Boost Your Returns by Showing More Skin (in the Game)

Kristin Orman By Kristin Orman, Research Analyst, The Oxford Club

Market Trends

Most investors know that a good management team is integral to a winning investment. That’s because CEOs are responsible for creating value for their shareholders.

Unfortunately, the interests of a public company’s leaders and those of its investors don’t always align…

Enron is a good example of what can happen when a CEO lines his pockets at the expense of the company and its shareholders. The company used a complex system of accounting loopholes, partnerships and poor financial reporting to hide billions of dollars in debt from investors. Enron filed for bankruptcy in December 2001 after the fraud was revealed.

But there is an easy way to weed out the good companies from the bad ones. By doing so, you can significantly boost your investment returns.

Creating Shareholder Value

During my tenure as an investment banker, I met with many CEOs and management teams. They were hoping I’d help them raise money to grow their businesses.

Not all of these companies ended up being lucrative investments. I found that in nearly every case, the company’s leadership made the difference between success and failure.

The companies with solid leadership went on to see surges in their stock prices. Those that lacked good leaders often saw their shares plummet.

One day, I asked one of my investment banking clients the secret to his success. He was a serial entrepreneur and had helped start several very profitable public companies.

“It’s simple,” he said. “You have to feed baby before baby feeds you.”

(He wasn’t talking about his children, though he loved to brag about their accomplishments too.)

He was talking about all of the companies he had started.


Raising a Public Company

What he meant was that growing a company is a lot like raising a child. It takes a lot of blood, sweat and tears. And plenty of money too…

You see, this serial entrepreneur and his partners treated the companies they launched as they would their own children. Every decision they made was for the long-term success of the business.

And when the company needed cash to continue growth, they were there to cough up the dough and extra hours to make it work. By the time I met my client, his company had gone public and the management team held a significant stake in the company.

On Wall Street, they call this “skin in the game.” What it means is that a substantial portion of the executives’ wealth is tied up in the company they run. Usually, it’s the majority.

In other words, the executives have to truly put their money where their mouth is. Their fortunes are directly tied to the success (or failure) of the companies they lead. And this makes their stocks the most shareholder-friendly investments.

And studies have shown that the companies run by management teams with skin in the game have outperformed the S&P 500 by more than 300%!

The FANG Stocks Reveal Some Skin

The so-called FANG stocks are a great example of what happens when “baby” grows up and starts to feed her creators… and her other shareholders.

“FANG” is the acronym given to this year’s high-flying tech stocks – Facebook (Nasdaq: FB), Amazon (Nasdaq: AMZN), Netflix (Nasdaq: NFLX) and Google parent company Alphabet (Nasdaq: GOOGL).

Facebook CEO Mark Zuckerberg owns more than 430 million shares of his company’s Class B “super voting” shares. This year, Zuckerberg’s net worth has risen to $71.5 billion.

Shareholders of the world’s largest social media network have seen their fortunes rise too. The share price is up nearly 50% since the end of 2016.

Amazon CEO Jeff Bezos owns nearly 80 million shares of his company. He’s now worth $82.5 billion.

Amazon investors are doing well too. The online marketplace’s stock is up 30% year to date.

Netflix CEO Reed Hastings owns 5.86 million shares of the company he helped launch. His fortune is now $2.5 billion.

His company’s shareholders haven’t done too shabby either. Netflix shares are up 45% so far this year.

Alphabet CEO Larry Page owns 20 million shares of the company’s Class C stock. He’s now worth $44.5 billion.

Page’s hard work has paid off for Alphabet’s shareholders, with the stock up more than 19% this year.

These entrepreneurial tech CEOs and their shareholders have a very important thing in common: Their wealth is tied to their companies’ stock prices. And these executives have done a great job building shareholder value for themselves and their investors.

Managing Even Higher Returns

Investing alongside entrepreneurial management teams with skin in the game pays off… big time. And best of all, these stocks outperform in every market… which is great news given today’s uncertain economic climate.

How can you find more of these companies?

Wealthy Retirement Editor Marc Lichtenfeld recently discovered a way to generate even bigger returns using this entrepreneurial phenomenon. He calls them “F Shares.” Click here to find out more.

Good investing,

Kristin