What Does A Share of Stock Really Represent? – Fall 2012

We strongly encourage our clients to meet with us once a year. We do this for several reasons. Your investment portfolio reflects the short and long-term financial goals you’ve set for yourself. These objectives are a moving target. As you close on one goal and look to the next, we may need to rebalance your portfolio. We are often asked during an annual review whether a portfolio comprised primarily of stock is adequately diversified. This is a very good question.

When you own shares of stock in a company, your investment is with the company represented by the shares you own – not with the stock itself. Here is a simple example. Let’s say that you and I decide to buy a 100-acre farm in Howard County. We could choose many ways to own this farm. We may own it as a partnership, as joint tenants or… we could elect to form a company and issue shares of stock to ourselves that would represent our relative ownership of the farm. We would then be ‘stockholders’ but would we be invested in the ‘stock market’? Well…I guess we could call it that but since our company’s only business is to own 100 acres of farmland in Howard County, you and I as shareholders would actually be invested in farmland. The number of shares we hold (which represent the overall percentage of individual ownership) make distribution calculations simpler at the end of the year. And should the need arise, the shares are also a convenient way to sell some of our farmland to another investor. Bottom line: our money was not invested in stock but in farmland. The stock is simply an easy, and potentially a more liquid way, to own the farm. It’s easy to look through the stock ownership in our farm to the actual business of owning the farmland. This is the same way that we look through the stocks in your portfolio and focus on their business operations.

So… if your portfolio with Sycamore is all or mostly stocks, just what do you own? When we build portfolios from scratch, we generally purchase about 45 or 50 different companies. The percentage of your ownership is represented by the number of shares of stock that you own in each of the companies. But your actual investment is in the operations of the given companies.

We usually spread your total investment over all sectors of the economy. We do not try to guess which sector will be the best performer. Within your portfolio, you will likely own shares in companies that produce basic materials such as chemicals and steel. You may have equity positions in companies that drill for oil or produce electricity. Other companies you hold may produce a wide range of grain products or even soap – staples of modern life. You’ll have shares in companies that own and operate real estate holding, ideally in different regional markets. Additionally, you will likely own some small, medium and large companies.

Our goal is to keep you broadly diversified in all sectors of the economy. It’s the best way we know to fend off the unknown risks that are always coming down the road. In the future when other investors speak of being invested in the stock market…you can correct them.

Running the numbers…

I’d like to leave you with one last thought. Because we are wholly focused on the fundamentals of the companies that you own, we do not pay much attention to the “stock market” as a whole. We asked ourselves several key questions about a company before any recommendation or purchase.

  • Is this company well managed?
  • Does this company make a good product that is needed?
  • Has this company demonstrated consistent growth of dividends and earnings?
  • How much debt does this company carry?

You’ve probably got the picture. We believe that numbers are a better and certainly more objective measure of a company’s potential profitability than a glossy prospectus. A picture may be worth a thousand words, but I’ll take a balance sheet any day of the week. Take it from someone who’s been in the game for nearly 40 years, predicting the U.S. or any international market is a fool’s errand. At Sycamore, we gather data, crunch numbers, draw conclusions and act on the result.

Craig

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Comments contained above are meant to be generic in nature and are not meant for specific action.

By |2012-10-02T21:46:29+00:00October 2nd, 2012|Craig's Commentary 2012|0 Comments

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Craig Smith

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