James Walker writes that investors could learn from the actions of a 15-year old.
A few years back a 15-year old girl, Natalie Clark, got up at the annual general meeting of one of USA’s biggest companies.
Others – adults - would have been sure to have been asking Bank of America's board in-depth questions about net interest margin, capital requirements, bad debt ratios. Perhaps because she didn’t feel the need to impress her compatriots, her question was a little more simple and pointed:
“What is the bank doing to raise the share price?”, Natalie asked the BoA board1.
She had a vested interest – 5,000 shares she was given as a baby.
The next AGM she got a little more specific2, considering whether she should use her shares to pay for her college education, asking the CEO what the bank is doing to improve its cost structure.
The point from Natalie is that she is taking an active interest in how her money is being spent by the company in which she has invested. She has taken being a shareholder seriously, thinking about her own interests – if the BoA shares will pay for college – and then overlaying that with the performance of the company. When she didn’t know the answer, or was unhappy with the answer, she asked more questions.
“There’s a lot of people who own stock…but [at the AGM] there’s barely enough to fill half a ballroom at a hotel,” Natalie said.
All investors would do well to take a leaf out of the then 15-year old’s book (or phone, or ipad). Although not all of us want to be activist investors, we can maximise our returns by being active, attentive and interested investors looking at the long term.
According to Benjamin Graham, in the short run the sharemarket is like a voting machine, preferencing popular companies over less popular ones. However, over the long run the sharemarket is more like a weighing machine, measuring how solid a company is – return on equity, growth, dividends - and ranking companies appropriately.
Similarly, we do not look at investment in companies because they may win a short term popularity contest. We weigh them up over the long term.
Being an active investor means taking a keen interest in how the business model of a company is travelling and how solid it will be moving into the future. It is only in that way that investing becomes less of a turn of a roulette wheel and more of an intelligent allocation of capital.
Unfortunately, many investors have moved in the opposite direction to Natalie Clark. Rather than taking an active interest in their investments, they have moved to invest in index funds. These index funds themselves do not take an active role in markets, but match market movements through machine trading.
With so much capital now tied up in backward-looking index funds, and liquidity so relatively small because of it, it becomes even more important for human investors to take an active role in the future of their investments. Just like a 15-year old.
This article reflects opinions as at the time of writing and may change. PM Capital may now or in the future deal in any security mentioned. It is not investment advice.