the company probably does not bear your name, embody your life's dreams, nor manifest your desires in its actions. Assuming you like what you are buying today, unlike an owner, you have little direct influence over what you own tomorrow.

Suggestion for future topic: buy companies of products you like. 1) Good products don't guarantee success. 2) Need to consider valuation. 3) By the time you know of it, it is probably already discovered and fairly valued.

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Author: Metal27 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 26702 of 41614
Subject: Re: Debunking Stock Market Myths Date: 9/2/2007 2:22 AM
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As an owner you not only put up your money, you also put up your expertise, your Rolodex, your club memberships, your Alma Matter connections, even your church and your political party.

Not to mention your time, reputation, credit, maybe even your wife and family! I have been a founder/owner (though our company is private) as well as an investor and I'll take investor every time. An owner makes a long-term commitment and undertakes responsibilities--to employees, customers, shareholders. No stock investor is required to make similar commitments or take on similar responsibilities. Owners can't quit if they are worth their salt.

Investors can and do sell out at any time. They may lose money but that is all they really have at risk. That is the best part of being an investor--I have no responsibilities to anyone but myself.

Cheers,

Scott
(looking forward to your next installment!)

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