When it comes to bad ideas, finance certainly offers up an embarrassment of riches – CAPM, Efficient Market Hypothesis, Beta, VaR, portfolio insurance, tail risk hedging, smart beta, leverage, structured finance products, benchmarks, hedge funds, risk premia, and risk parity to name but a few. Whilst I have expressed my ire at these concepts and poured scorn upon many of these ideas over the years, they aren’t the topic of this paper.
Rather in this essay I want to explore the problems that surround the concept of shareholder value and its maximization. I’m aware that expressing skepticism over this topic is a little like criticizing motherhood and apple pie. I grew up in the U.K. watching a wonderful comedian named Kenny Everett. Amongst his many comic creations was a U.S. Army general whose solution to those who “didn’t like Apple Pie on Sundays, and didn’t love their mothers” was “to round them up, put them in a field, and bomb the bastards,” so it is with no small amount of trepidation that I embark on this critique.
Before you dismiss me as a raving “red under the bed,” you might be surprised to know that I am not alone in questioning the mantra of shareholder value maximization. Indeed the title of this essay is taken from a direct quotation from none other than that stalwart of the capitalist system, Jack Welch. In an interview in the Financial Times from March 2009, Welch said “Shareholder value is the dumbest idea in the world.”
James Montier: A Brief History of a Bad Idea
Before we turn to exploring the evidence that shareholder value maximization (SVM) has been an unmitigated failure and contributed to some very undesirable economic outcomes, let’s spend a few minutes tracing the intellectual heritage of this bad idea.
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Jesse Stine is not the regular stock guru you see on the Internet selling services. Nope.
And he’s not a hedge fund manager trading other people’s money either. Nope. Jesse Stine is an independent stock trader, just like you and me, trading his own hard-earned money.
And Jesse Stine produced a mind-boggling (and fully audited) 14,972% returns in the markets, turning $46K into $6.8M… in 28 months.
Yes, you read it right.
On top of becoming a self-made millionaire through his trading, Jesse also realized another dream of his a couple of years, which completely changed my life forever.
He wrote the book “Insider Buy Superstocks: The Super Laws of How I Turned $46K into $6.8 Million (14,972%) in 28 Months” in which he not only shares his life story, but also the trading strategy he used, as well as many invaluable lessons he learned through his 16 years of experience (at the time the book was publish, in 2013) as an independent trader.
I’d like to now share with you 13 lessons I gathered from his book.
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Benchmark indices ended Friday’s volatile session in the red, thus recording fall for the eighth straight day and third consecutive week, as investors remained cautious ahead of the US-China trade negotiation outcome.
India VIX was up almost 4 per cent to 26.49
The benchmark S&P BSE Sensex ended the day 96 points, or 0.26 per cent, lower at 37,463, with Tata Consultancy Services (TCS), HCL Tech, Tata Steel, IndusInd Bank and Infosys contributing the most to the indices’ fall. Twenty-one of the 30 constituents of BSE ended the session with losses.
The broader index Nifty50 gave up the crucial 11,300 mark and slipped 23 points, or 0.20 per cent, at 11,279. About 1,187 shares advanced, 1,270 shares declined, and 162 shares were unchanged.
Among sectoral indices, both Nifty IT and Nifty Metal dipped more than 1 per cent. However, Nifty PSU Bank gained 2.5 per cent, the highest among the gainers.
The broader indices fared better than their benchmark peers with the S&P BSE MidCap index ending 34 points, or 0.24 per cent, higher at 14,390, while the S&P BSE SmallCap index was ruling at 14,106, up 29 points or 0.21 per cent.
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Jesse Stine is not the regular stock guru you see on the Internet selling services. Nope.
And he’s not a hedge fund manager trading other people’s money either. Nope. Jesse Stine is an independent stock trader, just like you and me, trading his own hard-earned money.
And Jesse Stine produced a mind-boggling (and fully audited) 14,972% returns in the markets, turning $46K into $6.8M… in 28 months.
Yes, you read it right.
On top of becoming a self-made millionaire through his trading, Jesse also realized another dream of his a couple of years, which completely changed my life forever.
He wrote the book “Insider Buy Superstocks: The Super Laws of How I Turned $46K into $6.8 Million (14,972%) in 28 Months” in which he not only shares his life story, but also the trading strategy he used, as well as many invaluable lessons he learned through his 16 years of experience (at the time the book was publish, in 2013) as an independent trader.
I’d like to now share with you 13 lessons I gathered from his book.
Continue Reading →
Back during my schooling years, I studied the same problem again and again so as not to make the same mistake come exam time.
Problem was, I was horrible at application.
If the exact question came out in the exam, I killed it.
But that rarely happened. The question was always worded differently and confused the heck out of me.
I screwed up similar questions time after time simply because I couldn’t adapt what I had studied to the current version of the question.
Isn’t the market like this?
You make investment mistakes and in order to make sure you get it right next time, you focus and tell yourself you won’t make the same mistake again.
But how often does the market offer the exact same situation?
Rarely.
