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Take Stock Of Your Shares

November 26, 2009

In one form or another, most all Americans own “shares of stock” in a business. Some own the entire business, others own a limited number shares, and many others have an interest in stock through mutual funds, insurance policies, and retirement plans.

Just what do these “shares of stock” represent? “Shares of stock” are an equity investment. In theory, they represent an actual ownership interest in a business; a “share” of the business. As the owner of a “share” of a company’s stock, you are entitled to share, on a pro-rata basis, in the profits and the future worth of the business.

Simple concept, easy to understand. In actuality however, the value of “shares of stock” have come to be more dependent on the trading value of the “stock” rather than on a “share” of the company’s earnings. How has this evolved?

Way back when,”shares of stock” where primarily sold when a business needed additional capital to operate. The business simply sold “shares” of the business to others that had money to invest.

The purpose of selling the shares was normally to acquire the additional assets, inventory, materials, or equipment needed to operate the business. The individuals who purchased the “shares” were buying a share of the profits that would result from the operation of the business.

In order to sell the “shares”, the business would offer evidence of its ability to generate the profits with the proceeds from the sale of its “shares”. Prudent investors, recognizing their investment depended exclusively on the success of the business, were careful to invest in businesses they understood or with people they had reason to trust.

If the business prospered, the investors received their share of the profits. If the business failed, the investors received only their proportionate share of the residual value. The investor’s share of income from the business was the exclusive motivation for buying a “share of stock”.

That income might be returned to the “shareholders” over time in the form of dividends or, those initial shares of profit might be reinvested in the business to increase the income earning capacity of the business so that it could pay a higher return to shareholders at some future date.

My how times have changed! Today, equity investments are no longer thought of as “shares” in the earnings of an enterprise. Stocks are now sold in all shapes and sizes for previously unimagined purposes.

“Shares of stock” have become simply “stocks”, a product unto themselves. They have a value and life of their own, often independent of the actual performance of their business. Some stocks are still traded even though the business in which they represent ownership no longer exists!

Is it little wonder why the individual investor is a vanishing breed in the “Wall Street” of today? Investing on the basis a “share” of income, while seemingly logical, can be dangerous if the majority of the investment community are trading the same “shares” based on different criterion.

While many fortunes have been made investing in “stocks” and “the market”, it appears that most individuals would be more comfortable investing in the original concept of “shares of stock”.

A recent published report discussed the personal investment preferences of the nation’s highest paid executives. These individuals, all with annual incomes well in excess of two million dollars, are primarily top executives in major publicly owned companies.

Interestingly, many of them did not invest in the stocks of other publicly traded companies. They invested in the businesses they ran and other businesses they knew or were closely associated with. It appears that their investment philosophy closely resembles the original concept of “shares of stock”.

Are there similar opportunities for the average private investor? There just might be some in your own backyard. Growing businesses and entrepreneurs, eager to begin, are always in need of capital. Private capital invested in private industry yields high returns.

Because your “shares” represent an ownership in the business, be careful to invest in businesses you understand.

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