- Individual Investors are LONG-TERM INVESTORS: Seven years is about the average for all companies, with 16-20 years for “better than average companies.” And many investors in companies with the best-known brands—or among the “most admired companies”—are second, third, or even fifth generation investors, as your editor’s grandkids are, in P&G. What’s the big deal about this? A hard core of long–term investors is a must if your company is to have the time it needs to successfully execute its long–term strategies…so please read on:
- Individual Investors WILL continue to follow the “Buffett Principle”—and to buy—and hold stocks—in companies they know and admire; with products and services that they know and admire… despite short-term buffetings in your stock price, and the blandishments of brokers (who only make money when you buy and sell and buy again) to take profits now, in order to buy the next-big-thing. But they will only do so if you continue to cultivate them, and to treat them, and communicate with them, as valued, long-term partners in your success.
- Smaller-cap companies take note: If you do NOT have a fairly large and solid core of long-term owners, or foolishly blow them off, you will NEVER get on, or back on the radar screens of Institutional Investors: None of them can AFFORD to buy and hold your stock if making a “meaningful investment” will cause the price to spike—and if an attempted withdrawal will cause it to tank.
- A solid core of individual investors automatically moderates stock price volatility. This is good for all investors: Some degree of volatility is good for your stock—especially those upticks —and no volatility is no good—because you’ll fall off, or never get on, the traders’ radar screens. But let’s face it; all investors—or their heirs—will have to sell some day. And usually, it’s because they need the cash now. And, when that day comes—whether you’re a regular stockholder—or an employee stockholder—or the Chairman of the Board— you don’t want to see the stock off 20% that day because earnings fell one cent short of institutional “expectations.”
- Individual investors provide a mighty floor to support your stock price—especially in distressing times: It’s not just because they continue to “buy on the dips,” because their modest buying power can usually be outgunned big–time by bearish institutions… who can always re-buy later and lower. It’s because most individual investors have a “floor” of their own; lower than which they simply won’t sell.
- A strong and loyal base of retail investors grows—and preserves—a company’s all-important Brand Equity: This represents REALLY BIG MONEY: Experts on “brand equity” estimate that a company’s brand accounts for at least 5% of its total stock price—and often more (think Apple—or Coca-Cola, or Hershey—or Merck, or Pepsi). Strong brand equity also helps to preserve shareholder value when troubles strike. It’s no cure all, for sure (look, for example, at the way BP stock tanked after the big oil-spill—or what’s happened to BofA’s stock) but think where they’d be if their individual investors gave up and moved on… and took their business with them.
- If you have 38% or more of your stock in “safe hands” (and please note that virtually all these hands belong to long– term individual investors) it is virtually impossible for impatient institutions or vulture capitalists to wrest control of your company strategy, or your company as a whole, away from your board: Will it make your company takeover proof? Of course not. Long–term investors will disinvest, and even the most patient will tender to a raider if they ultimately lose faith in your long–term vision. But note well; typically, it’s the walking away of long–termers that gives “investors” both the idea, and the critical mass to “take your company out” at a consequently distressed valuation.
- Companies with the right mix of individual investors have a lower cost of capital than companies that are thinly held or over–loaded with impatient investors. This represents BIG MONEY too: Lower volatility and strong brand equity (i.e., much less risk to investors) translates to a “premium price” for your stock—and to lower borrowing costs too—vs. your peers. As in any auction market, the bigger and the happier the crowd of bidders you have, the higher your market premium will be.
- Without a really solid core individual investors, your company’s stock can become constantly whipsawed by volatility or, just as bad, can get permanently stuck in the mud: As noted above, “good” institutions won’t touch it if a meaningful investment on their part will send your price soaring—or if a sell decision will drive your price down by five or ten percent. But speculators will have a field day when your stock is too thinly owned, or over–owned by short–termers.
- Individual investors will provide your company with huge amounts of extremely low cost long–term capital DIRECTLY—if you let them: Savvy electric utilities, for example, have been using DRPs and ESOPs to raise half or more the total equity capital they’ve needed for the past 35 years. And, they’ve raised it for pennies per share, vs. the 6–7% they’d have to pay over to the underwriters in a public offering. When major U.S. banks needed to dramatically boost their capital base in the eighties, they did the same. We are constantly amazed by the number of companies who could use ‘free money’—but fail to tap into this easy and cheap to tap pipeline.
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