Business-Like Investing Can Help You Pick Better Long-Term Stocks

The high priest of value investing himself, Benjamin Graham, taught us that, “investing is most successful when it is most business like.”  That makes sense because investing in stocks is, quite literally, the act of buying an ownership stake in businesses.  Whether you own 100% of the shares of a local jewelry store in your hometown, or 1,000/4,405,893,150th of The Coca-Cola Company based on its total shares outstanding in the last 10-K filing, the end result is much the same: There are only three ways you can make money from your stock.

This simple distinction makes it easier to spot flaws in an investment portfolio because it changes your behavior.  You suddenly demand a margin of safety in your purchases because you expect to be compensated for the different types of risk to which you are exposing yourself and your family.  You require evidence based on facts rather than hope for high growth assumption rather than getting swept away in the euphoria of crowds.  During stock market crashes, you can remain rational and buy ownership positions in quality companies at bargain prices despite everyone else rushing for the exit in panic.  You seek to understand things such as how the firm generations its underlying cash flow, what types of assets makeup the balance sheet, and whether management is following capital allocation and dividend policies that are friendly to you and other owners.
If you don't currently treat your stocks like this, I urge you consider a paradigm shift.  On my personal blog, I've spent the past few years driving home the concept by running case studies of stocks as viewed through the lens of business-like investing; looking at the long-term results generated by holding ownership stakes in businesses as diverse as Chevron  General Mills, McDonald's, Clorox, Hershey's, Nestle, Colgate-Palmolive, Procter & Gamble, Coca-Cola, Tiffany & Company, and the now-bankrupt Eastman Kodak.

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Role for Proxy Advisory Services in Nigeria

The recent tirade by Jamie Dimon of JP Morgan directed at shareholders for voting against executive pay rise as advised by proxy advisory services brings to focus the role and or activities of these advisory services and what they can accomplish in a country like Nigeria where corporate governance is at its infancy.

James Dimon, Chairman/CEO, JP Morgan

Proxy advisory Services are firms hired by shareholders of public companies (in most cases an institutional investor of some type) to recommend and sometimes cast proxy statement votes on their behalf, according to Wikipedia.

The vote at JP Morgan, the US Financial Institution, was on whether or not to hike executive compensation and whether or not to separate the roles of Chairman and CEO as currently held by Mr. Dimon.

 “The vote against the executives’ pay package at JPMorgan’s annual meeting last week was 38.1 per cent, a sizeable revolt from major institutional investors”, reports the FT.

 According to the English Newspaper, some 35.9 per cent contradicted the Board’s wishes by voting in favour of installing an independent chairman after Mr Dimon retires. He currently holds the roles of both chairman and CEO.

In reaching this much reviled decision (by the Board), shareholders primarily took advice from Institutional Shareholders Services (ISS), who believed that a $7.4m cash bonus for 2014 was not justified. Mr. Dimon also made $1.5m in base salary and $11.1m in restricted stock.

ISS advice is followed by many large pension plans and other institutional investors across the United States and beyond.

With the decision to go against the Board, shareholders are in effect expressing displeasure with the pay structure for Mr Dimon and other executives; they want rewards tied to a predetermined performance metric, like Return on Equity (ROE).

This may just be the way to go in a developing market like Nigeria where Good Corporate Governance is yet to take solid foot.  In this economy, much of corporate compensation are done arbitrarily regardless of value creation. Sometimes corporations reward failure.

It is now an imperative for shareholders to engage advisors to help determine metrics upon which to gauge Board performance after all skills for determining ROE, market share and profit margins and efficiencies are not exactly common place.