I work for a private, family-owned company that started over 120 years ago. And how they manage their businesses can provide us with some valuable lessons. For starters, they used to be a public company that traded on the NYSE.
About 15 years ago, they chose to buy up the rest of the outstanding shares and go private. Their big reason for going private made total sense – the markets quarter by quarter performance pressure countered with their desire to focus on long-term wealth building.
“The offer is a bold gamble that shares in its business are undervalued and that the company can do better as a private business without the pressure to meet quarterly earnings targets.”
One Analyst Comment
In other words, a focus on short-term performance doesn’t equate to building a sustainable wealth building business for their family. Let that concept soak into your brain for a moment because it’s important.
Let me tell you what I saw in the years following that event. I would see strategic plans and forecasts that would go out 20 years. They increased capital investment because they didn’t have to worry about the market’s negative reaction to their free cash flow.
Additionally, the family would use the cash flow from our business (our dividend to the family) to diversify into other businesses. The family was comfortable putting more capital into the business because we were their cash cow and paid them a healthy, safe dividend.
Finally, the employee pension – viewed negatively by the market – was important to the family and it got fully funded. As employees, we viewed all this activity as a commitment to the company. The company was no longer negatively impacted by how the analysts or CNBC or anybody felt about the organization on any given day. On that day, they chose to build long-term wealth for their family.
Conflict of Interest
Many years ago, I was a stock broker for a major brokerage firm. I could only stomach about 3 years in the industry. The conflict of interest runs deep – companies, brokers, analysts, TV, the system, and nearly everyone associated with it.
Let me tell you a story that occurred on a regular basis when I was a stock broker. There is only 1 week left in the month and, like any sales commissioned job, people start panicking to close the month strong.
For me, it’s been a slow month. Actually, one of my slowest ever. I have many of my clients in Exxon Mobil with a cost basis of $30. They’ve been collecting a dividend for a couple of years and we bought the stock at the right price.
But remember, it’s a slow month. And Exxon Mobil is now at $39, which gives us a 30% return plus 2 years worth of dividends. My clients have about 40% total returns right now. I’ve got a price target (as do the analysts) of $50 on the stock within the next 2 years so my normal inclination is to hold or even buy more at this price.
My manager is pressuring me to close strong and I’ve got no new client cash to move into “investments.” That means I’ve got to move my current clients money around if I want a paycheck for the month. So, I sell my clients out of Exxon Mobil at $39 and collect my commissions. I then move my client’s Exxon Mobil cash into Coca-Cola and collect more commissions. It turns out to be a great month for me, all because I did what I shouldn’t have done.
In this business I win on selling and buying of securities. I can’t lose but my clients just got taxed on the capital gains, paid commissions, and exited an investment they should’ve stayed with for several years. I was not building them wealth and it’s one of the biggest reasons I left the industry.
Buy, Buy, Buy – Sell, Sell, Sell
If you went to an American elementary or high school, you probably participated in some form of a stock picking contest. Personally, I participated in 3-4 of them in a variety of classes over the years.
These were not focused on long-term wealth building techniques. Looking back on them, they taught us nothing positive about investing. We might as well have been taught how to gamble because that’s how they were set-up.
There was only one way to win these 1-3 month contests – high beta stocks. Beta is a measure of a stock’s volatility in relation to the market. And you needed stocks that could blast off to the moon.
This is not how you build long-term wealth so erase those memories from your mind. And if you are watching Fast Money, Mad Money, or any of those other shows on CNBC please do not follow their advice.
If you do watch them then do so for entertainment purposes only. I’d say about 5% of their show has value and the rest is just folks stinking up the airwaves. Plain and simple, their focus is trading and short-term thinking.
The “analysts” that appear on TV or working for brokerage firms should be taken with a grain of salt. Most of their ratings are reactionary. You see this everyday.
A brokerage firm will put a buy on a company May 1st, the company announces earnings just missed analyst expectations on June 1, and then the analyst moves the company to underperform. It happens everyday and it’s a joke.
Build Your Wealth
Long-term thinking, solid companies, sector diversification, and dividends are the way to go. A good place to start for ideas is my Master Stock List. Create your own list but this is a good place to start. Build a diversified portfolio by investing 2-5% into 20-50 companies.
Buying large, proven companies means the price you pay for them is critical. These companies are not high beta stocks but they can move quickly if conditions are right. I like building positions in these companies over time, which means I’m usually going to buy over multiple years.
Let’s take a closer look at Coca-Cola and get a feel for when we might have had some opportunities to buy the stock over the years. I pulled up this chart from 1980 – 2019. You can see the big move 1994-1998 after 2-3 years of doing very little. I would not have bought Coca-Cola in 1998.
Since I wouldn’t buy in 1998, look at all the potential purchase entry points (designated with red numbers) I’ve had over the last 15 years. By being patient, we could have at least 13 opportunities since 2003 to build a position in Coca-Cola.
There are plenty of opportunities in other stocks too, especially if you are building a long-term portfolio. It wasn’t that Coca-Cola was a bad company from 1998-2003 but it just got a little ahead of itself. Markets can do that so you want to have other companies on your watch list.
Good companies that you can buy on dips is the focus. Let’s take a look at another excellent company on the Master Stock List – Exxon Mobil.
Since I would’ve waited to buy Coca-Cola until 2003, it’s very possible that Exxon Mobil would have been on my radar. In fact, it’s likely that I would have purchased some shares during this time frame even though I show the first purchase opportunity in 2002.
This is why I like building positions over time. I spread my money into solid companies and look for the right time to buy. Since Coca-Cola and Exxon Mobil are not high beta stocks, you wouldn’t want to buy them after they have big moves in their stock price.
Be patient and wait for them to come back down to earth. Buy them on multiple purchases, collect your dividends, hold them 20-30 years, and you will have built wealth.
Summary
The family that owns the company I work for … they get it. We need to get out of the short-term thinking game and consider 20 or 30 year time horizons. They use the dividend from our company to build positions in other organizations. This is what we need to do too.
The investment business is not your friend. This includes banks, brokerage firms, analysts, TV shows, and stock brokers. They need/want your money so they can make money. Let’s not give them that opportunity.
Unlike the investment industry, the perform or get fired mentality doesn’t apply to us because we are building wealth long-term. We buy good companies at the right time, right price. We are patient because our time horizon is 20-30 years not 2-3 months.
I’ve lost lots of my own money over the decades because I was trading and thinking short-term. Fast money happens because of luck … it’s gambling not investing. Change your thinking to long-term and be patient.
Change your view on money too. Losing $10,000 on a small, debt-filled company is comparable to working an extra several years. How many months did it take you to earn $10,000 to invest? Plus, losing $10,000 in your 20’s means you’ll have $40,000-$50,000 less in retirement. Do that a few times during your life and you’ll be lucky to retire at 62, 65, or even 70.
Thanks for reading!
Mr. TLR