Thoughts on Investing – Savers Continue to Be Punished

Once in a while I am still surprised when I look at the Certificate of Deposit (CD) yield tables.

Paltry.

6 month jumbo CD’s are yielding .28%

5 year jumbo CD’s are yielding 1.68%

These are national statistics, as published in today’s edition of the Wall Street Journal. Absolutely amazing.

The current monetary policy is such that anybody who puts money into CDs, savings accounts, money market mutual funds or even government bonds is set to lose money every single year.

How?

When you earn .28% on your money and inflation increases at that rate or more (which it is most certainly MORE), your investment value is eroded.

Is it any wonder why the debt levels in the US are so high and the savings rates so low?

What is the incentive to save when you are punished for doing so?

Injecting more and more fiat money into the economy creates problems…

Savers are incentivized onto two paths: invest the money or spend it.

With the former, cash flushes into markets and inflates security values (witness tech IPO frenzy, etc.). With the latter, the economy may (and I say that warily) get a short term boost, but leaves people with no ability to consume later. It’s all about the now.

Seems short term thinking is thus transplanted from corporations and Wall Street to Main Street consumers.

THOUGHTS ON INVESTING – FOR WHOM THE BELL TOLLS
Quick tip: if the bell of any public company is not “ringing for the shareholders,” you should look elsewhere to place your investment dollars.

While this may sound like a “duh”…it can be quite tricky to really discern for whom a company is being run.

Sometimes you have to do some digging to find the truth. Just studying the financial statements and operating results is not enough.

Many publicly traded companies are run for the benefit of senior management and the founders. With high salaries (relative to company operating performance), cushy benefits (like the company paying for 3 different big city apartments for the CEO), highly dilutive equity compensation plans and more…it is readily evident these companies went public not to raise capital for expansion but rather exclusively for a liquidity event and profit pilfering for the private owners and upper management.

Ok if you are the private owner and concerned only with the short term….not OK if you are an investor like me and you.

I long ago stopped asking the question: “why not just stay private?”

A quick look at the disclosure docs for any publicly traded company – or even insight provided on websites like Yahoo Finance – can yield volumes of important information.

Grab a copy of the DEF-14 Proxy statement and a 10k and consider:

Is the company closely held by one or a few people? (you’ll be surprised to learn that many times these parties are related – like family – or are old business cronies).
Is the company domiciled in a location which makes it difficult or impossible to enforce shareholder rights? Like, say, Bermuda or the Isle of Man or similar offshore “haven” which are subject to different corporate and shareholder laws. These domiciles largely mitigate possible shareholder activism when it is called for.
Are there different tiers of ownership structure (e.g. A shares, B shares, etc.)? Some companies take only a portion of their shares public (e.g. “float”). And, what often also happens is the B or C shares are the only publicly available stock…and those share being junior to A shares which are usually held by the founders and/or founders family.
How is the board of directors comprised? If you see too many familiar faces from senior management, or if you see the same faces showing up on every committee, there’s a good chance the common stockholder with 5,000 shares is having their interest even thought about.
How dilutive are the stock options and warrants? If you see a lot of complicated mumbo-jumbo about the equity compensation plan, and then see that the “real” diluted earnings of the company are much less than those reported, it’s time to start taking a hard look at the reasons
While this is only the start of proper diligence, answers to these questions will tell you for whom the bell tolls.

In my experience, these problems occur most often in small cap or micro cap value plays. Often there is a compelling reason these types of shares trade at a perceived discount to intrinsic value…it’s because there is minimal likelihood of this value being unlocked.

However, these shareholder money drains also occur at the biggest of the big public companies also. Think about the Tyco CEO Kozlowski a few years back with his toga parties and such.

As you consider purchasing an interest in a public company, ask yourself: “would I want these guys as my partners if this were a private business?”

If the bell doesn’t toll for thee, walk away.