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Benchmark indices ended Friday’s session with marginal cuts after erasing its intraday gains in the final hour. IT stocks remained subdued throughout the day after the US-based IT services company Cognizant nearly halved its 2019 growth guidance.
The intra-day rise in the indices was spurred by a slip in oil prices with financial stocks gaining the most, before the indices retreated to trade flat in the end.
S&P BSE Sensex settled 18 points lower for the day at 38,963, with TCS, Hindustan Unilever, TATA Steel, HCL Tech and Infosys being the top drags. Twelve out of the 30 constituents of the BSE ended the day in red.
The broader Nifty50 was also down 12.5 points, or 0.11 per cent, to end at 11,712 levels. The market breadth was tilted in favour of declines. About 1,031 stocks fell and 702 shares advanced on National Stock Exchange.
Among sectoral indices, the Nifty IT index was the biggest loser, down almost 1.9 per cent while the Nifty FMCG index also slipped 1.13 per cent. On the other hand, Nifty Realty index and Nifty PSU Bank index gained 1.57 per cent and 1.09 per cent, respectively.
On a weekly basis, the S&P BSE Sensex closed 0.27 per cent lower while and the NSE Nifty50 slipped 0.36 per cent. This was the indices’ biggest weekly loss since February 11.
The volatility index, VIX, ended the day 4.35 percent higher at 23.98.
The broader market took the cue from benchmark indices to end flat. The S&P BSE MidCap index slipped 15 points, or 0.10 per cent, at 14,783, while the S&P BSE SmallCap index ended the day at 14,548, down 45 points, or 0.31 per cent.
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Over the past ten years, I’ve participated in both the public and private markets, investing in over 50 late-stage private companies, early-stage startups, and pieces of real estate. This is how I’ve learned to evaluate investments.
Successful investing boils down to buying assets at a discount to intrinsic value. The greater the discount, the more likely the investment will perform. Benjamin Graham, the father of value investing, called this “margin of safety.” The concept is simple in theory and extremely challenging in practice, with the valuation process anything but straightforward.
Two highly-educated, emotionally stable, and reasonable people can view the same information and come to very different conclusions. People weight information differently based on their preferences, values, and experiences. Some are comfortable tolerating certain types of risk. Predictions differ and forecasts can be wildly divergent. Those differences create the market. As just one participant in the market, here’s how I evaluate a company’s intrinsic value.
I always start by understanding what I call owner earnings, which I define as:
Owner Earnings = Net Income + Non-Cash Expenses (Depreciation, Amortization, Depletion) + One-Time Charges – (Maintenance Capital Expenditures + Working Capital Needs)
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Growing up I would help out serving customers in my grandparent’s corner convenience store (Milk Bar) on weekday afternoons and weekends.
My late Grandfather in his convenience store, better known as Parris’ Milkbar.
There was only one cash register on top of the counter, which received cash from the customer’s purchase, and my grandmother would take out money, from the cash register, to buy new stock for the shelves, pay the utility bills, and pay me.
My grandparents would then have to choose, either to, invest in growth, pay down debt, or pay their own living expenses, out of the remaining amount of money left in the cash register.
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A sudden surge in the benchmark indices, lifted by gains in financials and metals, took Sensex nearly 300 points higher and Nifty beyond the 11,700 mark after a range bound morning trade.
At 2:10 PM, Sensex was trading at 38,980, up 250 points, or 0.64 per cent, with TATA Steel, Axis Bank, ICICI Bank, TCS and State Bank of India being among the top gainers. Nifty broke past the crucial 11,700 mark to trade 80 points, or 0.69 per cent, higher at 11,722.
Most of the sectoral indices on Nifty were trading in green, with Nifty Metal the top gainer at 1.63 per cent higher while Nifty Bank too was up over 1 per cent.
In broader markets, S&P BSE MidCap had slid 0.42 per cent, or 63 points, to trade at 15,067 while S&P BSE SmallCap was down 20 points, or 0.14 per cent, at 14,818.
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Investors have many different strategies that they can follow to build wealth in the stock market. Income investors tend to prize dividends above all else. Value investors seek to buy stocks that trade below their intrinsic value. Growth investors, on the other hand, aim to buy businesses that hold the greatest upside potential and tend to de-emphasize traditional valuation metrics that generally show a growth stock to be expensive compared with the company’s current earnings.
Growth investing is highly attractive to many investors because buying the right companies early can lead to life-changing returns. However, companies that promise huge upside potential usually trade at lofty valuations. That amps up the risk that they will fail in spectacular fashion if they don’t meet expectations.
So how can investors increase their odds of buying the next Amazon.com (NASDAQ:AMZN) instead of a Fitbit (NASDAQ: FITB)? While there’s no bullet-proof solution to this conundrum, I’ve found that buying companies with the following traits can greatly increase the odds of success:
- A large and expanding market opportunity
- A durable competitive advantage
- Financial resilience
- Repeat purchase business model
- Strong past price appreciation
- Great corporate culture
- Talented leadership with skin in the game
Let’s dig into each of these principles in detail to see why they work.
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