Imagine that your wealth manager recommends an investment into a fund managed by someone you’ve never met and likely never will, someone you’ve only read about, who is partnered with a team of professionals whose names you mostly don’t know.
Further, while you have access to the manager’s track record, you have no clear understanding of how they plan to make money. They hint that their strategy will be somewhat different than previous ones, but won’t offer any details. And in this fund, the management team decides how much of the annual revenues to keep for themselves in the form of compensation, and how much accrues to the benefit of investors. Finally, they also decide how much, if any, of those revenues are paid out to investors in the form of dividends.
Does this sound like the kind of investment pitch that would persuade you to reach for your checkbook? I’m guessing no. Like some others in the investment world, I manage an investment business where the opposite happens — we carefully articulate our strategy, regularly make all of management available to our investors, have a fixed compensation scheme for managers based entirely upon performance, as well as a contractual dividend policy. And even with that, we are carefully scrutinized by prospective investors, and appropriately so. And yet, I am continually amazed at the correspondingly low level of due diligence that happens when people invest in the public securities arena.
Investors buy stocks accepting very little disclosure, and even less when it comes to checks and balances, and alignment of interests between managers and shareholders. Investor disclosures are generally so poor that even a well-educated analyst would struggle to assess the true value of many companies, or the risks inherent in their businesses.
Even a powerful and massive company like Apple is, in my mind, far riskier that many would imagine. While it has long been one of the dominant consumer goods/technology companies, it would have to continue to innovate successfully in a way that hasn’t been done before by similar companies to justify its enterprise value. BlackBerry dominated handheld devices not long ago and is now a much less valuable company. Even more alarming is Palm, which was an early mover in this space and was perhaps the Apple of its time. Right now, younger generations would struggle to recognize that name. And, yes, Apple has a massive pile of cash. However, history has shown that management of public companies are loath to return that cash to investors for fear of shrinking their empires. They opt instead to grow their empire by using the cash for acquisitions.
My point is not to pick on any single stock, but to illustrate one of the main disconnects I see in the investment world today: Investors are far too complacent when investing in the stocks of public companies — displaying a willingness to accept risks, a lack of transparency, and poor alignments of interest they would never accept in a nonpublic investment.