We discussed the role of large investors in resolving the shareholder-manager conflict in class today. This article describes two large shareholders, Ackman’s hedge fund and the Vanguard group, taking action to re-align management with shareholder interest. Ackman’s angle is to push for CEO removal, actually the two co-CEOs which I never heard of before. Vanguard voted against the pay package for the co-CEOs.
Stay tuned as the Chipotle story unfolds…
Expect lower returns going forward, don’t reach for yield (I.e., take on more risk), and just save more. Another subtle but important point in the article regarding fees:
“Inattentive investors can expect to lose as much as 70% of their profits to “hidden” fund management costs in addition to the “expense ratios” touted in mutual-fund prospectuses. (These hidden costs include things like sales load, transaction costs, idle cash and inefficient taxes.)”
So yes, stocks are relatively high now. The P/E ratio is currently 25.22 well above the historical average of 15.61 (multpl.com, based on trailing 12 month earnings). Does this mean sell stocks and go to cash? No. Personally, I address high market multiples with a lower (but greater than zero) percentage of my allocation to stocks. I continue with my monthly contributions and have increased them once already this year. After reading this article, it may be time to consider another increase.
Good luck everyone!
-Dt. Moore
Totally wild idea not in this article: what if there were a flat corporate tax around the world? Would that eliminate all tax havens and then force corporations to setup shop only in countries that have infrastructure, an appropriate labor force, and perhaps convenient proximity to consumers?
Just s thought…
Thoughts on this article…
1. There is a wealth gap in corporations just like people. Corporations are people too!
2. The notion of “Small beats Large” is questionable going forward. It sounds like smaller companies may have difficulty servicing debt while large companies are in better shape. Any negative economic shock will likely hurt small companies more.
3. I’m glad the S&P 500 companies that I own are okay. 🙂
4. Analysts should take a closer look at debt management ratios before any purchase decision, particularly in smaller companies intended for long-term portfolios. Current ratio, debt ratio, times interest earned, EBITDA coverage ratio, to name a few.
-Dr. Moore
The hidden risk to the economy in corporate balance sheets
SF Gate
NEW YORK — America has a debt problem, but it’s not what you think. Yes, the federal government owes trillions of dollars more than it did a few years ago. Yes, Americans are still struggling to pay off mortgages and student loans. But it’s the buildup in debt elsewhere that most worries some experts, and the big borrower this time may come as a surprise: Corporate America. Read the full story
Shared from Apple News
Last month I blogged about Elon Musk selling 2.8 million of his own shares of Tesla stock in an offering. That offering came after an undisclosed death involving a Tesla car in autopilot mode.
Today, we see that Tesla is acquiring Solar City, a company with Elon Musk as the chairman of the board and his cousin Lyndon Rive as the CEO. Musk is also the largest shareholder in both companies. Highlights from the Reuters article:
The game of hot potato continues…
http://www.reuters.com/article/us-solarcity-m-a-tesla-idUSKCN10C26O
First, thanks to D-Lo for forwarding this article to me. The gist of this article is CEOs are overpaid. The connection between pay and performance just isn’t there. In fact, the opposite relation is observed. Companies with lower paid CEOs perform better than companies with higher paid CEOs. All we need now is a nice list of those companies so we know where to allocate our investment dollars and perhaps our purchases of goods and services.
Another study should be done showing how others suffered while CEO pay increases. For example, how many Yahoo employees lost their jobs while Mayer was making her $100 million? How about companies with highly paid CEOs and stock declines? Did those companies also layoff thousands of employees while maintaining 7, 8, and 9 figure pay packages for executives?
Now, let’s contemplate how spending nearly $5 billion for Yahoo makes sense for Verizon and its shareholders…
http://www.cnbc.com/2016/07/25/marissa-mayers-9-figure-compensation-put-in-perspective.html
Was Ackman’s great concern over the alleged Herbalife pyramid scheme rooted in concern for the little guys “downline” in the pyramid or to make money with his short position? Think about this: he entered a huge short position then led a crusade to have the company shut down so he could make money. Even in that situation, how do the people “downline” benefit other than watching Ackman make billions while they are out of a job? Maybe his plan was to reinvest the billions made from shutting Herbalife down back into the community, starting a new company that will hire all of the former Herbalife workers.
I noticed something interesting at the end of the article:
“Pershing Square International was last down 15.3% through July 12, according to data compiled by HSBC. Meanwhile, Pershing Square Holdings, the fund’s publicly traded vehicle, was last down 19.1% through the same time period.”
I wonder why the publicly traded vehicle Pershing Square Holdings is down more (19.1%) than the non-public Pershing Square International (15.3%)?
This reminds me of the “Everything I need to know I learned in kindergarten” poster. On that poster it said “Be aware of wonder.”
-Dr. Moore
http://finance.yahoo.com/news/bill-ackman-herbalife-short-losses-000000081.html
I will let the attorneys decide whether or not an autopilot crash is material information to be given to shareholders prior to selling them stock. What I found really interesting is this quote:
“included nearly 2.8 million shares sold by Tesla Chief Executive Elon Musk. Tesla has said Mr. Musk’s sale was triggered by tax requirements. ”
This sure sounds like a case of hot potato. The CEO sells half a billion dollars worth of his portion of his own company’s stock less than a month after a fatal, and undisclosed to the public, crash. A sale allegedly “triggered by tax requirements.” Something smells fishy here. I wonder who will be left holding a worthless potato or gourmet fish? Okay, that analogy didn’t make much sense, but you get the point: buyer beware, of Tesla stock and the cars themselves.
SEC Investigating Tesla for Possible Securities-Law Breach
The Wall Street Journal
The SEC is investigating whether Tesla Motors breached securities laws by failing to disclose a fatal crash in May involving an electric car that was driving itself. Read the full story
Shared from Apple News
An interesting read from Morningstar in response to Brexit, the latest financial crisis. The article references “The Big Short” and says “the biggest of the big shorts in 2007, John Paulson, was recently forced to invest some of those profits back into his ailing hedge funds.’’ Also, another quote I like: “some investment managers … talked themselves and observers into believing they knew it all along.” To not know that you do not know, that is dangerous.
The article suggests that history and reason tell us an investment manager can’t make the right call every time. “Every crisis is different” roughly translates into “the future is unknowable.” One comment at the article end included a quote:
“It is difficult to make predictions, especially about the future.”
My response to Brexit? I’m at peace with my 403b auto-invest happening with this next paycheck. If the market stays low, I buy low. If the market goes up, my current holdings go up.
-Dr. Moore
http://news.morningstar.com/articlenet/article.aspx?id=758088
Let me begin by quoting Bogle, age 87, of Vanguard:
“‘accept the returns offered by the market, and don’t take risks to get higher returns, whether you’re talking about bonds or stock.”
No one has a monopoly on the truth and the future is unknowable. That includes Mr. Bogle. However, his experience and over 3 trillion reasons (assets under management) should not be ignored.
Having said that, I would like to hear more from him on why we should expect and accept lower returns. Slowing population growth? Is he talking about returns only in the United States suggesting no one wins all the time? Have corporations reached peak productivity similar to reaching the limits of Intel’s Moore’s law (no relation)?
This leads me to a connection suggested by Schumpeter: economic growth arises from productivity enhancing technological progress. Perhaps Bogle doesn’t see Facebook, snapchat, Whatsapp, etc. as productivity enhancing.
-Dr. Moore
Efficient Minds™ 