Thursday, October 16, 2014

Think Like An Owner – Part 2

I wrote an article last month about thinking like an owner. It was a piece that I’ve been meaning to write for a while now, but finally had some time to put my thoughts down. I was pretty happy with how it turned out, but I think there’s still some additional points I wanted to cover. So I’m going to expand a bit on that original piece with some further ideas on how and why you should think like an owner, even when you’re buying little slivers of ownership in gigantic companies.

Are You A Long-Term Partner?

I basically compared owning common stock in publicly traded companies to owning your own business outright – I used a local pizza shop for illustration. And this illustration is valuable and apt, because when you own common stock in a business you are in fact a part-owner in that company. You and potentially millions of other people are all business partners, with generally common ground between you. I mean we’re all after the same thing, right? When you invest in The Procter & Gamble Company (PG)alongside me, we’re most likely both after Procter & Gamble selling more high-quality products, increasing profitability, and paying us more income in the form of dividends.
As such, I look at every investment as a partnership. And I approach every investment with a long-term time horizon. In fact, I don’t plan on ever selling any of the partnerships I buy into. After all, what would be the point of doing hours of research on a company, putting my hard-earned capital to work, watching that company succeed and my thesis realized, only to sell a little while later for a small profit? That’s nonsensical.
If I invest $1,500 in a business, I’m not real excited when that $1,500 investment rises to $2,000. I expect my partnership to do well, and as such expect the business I own a piece of to be worth more in the public market over time. This is natural. I would of course prefer shares in this business to be cheaper so that any new capital I can invest buys a bigger share of the overall company, but I don’t expect this to be realistic over the long haul.
As such, I’m not after turning $1,500 into $2,000. I’m after the percentage of the business my $1,500 buys to do increasingly well over time and pay me more income. Furthermore, I would expect that $1,500 to eventually turn into a $5,000 or $10,000 stake, if given enough time. Taking a quick profit on what could be a wonderful partnership for the rest of my life is awfully shortsighted, in my view.

Be Proud Of Your Business(es)

How would you feel if you took out a $20,000 loan and turned it into a happening pizza joint in your hometown? You’d probably feel pretty good, right? You’d very likely feel fantastic every time a customer came in through the front door to order up dinner. And you might be elated if a local business orders up 20 pizzas to cater a lunch. Your restaurant would be an extension of all of your hard work, and to know that people appreciate that hard work and enjoy your finished product must make one pretty proud.
Equally so, I feel the same exact way whenever I’m at the grocery store and someone buys a product fromThe Coca-Cola Company (KO). This might sound corny, but my heart flutters just a little bit when I see a grocery cart stocked up with Coca-Cola, Dasani, Powerade, or Simply Orange Juice.
A real-life anecdote: My aunt had to get rid of some mold in her home just the other day. So she ran up to the store to buy some bleach (she was out). You can’t imagine how proud I was when I noticed she had a bottle of Clorox in her hand. As a part-owner in The Clorox Co. (CLX) I feel great that she trusts in a product that my company produces.
I’m a proud business owner, and that’s true even for some of the companies in my portfolio that produce products that could be construed as morally wrong. For instance, I have a small ownership stake inRaytheon Company (RTN). Sure, some of their products are used to cause bodily injury and/or death. But these products are also used to protect the freedom I so thoroughly enjoy in this country. Furthermore, these products are also used to reduce bodily injury and/or death by protecting the US soldiers that use them. And I’m proud to know Raytheon is protecting the US from foreign missile attacks through a number of radar systems they’ve been contracted to build and deploy.

Take Competition Seriously

If I owned a local pizza shop – call it Papa Jason’s Pizza – you can be absolutely sure I wouldn’t be buying pizza from a local competitor. If I had any pride at all in my own product then why in the world would I go and buy pizza from the competition? Every dollar in their pocket is one less dollar in my own.
Likewise, I always make a reasonable attempt to buy products and/or services from the businesses that I own a stake in. After all, every dollar I contribute to their bottom line is partially contributing to my own.
For instance, every time I buy a bag of chips it’s Baked Lay’s. Manufactured and marketed by PepsiCo, Inc. (PEP), I’m pleased to know that I’m contributing (in a very small way) to my own company’s profit. And that profit eventually trickles down to me in the form a dividend check. If I instead buy a bag of chips from another manufacturer, that provides them financial resources to grow and potentially compete more effectively with the company that is paying me dividend income. Why in the world would I want that?
If I need to fill up my Toyota Corolla’s gas tank, you can bet your bottom dollar I’m trying to visit a local BP Plc (BP) gas station, or a station owned by any other of the companies I own a stake in. I’ll buy gas from the competition if I’m running on empty and I have no other choice, but you’d better believe that I won’t be very happy about it.

