Sunday, August 30, 2015

Investors by Allen Laudenslager & Bryan Neva (2005)

With all the turmoil in the stock market this past week, I thought I'd post an article my writing partner Allen and I wrote over ten years ago about business investors.

Investors supply the capital (money, buildings, or machinery) an entrepreneur needs to start a business. Given the high risk of failure for new companies, investors typically demand a very high rate of return (RoR) on loans or a significant equity ownership stake in the business. If the company is not yet publicly traded, the stock is purchased directly from the company and the money is used either as startup or operating capital. In these cases, the investor generally has some relationship with the founder or someone involved in the day-to-day operation of the business. If the stock is publicly traded the investor is less likely to know the founder or any of the people operating the business.

Investors have perhaps the simplest needs of any of the divers groups of business stakeholders because their involvement is mostly financial. This is not to say that the investors don't care what the business is or what it's business practices are, but first and foremost the investors want a return on their investment (ROI). Money hidden under a mattress actually loses money because a dollar today is worth more than a dollar a year from now which why interest is typically paid for the use of that dollar. So money is generally put to work so that it generates more money and doesn't lose its value. We all work hard for our money, so it's only fair that our money work hard for us. Once the investor is satisfied with the ROI then they need to be satisfied with the kind of product or service supplied and how the business is managed.

Warren Buffet (nicknamed the "Oracle of Omaha") is probably the most famous investor today. Starting in 1957, he amassed a multi-billion dollar fortune from very astute, long-term investments through his investment partnership company Berkshire Hathaway. Typically, his company makes investments in undervalued companies that are frugally managed and have good long-term growth potential. Berkshire Hathaway has outperformed the S&P 500 and the Dow Jones Industrial Average for over forty years. Buffet is a graduate of the University of Nebraska and also has a Masters in Economics from Columbia University. His father was a stockbroker and U.S. Congressman from Nebraska.

Buffet has been very successful because he looks at the big picture and invests for the long-term. When Buffet buys a privately held company, he'll remind the owners that the company isn't worth a cent more after sale than it was before the sale. His involvement after he buys a company is to hire the top managers and establish their compensation package. Usually his top managers work for relatively small base salaries (around $100,000 per year) and a significant share of the profits. If their companies earn a good profit, the managers can earn millions, but if they don't earn a profit, the managers only earn their base salaries. Needless to say, his managers could lose their jobs if their companies consistently lose money. Buffet's most famous quote is, "If a business does well, the stock eventually follows!"

Where the investor looks beyond the ROI there are many non-monetary needs to fill. For example, some investors will buy stock in a company that operates pornographic websites if the ROI is high enough; others will not invest in that type of business, no mater what the return. Beyond the simple decision to invest in a certain type of business, other investors will look at management practices. The most obvious example is the investor who seeks out businesses that try to minimize their impact on the environment such as “green” mutual funds that only invest in environmentally friendly companies. There are other investors that only invest in companies which practice social justice.

Father Claude Lenehan, O.F.M. (a simple Franciscan Friar who resides at St. Anthony Friary in Ho-Ho-Kus, New Jersey) has spent the better part of his professional life advocating corporate responsibility and social justice. Under the umbrella of a socially conscience, religious advocacy organization that promotes corporate business responsibility through its members (The Interfaith Center on Corporate Responsibility,; the organization includes most of all the major Protestant Christian denominations and over 270 Catholic Christian religious orders and diocese) he has tirelessly worked to influence multinational corporations into behaving ethically and responsibly especially with people in developing nations. He's done this mainly through an active role as a proxy at shareholder meetings that make decisions on corporate governance. Father Claude believes we all should use some of our investment dollars to help the poor in underdeveloped countries rather than exploiting them.

For Father Claude, being a good investor means being a good steward of our investment capital: finding a balance between the practical and the charitable; that is, the practical side of investing would be going after the highest yield with the lowest risk and the charitable side of investing would be perpetuating the condition of the poor and fostering dependency. In his unpublished essay titled Roman Catholic Rationale For Alternative Investments, Father Claude writes: 
Generally, alternative investments use their resources in low interest, long-term loans for development projects, leading to self-reliance, social justice and people’s participation in their own economic growth. Capital is thus used in response to poverty and under-development. Furthermore, it would challenge us to examine our unquestioning investment in the multi-national corporations and commercial banks, which can be exploitive in their pursuit of profit. Alternative investments would be “good news for the poor” and a sign of the times in accord with the challenge Pope John Paul II addressed to American Catholics on the use of our (financial) resources: “Nowhere does Christ condemn the mere possession of earthly goods as such. Instead, he pronounces very harsh words against those who use their possessions in a selfish way, without paying attention to the needs of others. Christ demands openness from the rich, the affluent, the economically advanced; openness to the poor, the underdeveloped and the disadvantaged. Christ demands an openness that is more than benign attention, more than token action or half-hearted efforts that leave the poor as destitute as before or even more so (Pope John Paul II, October 2, 1979, New York, NY).” 
As investors, we all have to be cognizant of our important role in business and the good our investment dollars are doing.

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