are you ready to own a company?

sell

Have you ever dreamed of owning a business? I’m not sure it’s the fantasy of little Johnny or Susie swinging on the tire in the backyard. “Firefighter? Doctor? Professional wrestler? Naahh… I wanna own a company that produces widgets and sells them to knickknack factories!” Unlikely, unless you were the kind of kid that got pushed around at dodgeball time.

As an adult, have your dreams changed? Mine have – the one with the Muppets flinging knives in my direction haven’t been back in years. And I don’t dream of being a professional wrestler anymore (more or less). But I do dream of owning businesses. Lots of them. I am a part owner, for example, of one of the largest banks in the world. By part owner, I mean fractions of a smidgeon of a percent, but I am an owner of the business. They send me a nice little check for my share of the profits four times a year, too.

You may hear people say they buy Apple because of its great products. That makes no sense to me. Atari made a pretty cool product when I was in 4th grade. In fact, with the exception of the Intellivision I would argue Atari was the perfect kids’ toy (at the time). However, the company couldn’t KEEP producing fantastic products and managed to disappear off the face of the earth until some new company bought their logo to slap on their videogames.
Great products mean nothing to me as an owner. I want Benjamins in my chubby little fist. If my company sells a doodad that Gisele Bundchen sports as an accessory, great – but if I sell each one at a loss and have no plan to create the next cool doodad when she moves on to sporting a rabbit foot or whatever, I’m not happy. I would rather sell widgets at a profit than iDoohickeys at a loss.

And that, of course, is what makes Apple such an interesting company. They sell cool junk AND make a nice little bit of dosh doing it. Don’t forget that about 10 years ago Apple was practically dead. But like John Travolta, they reinvented themselves and became the hot new guy on the block…again. Great products had a lot to do with that, but making good money off those great products was what saved the company.

So when you think about buying a stock, don’t look at the products they sell, or how they are priced compared to competitors. You have to look at boring, detailed facts: do they have growth plans? Will they be made irrelevant by changes in the market? If you owned this company, would you be happy seeing your product everywhere but making nothing off of it (in which case I would call you a Bad Owner)? Find a company that has a long track record of growth – of returning excess cash to its owners or investing it in new product development. Do you want your CEO to be making $400 million a year if the company is tanking? Hm. Are you happy owning a company with more debt than assets? Hm.

If you take a step back and think about owning a company – as opposed to owning an abstract idea like a “stock share” or an “investment” – then you’re ready to buy stocks. If you are still thinking of buying eWhangaDoodle at 34 and getting out at 42 – then you’re still better off buying chips at Bellagio.

(all props to foundphotoslj on the image)

16 comments

  • Good point. At the end of the day it is all about the money the company makes and how well it reinvests that money. Products can be fickle things – Perhaps other than something like Coca-Cola.

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  • De Lorean had a great product too. Coke not fickle? What about New Coke?

  • Yeah, I’m more ready to own a lot of companies. Maybe 500? 😉 (I must be so rich!)

  • John Travolta’s back? I would need more proof than ‘Hairspray’ to back that claim…

    investing, it’s about being comfortable, ahem:

    http://variableinterest.blogspot.com/2007/12/its-about-comfort-levels.html

    yey dividends!

  • @LOD: Yep – reinvests OR (as you obviously focus on) pays it out in dividends. Coke is a decent example. Hunter, I think New Coke was part of a massively clever strategy to create massive demand for Coke Classic – it’s another one of those moments in corporate history where ol’ Steve straps on his tin foil hat and starts pointing at conspiracies. I still think it was all a scam to drive up consumption.

    @t h rive: You clearly never saw ‘Battlefield Earth.’ How that got passed over for an Oscar… but I digress. 🙂

  • Shawn@MoneyBrick

    I thought you were going to start talking about really owning a company for a moment there! But, your post went in a nice direction. I feel that what you said has Buffett written all over it. According to those who let out his secrets, he basically looks at companies in the same way you mentioned (you were very brief, of course) and it’s all about the bottom line for him. Companies like Coke that don’t spend much on capital machinery and aren’t so glamorous are great for him – as opposed to companies that appear in the sky like fireworks and then just as quickly disappear.

