What better way to get rich than owning part of a profitable company?
Almost all the rich people you know probably built their fortune by owning a business. Some have high-end salaried jobs, like doctors and lawyers. But the richest doctors and lawyers did it by starting their own practices.
And buying a stock entitles you to a fractional ownership in a business.
According to financial commentator Professor Jeremy Siegel and his long-run, inflation-adjusted numbers, $1 invested in stocks over 204 years turned into $755,163.
The next best performer, bonds, grew to only $1,083.
But the ideal version of investing that you may have in your head – you buy shares, management boosts earnings, the share price goes up, and everyone gets rich – is often wrong.
The gulf between stockholder and management is vast. Management usually simply won’t do what you want… or even what is in your best interest.
However, as I’ll explain, you can still own businesses in a way that won’t make a sucker out of you… You just have to know what to look for.
CEOs and their cronies should work to maximize shareholder value. But they often have many other concerns and goals. So much so that it’s rare to find a management team that would truly do what you would do were you the full owner of the business.
In fact, it’s not hard to find management that has made suckers out of their investors. We’re talking about stories like…
Last year, legendary activist investor Carl Icahn hosted Jeff Jacobson, CEO of tech firm Xerox (XRX), for dinner. Icahn owned about 7% of the company. Icahn announced his disappointment in Jacobson and told him he planned to fire him. “Thanks for the wine, but it’s not going to change my opinion no matter how much I drink,” Icahn told him, according to Bloomberg Businessweek.
Rather than get fired, Jacobson went out to find a buyer for the company. Japanese company Fujifilm made an offer. And as part of the deal, Fujifilm agreed to make Jacobson CEO of the new, bigger company.
Could Jacobson have found a better offer? One that got a higher price for shareholders but didn’t include a backroom deal to keep his job? A flurry of shareholder lawsuits aim to find out. And the deal has been called off.
Or take Wells Fargo (WFC)… If you personally owned all of this major bank, would you have built such an aggressive sales culture that employees opened 3.5 million fake accounts for customers – accounts that didn’t make Wells Fargo money? That’s how many the investigation turned up between 2009 and 2016, after the scandal came to light two years ago.
A full owner would never encourage such a stupid thing for fake growth. What would be the point? But the accounts helped executives hit quarterly numbers and earn bonuses.
Or take electric-car maker Tesla (TSLA). CEO Elon Musk has designed an extremely narrow path of success. With $1.2 billion in debt coming due by early next year, the company needs to solve tough production challenges in a small window to turn profitable before it goes bust.
The future of the company has been gambled on what may happen in the next six months. That’s fun for a CEO who’s already a billionaire. As an owner, I suspect you’d never do any such thing.
Most management perversion is more run-of-the-mill… CEOs take on big, expensive acquisitions so they can rule over a larger company – known as “empire building.” Or they buy back stock when it’s expensive simply to boost short-term earnings. Or they take on risks that may backfire years down the road when it’s another guy’s problem.
We work hard to study each business and decipher the quality and motivations of each management team for the businesses we recommend in my Retirement Millionaire newsletter. Of course, it’s nearly impossible to find a leader with perfectly aligned goals. Even the most honest and intelligent CEO will diverge from shareholders on some measures.
To invest in any business, we need to know that management cares about the business and recognizes we’re the owners. That means rewarding us along the way.
And that’s what we look for when we start identifying valuable stocks first. We require a history of shareholder friendliness – companies that are stable and reward shareholders with dividends and stock buybacks.
We want companies that consistently pay and raise dividends.
I’ve told my subscribers many times that “dividends don’t lie.” Companies can’t fake a cash payment like they can manipulate other items on the balance sheet. If you’re going to cut a dividend check, you have to have the cash to cover it. And a rising dividend is like a magnet drawing shares higher.
Some investors might think they can’t triple or even quadruple their money on well-known, dividend-paying, blue-chip companies like Johnson & Johnson (JNJ) or Coca-Cola (KO).
But I believe strong dividend payers like these give you the best opportunity to grow your income in the markets. I urge you to take advantage of them.
Here’s to our health, wealth, and a great retirement,
Dr. David EifrigWhat a Melt Up Means For Ordinary Americans [sponsor]
Financial PhD predicts the market is about to soar higher than you could ever imagine, faster than you thought possible. Here's how he suggests you play it...
Source: Daily Wealth