Know Your Management, But Be Confident They Can Be Replaced

I discussed in the last article how important it is to know what you own. But another important point is to know your management, and also make sure that the team in place isn’t irreplaceable.
If I own my own pizza shop, that’s a pretty easy business to run. It doesn’t take any kind of specialized skill that only one out of a billion people can possibly acquire, right? You just make sure the raw ingredients come in on schedule, have an appropriate staff for the demand, market your product effectively, and make great pizza. I might be simplifying it there a bit, but you get the gist.
And, as an owner, I might choose to hire a general manager to run the day-to-day operations for me. Maybe I want to check in a few times per week, but otherwise have a plate full of other hobbies and passions I want to pursue. So I’m going to do my best to pick an extremely competent general manager who I feel has my best interests at heart. I want someone who can both get the job done effectively and communicate about how that job is getting done effectively.
But I also have to know in the back of my mind that this general manager can be replaced, if necessary. I don’t want someone that’s irreplaceable, because then what do I do if this person wants to leave or has to be replaced for any number of reasons?
When looking at the management teams that are currently in place in a business I’m considering for investment or perhaps a business I’m already invested in, I often remember Peter Lynch’s immortal words, as published in his 1989 book “One Up On Wall Street”:
 Getting the story on a company is a lot easier if you understand the basic business. That’s why I’d rather invest in panty hose than in communications satellites, or in motel chains than in fiber optics. The simpler it is, the better I like it. When somebody says, “Any idiot could run this joint,” that’s a plus as far as I’m concerned, because sooner or later any idiot probably is going to be running it.
So I love great management teams. That’s always a big plus in my book. For instance, I admire Richard Kinder who has a massive stake in his masterminded pipeline and energy business – Kinder Morgan Inc. (KMI). I also have a relatively big stake in that company, and I love Kinder’s passion and pride. I hope he continues running the company for a very long time. However, if Kinder were to all of the sudden no longer be able to run the company, I don’t think he’s completely irreplaceable. The pipeline model isn’t specific to that company, and the assets are already in place to profit shareholders for many years to come.
You might make a comparison to Apple Inc. (AAPL), which has been beleaguered by media and major investors alike for their lack of major innovation since the company’s founder, Steve Jobs, died. They’ve mostly come out with some smaller and larger versions of products that were already in place with Jobs died, but most of the life-changing innovation the company became extremely popular for has largely been absent.
The company just recently announced the first really new product since Jobs died back in 2011, in their new Apple Watch. Will this change lives and the entire watch industry like the original iPhone did back in 2007? Time will tell. Now, they’re still massively profitable. And they may very well continue to be such for many, many years to come. But was Jobs irreplaceable? I don’t know if one can answer that question with an unequivocal answer.

Conclusion

I always think like an owner. Adding on to the points made in the original article, I consider every investment to be a lifetime investment. When I buy shares in a company, it is my anticipation that I will own those same shares 50 years from now. And it is my expectation that these shares will be worth much more money, so short-term profits (or losses) don’t tempt me to sell, assuming the business is still doing operating correctly.
Furthermore, you should express pride in your business(es) and take competitors seriously. Every competing business out there can be thought of marauders waiting to cross your business’s economic moat and tear the castle down. So buying products and/or services from these competitors gives them just a little more ammunition with which to accomplish that mission. I’d rather choose to fortify my castle by contributing to the bottom line of companies I own a stake in when reasonable, which provides them a small slice of the ongoing profitability which is necessary to pay me increasing dividends.
Lastly, management should always be considered. You don’t want an idiot running your company. But you should try to avoid investing in businesses that an idiot cannot run, just in the off case that one ends up in that position. Great management teams can turn a good company into a wonderful one, and these teams should be thought highly of and pursued. But you don’t want to put all of your eggs in one management’s basket, because management teams occasionally change.
Full Disclosure: Long PG, KO, CLX, PEP, RTN, BP, KMI.
What do you think? Do these points add to the original discussion on thinking like an owner? 

This article was written by Dividend Mantra. If you enjoyed this article, please subscribe to my feed [RSS]

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