Should You Buy Shares of Stock or Not?

Well, I was honored to be tweeted to by Mark Cuban.? Here it is:

@howardlindzon @AlephBlog the real question is why would an individual buy a share of stock? It no longer reps ownership in company

Now let me try to answer the question.? Yes, average people buying stocks with the small amount of money that they have, have no control over their investments.? What is worse is that those who invest through mutual funds have less control, because the mutual funds don’t care much about governance except when something critical comes to them: an acquisition, a spinoff, a merger, etc.

Small investors need to realize that they are riding on the bus of the company (ies) that they own.? They have little ability to affect the board of the company, much less management.

So why buy, if you don’t get control?

Well, let’s talk about institutional investing in alternatives.? Many institutions ride on the buses of general partners with expertise, while they are limited partners.? They have little to no control, and they invest because they think their LP interests will be worth more by the time the partnership matures.? The partnership must raise liquidity by the end of the term, and players get paid, even if they are rolling into the next deal.

The key here is a liquidity event, or the threat of one.? Something that forces the investment to interact with the cash world.? It can be a spinoff, selling a subsidiary, an outright sale of the company, etc.

But liquidity events are rare with publicly traded equities.?? Maybe not *so* rare, when you consider dividends and buybacks.? But full acquisitions happen rarely, and individuals play a small role in M&A.

So here is the answer, which only makes sense if you are a value investor: we buy stocks that we think will compound value.? We may not have control, but we look for situations where management honors the investments of outside passive minority shareholders.

We may be aided by larger investors that seek control, or not.? When you own an undervalued company, catalysts appear. It may take time, but the effort to make value emerge will work more than half of the time.

My view is to focus on companies that are growing value and own them.? That will result in increases in the underlying value of the companies held, which will result in high market values.

Yes, we may not have control.? But if we focus on undervalued equities, we may own companies that those large enough to buy whole companies will buy out, rewarding our patience in holding neglected companies.

And so, Mr. Cuban, though I am nowhere as successful as you, I regularly do better than the S&P 500 by picking stocks with my value discipline, buying stuff that few want to own, and profiting when the stocks exceed expectations.

That is why I own individual stocks, for myself and my clients.? I note that you on rare occasion buy common stocks, including this purchase of Apollo Group.? Guess what?? I own that as well.

I buy the stocks of companies that are out of favor, but have a margin of safety — if I am wrong, I won’t get killed.

That’s why I buy shares of common stock even though I know my ability to control is limited.? (That said, at least in the insurance industry, if I call they will listen to me, at least among the midcap and smallcap firms.)

But I agree with you.? Small investors ride on the backs of larger control investors.? Thus small investors should ask, “What will the large control investors like?? And that is why clever small investors should buy shares of stock, despite the lack of control.

Full Disclosure: Long APOL

2 thoughts on “Should You Buy Shares of Stock or Not?

  1. APOL strikes me as an interesting case study in ownership.

    Due to the company’s class structure, voting rights are further restricted as there is no possibility of riding the coattails of activist investors:

    Our Class A common stock has no voting rights. Our Executive Chairman and Vice Chairman of the Board control 100% of our voting stock and control substantially all actions requiring the vote or consent of our shareholders, which may have an adverse effect on the trading price of our Class A common stock and may discourage a takeover.

    That’s not entirely unusual. Even Berkshire has asymmetric voting rights that give the class A shareholders control of the company.

    What concerns me with APOL is the liquidity event as you refer to it, which as you note for common stocks are typically dividends.

    Although we are permitted to pay dividends on our Apollo Class A and Apollo Class B common stock, we have never paid cash dividends on our common stock. Dividends are payable at the discretion of the Board of Directors, and the Articles of Incorporation treat the declaration of dividends on the Apollo Class A and Apollo Class B common stock in an identical manner as follows: holders of our Apollo Class A common stock and Apollo Class B common stock are entitled to receive cash dividends, if and to the extent declared by the Board of Directors, payable to the holders of either class or both classes of common stock in equal or unequal per share amounts, at the discretion of the Board of Directors.
    [emphasis mine]

    I don’t want to attribute ill will to the Chair/Vice Chair but that has the language of a scam. I don’t know what the law is here (the preceding line says “in an identical manner as follows” but it sounds as though the company can pay out dividends to their class B shareholders but not their class A shareholders and since the class A shareholders have no say, there isn’t anything they can do about it.

    Contrast that with Berkshire’s language:

    “Class B common stock possesses dividend and distribution rights equal to one-fifteen-hundredth (1/1,500) of such rights of Class A common stock. ”

    . . . which is equivalent to their ownership claim on the firm.

    I guess I’m not convinced a class A APOL shareholder owns anything. If there is no ill will, perhaps they can consider changing the language in the future.

  2. David,

    Your long APOL, what are your thoughts on Strayer and Devry? I know Robert Rodriguez owns DV and APOL as well.

    Kevin

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