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Are all Compounding companies owner operated?


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A thought occurred to me recently: that virtually all companies that compound at > 17% say are owner operated.

 

Now of course, the sample is inherently biased due to the nature of the compounding companies, most of them start small and thus would tend to have an owner operator, yet, I can only think of two companies that were not and really the owner-operators were not long gone:

 

Intel, after  Noyce and Moore and Walmart after Sam Walton, but I would argue that these don't count:

 

Intel, which really was owner operated given that the founders hired Grove as the 3rd employee and he had a ton of stock, and the founders were still around through 1987.

 

Walmart, after Sam Walton.

 

Anyway, are there any compounders that are truly not owner-operator companies?

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the tobacco companies.

 

On cursory inspection, the tobacco companies don't look like 17 plus compounders to me. Just looking at the 10 year charts, MO and BTI look more like 7% at the most, adding back the Altria spinoffs.  (But that is what is interesting.  One could argue that Loews did not do that with their company, but of course you could respond that they did not have to; they already had other businesses.) 

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the tobacco companies.

 

On cursory inspection, the tobacco companies don't look like 17 plus compounders to me. Just looking at the 10 year charts, MO and BTI look more like 7% at the most, adding back the Altria spinoffs.  (But that is what is interesting.  One could argue that Loews did not do that with their company, but of course you could respond that they did not have to; they already had other businesses.)

 

Not sure what I should say...maybe "look more carefully"?

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AAPL (what was Jobs' stake - really low AFAIK)?

 

I don't remember the exact number, but it was low. It's because he sold all but 1 of his shares after he was forced out of the company. He made most of his money from selling Pixar to Disney, actually.

 

But he had an owner's mindset (more than many people who own large % of companies), so the number of shares he owned didn't matter in this case...

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AAPL (what was Jobs' stake - really low AFAIK)?

 

I don't remember the exact number, but it was low. It's because he sold all but 1 of his shares after he was forced out of the company. He made most of his money from selling Pixar to Disney, actually.

 

But he had an owner's mindset (more than many people who own large % of companies), so the number of shares he owned didn't matter in this case...

 

True but at the time people pointed to the terms of his options and Gulfstream jet gifted from the company as glaring examples of the worst of corporate governance, and many people refused to consider Apple in a turnaround phase just under the view that the view to shareholders was highly unfriendly and even unethical. Only in hindsight is the mindset more appreciated...

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True but at the time people pointed to the terms of his options and Gulfstream jet gifted from the company as glaring examples of the worst of corporate governance, and many people refused to consider Apple in a turnaround phase just under the view that the view to shareholders was highly unfriendly and even unethical. Only in hindsight is the mindset more appreciated...

 

Exactly. He treated the company as his toy and the fact that shareholders got great return had nothing to do with his "owner's" attitude. People are just trying to shoehorn every success story into "owner operator" box.

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^Actually, that's the point. Owner-operated/compounders does not mean shareholder friendly. Rather, I feel that the best owner-operators are the ones that are regularly ignoring shareholders in order to execute on a very long term vision. Steve Jobs treated shareholders as a nuisance, however by thinking in the best interests of his company, he created a lot of value for shareholders, as a side effect.

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^Actually, that's the point. Owner-operated/compounders does not mean shareholder friendly. Rather, I feel that the best owner-operators are the ones that are regularly ignoring shareholders in order to execute on a very long term vision. Steve Jobs treated shareholders as a nuisance, however by thinking in the best interests of his company, he created a lot of value for shareholders, as a side effect.

You don't need a free Gulfstream jet to execute on a very long term vision, and it has nothing to do with thinking in the best interests of "his" company. The new products were simply so good that no matter what returns would be great. They probably could have been better, but no-one complains when the company is a 100-bagger. Unfortunately, most companies don't manage to pull an iPhone-like success from their hat and only manage mediocre returns if company resources are wasted on free Gulfstream jets.

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Another note is that in the past - and even currently in some countries (China, for example) - the owner operated companies have been a dirty word. The owner operators can treat the company as personal piggy bank, engage in nepotistic behavior, etc. Owner operators can be as bad or even worse as non owner operators.

 

Even the best owner operators can have succession issues.

 

Not owner operated companies can be as good - or as bad - as owner operated ones.

 

KO hasn't been owner operated for ages, though it has not had 17% return for ages too now.

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As to the time frame, I left that open.

 

I probably should not have said all, but rather a large plurality  (40% to a majority) of compounders still seem to be owner operated.  (But bold absolutes unsupported by facts tend to get people agitated and talking, can you say Fox News?)

 

You do have some anomalies like Apple ('nuff said already) or Precision Cast Parts, where it really was owner operated for 36 years until 1986, then you have the next two CEO's who seem to have totally married a high integrity culture with their learned GE acquisition model.  Are they owner-operated, well strictly no, but...  (Who said that investing was either easy or a science?)

 

I should also note there were some 'interesting' inclusions those lists from turar:

  • Time Warner, wow, that is an argument for OO company, the AOL merger was one of the worst in the history of capitalism for Time Warner shareholders and one of the best for the OO AOL shareholders!
  • Counterfactual, CountryWide, dreck!

 

The implied argument is not that OO companies are all good by the way, that you should buy them willy-nilly, or that they do not have succession issues, but that since OO companies are incredibly over-represented among the compounders, looking for OO's is probably a reasonable strategy. (Along with finding the best companies at a fair price that are in growing markets.)

 

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looking for OO's is probably a reasonable strategy.

 

In US probably, in Europe maybe, in the rest of the world probably not (but likely you can't escape them if you want to invest there).

 

As Buffett (and Graham too, I think) said, go for hardworking, intelligent and honest managers, because hardworking and intelligent crooks will steal you blind.  Not to cast aspersions, but like some companies in the US, some of the dynastic companies companies in Taiwan, China and Thailand have treated minority shareholders like Putin treats his enemies.

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True but at the time people pointed to the terms of his options and Gulfstream jet gifted from the company as glaring examples of the worst of corporate governance, and many people refused to consider Apple in a turnaround phase just under the view that the view to shareholders was highly unfriendly and even unethical. Only in hindsight is the mindset more appreciated...

 

Exactly. He treated the company as his toy and the fact that shareholders got great return had nothing to do with his "owner's" attitude. People are just trying to shoehorn every success story into "owner operator" box.

 

He treated Apple as his toy?  Are you serious?

 

It would be more accurate to say that he treated Apple as his life's work and masterpiece. One of his stated reasons for doing a biography was that he wanted his children to know why  he was not there so often because his work through Apple was so important he believed.

 

With regards to the Gulfstream, it was gifted to him by the recommendation of Larry Ellison who was on apples board at the time.  The Gulfstream apparently cost about $90 million. At the time Steve Jobs was shuttling back and forth since he was CEO of Apple and Pixar at the same time. Given the many many billions of dollars of worth that he created both Apple and Pixar, and his subsequent impending death, hence his limited time, I don't think that the $90 million was a bad investment in fact it was probably an immensely good one. My guess is that if you with some numbers on the amount of money that his time generated, And the amount of time that that Gulfstream saved him, You would come up with a pretty darn good ROI.

 

He didn't think in terms of generating money for shareholders, he thought in terms of creating amazing beautiful products that combined the best in design and technology.  He saw the company structure as a way for him to fulfill that vision.

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