You may have noticed that I often refer to investing in the stock of companies as “partnering” with the company instead of “buying the stock.” It might seem like a small difference but, to me, it’s conceptually a very big difference.
Investing is much longer in nature. When I purchase shares of stock in a company as a long-term investment, I don’t view it simply as a security that I hope “goes up” so I can sell it for a gain. That’s a trading mindset. Trading is more about placing a bet that something will happen to the price of the security being traded (e.g. it will go up, or down, or stay in a range). The focus is on the price of the stock.
Whereas with investing, the focus should be on the underlying business. The stock price is the just the current market price at which you can buy or sell shares of the company. Sometimes they accurately reflect fair value, and sometimes they don’t. From this perspective, I try to view companies as if I was the owner of the entire company. This is taking an owner’s mindset. If you owned and ran a small business that supported your family as your primary source of income for the next 10, 20 or 30 years of your working life, you probably wouldn’t care what the market value of the business was today. Market value doesn’t matter unless you’re going to market to buy or sell. You would be focused on the profitability and long-term sustainability and growth of the business. If this was the case, your decisions wouldn’t be focused on short-term artificial boosts to market value/price but rather, would be taken with a sound, long-term view for the health of the business.
If you’re a long-term investor, you want to partner with companies run by executives with a similar long-term, owner’s mindset. Something that gives me a lot of confidence is to see the executives own a lot of shares of the company. This means their personal wealth is invested alongside of yours and they will likely make decisions with the long-term in mind even if it means short-term setbacks. These companies are often referred to as Owner-Operators.
If a CEO owns very little of the stock and continually sells shares as they’re granted through options every year, I most likely won’t look to partner with them. Why would I? It’s a clear message that the CEO is milking the company for short-term bonuses and is likely too heavily focused on the price of the stock. That type of CEO will likely lose their way and the company will slowly lose market share to competitors. That CEO is not an owner and not worth trusting my hard-earned capital with.
I bring this up because a company we’ve partnered with for years now, Howard Hughes (HHC), just released their annual letter to shareholders this week and there was a section worth passing along. Here is the excerpt from CEO David Weinreb (emphasis added):
One theme that has been consistent throughout my career and reflected in my previous letters is the importance of having skin in the game. When HHC began trading as a public company, I invested $15 million dollars in the company, with Grant Hurlitz, HHC’s President, investing $2 million, both in the form of long-term warrants. This year, I invested $50 million to purchase a new warrant and signed a long-term employment agreement. This investment is in addition to the more than 1.2 million shares that I own outright. Grant purchased a warrant for $2 million and David O’Reilly, HHC’s Chief Financial Officer, purchased a warrant for $1 million upon joining the company in 2016. We will not benefit from any gain in the warrant unless the stock price trades meaningfully above the blended warrant strike price of $124 dollars per share. Moreover, we will lose our entire investment in the warrants if the share price is at or below that price. Collectively, management and the Board of Directors have a combined approximately 22% economic interest in HHC. As evidenced by our recent investments, we are more inspired and confident in HHC’s prospects today than ever and our commitment to the continued creation of long-term shareholder value. You can be certain that we will treat your capital as if it is our own.
So the CEO currently owns over $160 million of stock in the company at today’s price (2.75% of the company) and just made a $50 million dollar bet on himself and his team after signing a new long-term employment agreement. That’s an owner! It gives me that nice fuzzy feeling inside and allows me to sleep well at night.
HHC has a unique business model when it comes to real estate development and owns a very unique collection of assets, some of which, like they’re properties in Hawaii and NYC, can’t be replicated due to land constraints. Furthermore, they’re run by an experienced team with a lot of skin in the game. I couldn’t care less where the stock price trades over the next 3, 6 or 12 months. This is a company with a long-term vision and is on a mission to create value. This is the type of company I like to partner with.
A few other examples of companies we’ve partnered with that have high insider ownership include:
- Cal-Maine Foods – founding family owns 38% of the company!
- Tanger Outlets – CEO Steven Tanger owns over 1.1 million shares after recently buying another $3 million worth of stock this year – over 1% of the company
- Starbucks – Howard Schultz who was long time CEO and now Executive Chairman owns over 32 million shares – over $1.8 billion! – 2.2% of the company
- Franco Nevada – Pierre Lassonde, co-founder and current Chairman of the Board, owns almost 2 million shares worth about $142 million. CEO David Harquail owns 1.1 million shares worth about $78 million – collectively about 1.5% of the company
- Berkshire Hathaway – Warren Buffett still owns a large majority of the company and talks religiously of not diluting ownership
- JD – Founder and CEO Richard Liu owns over 18% of the company and only takes a salary of 1 yuan. He has a long-term mission of growing the company with all of his wealth tied directly to the stock.
There’s a lot more that goes into a decision of whether or not to partner with a company but management putting their own money at risk right alongside yours is a good place to start.
Thanks for following and have a great weekend!
-Nick