    However, I’d like to say that the basic goal of any company is profit. Maybe the goal is not profit for the investors, but profit for the entrepreneurs, managers and board-of-directors, surely. It’s only when things go awry that a company is putting out goods or services at a loss. The ideal situation for any company is to give the customer what he or she needs/wants, and to make a healthy net profit. So basically, no company really aims for that negative situation you mentioned.

    I say this because you said that great products mean nothing to you as an owner. However, as a follower of Seth Godin, I feel that a great product equals a great company! If a company’s product is desirable to its audience, that audience will expand and grow and thus profits will do the same. Companies do, of course, have to make sure that people will buy their products/services for more than it cost them to develop, produce and market.

  • Interesting you use Apple as an example. Didn’t they start to build up again once Steve Jobs came back on board? So, no, the product can’t be all you look at. You have to look at who is managing the company as one of the important factors.

    Oh, thanks for reminding me that my dream of playing with the Electric Mayhem or wrestling Andre the Giant will never come to fruition!

  • @Shawn: Well, I was right there with you until you said that if a company’s product is desirable the audience will expand and grow and profits will do the same. It is not an automatic correlation. You can mismanage a great product – prices can be set too low/high, marketing can be bad, etc. I have seen awesome products that just couldn’t be sold profitably… now, maybe just awesome to me, but still the great product = profitability equation isn’t automatic. Seth is awesome, but I disagree sometimes with his “if it is truly great, people will come.” iPods were cool, but let’s face it, there was a LOT of kick-ass marketing going on there.

    I would also say that the goal is profit, but some companies mistake short-term profit for “good” profit. I won’t get too long-winded in comments, but I worked for a marketing-intensive cosmetics company at one point. They were VERY careful which products were named after the company and which were called by generic names. Even though the $1.99 cologne sold at Wal-Mart would sell much, much better with the “big name” attached, they didn’t want to damage their other brands. So they took some short-term loss of profit to enhance their long-term prospects. A lot of companies miss this point and churn out junk that makes money in the short term, but hurt the company long term. That’s a major distinction, if you ask me…

    @FFB: Right! What Jobs did – in my opinion – is come up with great products but more importantly he made them profitable through marketing and demand. A Zune is practically the same as an iPod, but the marketing and presentation and ‘mystique’ weren’t even close.

    And yes, sorry, your dream of wrestling with Andre the Giant (May 19, 1946 – January 27, 1993) is not going to happen.

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  • Well done. Not letting on that you were talking about investing from the start is a great way to get readers into thinking of investing as owning a business and not gambling.

  • i watched “The Thin Red Line” again last night. Travolta plays a pretty cool part in that flick. Practically a cameo. Good movie.

  • I disagree! Intellivision was great… when i was a kid, i couldn’t get enough of Burger Time and Lock and Chase.
    Good article though… I’m a regular reader. Keep it up.

  • One more thing… what you said about tv vs. movies is why I got tired of the show “Lost”. It would have made a great movie but after a few hours, you just want an ending and to go on with your life. The show sucks the life out of you.

  • @Lucky: No, no, you misunderstood – I liked Intellivision, too. I meant Atari was the perfect toy, except for maybe the Intellivision. The Atari’s graphics were much worse but the games were cooler. I loved the Star Wars game with the Walkers.

    And I never got into “Lost”, but you’ve described the problem with about 99% of the dramas on TV – most of them would make excellent miniseries or long movies. “Lost” sounds like it would have made a great 1 or 2 season show, then end it – but of course that advertising money is going to keep it dribbling on to a dull and unsatisfying conclusion (like “Angel”, for example).