The Shareholders Are Not The Owners Of A Corporation

The contention that the shareholders own companies is based, at best, on lack of understanding of the law, of business, and of history. At worst, it is driven by greed, power, and the desire to protect a business governance that has devastated much of America for some 40 years.

Why, you might ask, is the issue of who owns the corporation so vitally important? Because at the heart of the debate between two versions of capitalism lies controversy. One side feels a deep need to protect the interests of the shareholder first and foremost. The other side feels the pain that comes from de-prioritizing the other stakeholders in a corporation – including its employees, customers, and the community in which it lives.

In truth, the shareholder almost certainly will do as well with either version of capitalism. Change is always hard and threatening to those wanting to protect the status quo even if it won’t cost them a thing. But I contend there is a problem with the status quo, with the current version of capitalism, which serves the shareholders well, but has proven to be catastrophic for the vast majority of the American people and detrimental to American competitiveness on the global stage, particularly in our economic rivalry with China.

Further, it is now proving to be a major threat to our democracy. Thus, a change away from shareholder primacy capitalism must be made decisively and with utmost urgency. The defense of the status quo—shareholder primacy governance—rests increasingly on the rationale that the shareholders are the true owners of the corporation and therefore have the right to demand whatever is in their best interest.

But before we blindly adhere to that idea, it is vital we examine these versions of capitalism, the experience the nation has had with each; and why the issue of corporate ownership becomes an important – if not central — consideration.

Capitalism And Its Multiple Versions Of Governance

The ferocious debate in the U.S. today is really between two forms of capitalism. Not of capitalism itself which continues to be the most powerful economic engine ever created by humankind. Capitalism by itself with access to needed resources, including capital, labor, and a sustainable supply chain and embracing the principles of prudent risk taking, wise apportionment of incentives and rewards, and a commitment to practical long-term investment—acts like a brilliant inanimate engine.

It has no ethical or moral components. And that’s why the governance, the rules of engagement, become so very critical. Vitally, governance identifies the beneficiary of this amazing capitalist engine. In China, the capitalism engine is working brilliantly given what China intended. And there, the major beneficiary of much of the value creation goes to the Communist government. In some Nordic European nations, capitalism rewards both shareholders and, through taxes, government projects which provide citizens with some combination of free education and/or free healthcare. Much of Europe, through taxes, has a very elaborate societal safety net. But the engine is still primarily free enterprise capitalism.

Shareholder Primacy Capitalism

In the United States, the governance for the last 40 years has been clearly committed to give the shareholder priority over any other company stakeholders. This is the concept of shareholder primacy every CEO and board director knows: The purpose of business is to maximize short-term shareholder value. Recently, it has been contended that this is fair and just because the shareholders own the company.

The other stakeholders, for the last four decades, became secondary: the customers, the workers, the corporation itself, the vendors, community, the planet. Even in this system, the capitalist engine worked magnificently. As intended, it drove short-term shareholder value to unimaginable wealth and prosperity. The other stakeholders became deprived and exploited. And the guardians of this governance became the financial community which enforced the system with aggressive brutality.

The CEOs and others in the C-suite of top corporations became corrupted by equally unimaginable compensation, as long as they delivered on this shareholder demand. And if they couldn’t or didn’t do it, they were summarily dismissed. If and when the CEOs and boards of directors tried to deviate from this strict behavior, the company was punished by the financial community which has the power to drive down the company’s price in the stock market.

Before the pandemic, Bank of America downgraded Chipotle’s stock because an analyst decided the company was paying its workers too much. As a result, the company’s price declined by 3%. When American Airlines announced pay raises for its pilots and flight attendants, Wall Street punished the company by dropping its stock price 5%. The message sent to the market was clear — workers were to be squeezed and the benefits belong to shareholders. So, for 40 years workers’ wages have been relatively flat sitting at, or often below, inflation.

Lastly, in the past decade, shareholder primacy expanded the intensity of activists who acted like terrorists, blackmailing and terrorizing CEOs and corporate boards alike. Historically, activists have served the business community well. Often, they worked with management to help increase value creation. Occasionally, they did take over the company with intention to hold the stock and capitalize on the inherent, but previously underperforming, value creation.

But this new group of activists employ a different strategy. They take over the company, take out the cash, cut R&D, fire as many people as possible and in the shortest possible time, flipping the company after taking it public or selling the corpse to a strategic buyer. All in the name of maximizing short-term value. Of late, they don’t even have to take over the company. They buy in to the target company and threaten to run their standard play if the company will not “voluntarily” provide that extra short-term value at the expense of all the other stakeholders.

Another brutal tactic to drive shareholder value is the tax efficient practice of stock buybacks. Trillions of dollars have been created to benefit current shareholders in the stock market by reducing the number of available shares. This artificially increased the value of the remaining shares, without creating organic value to the enterprise. This is financial engineering at its best. (Prior to 1982, stock buybacks were illegal and were considered stock manipulation.)

Before the pandemic, 54% of business’ operating profits went to shareholders through stock buybacks and an additional 37% were distributed in dividends. Some 90% of American businesses’ operating profits ended up with shareholders. As a result, 25% of Americans by income, almost all shareholders, came to own close to 98% of the value of the stock market.

In the first four months of 2021, the stock buybacks practice continued and recorded the highest levels in 20 years. And what a negative impact this extraordinary use of operating profits turns out to be. Workers are grossly underpaid. And corporations that used to lead the way by investments in R&D and basic research were starved by this choice. America used to be the leader in technology, transportation, semiconductors, computers, medical science and more.

For example, America invented synthetic biology but now we trail Chinese scientists. And where are we on 5G technology? In a recent interview, Intel CEO Pat Gelsinger cried out, “Our competition is out to eat our lunch. And if we don’t fight for it, every single frickin’ day, we are at risk of losing it.” Government investment support continues to be anemic as well. Simply put, business must step up. Because right now we’re setting stock buyback records. We are world champions at this, indeed.

But the most cruelly treated victims of shareholder primacy were the workers. Their unfair, unjust, and unreasonable wages created a catastrophic microeconomic disaster. It affected families; it created an unequal quality of education which placed American kids at the bottom half of the developed world. It also catapulted America as the most unequal nation with the most immobile society among peer nations. Just one more fact.

Prior to the pandemic, some 60% of American homes had to borrow money most months to put food on the table, or to pay to keep from losing the roof over their heads. So, this is the fallout from the shareholder primacy system. A perverse version of capitalism that the shareholder community today is fighting to protect. And it’s finding some allies in Congress as well, who are the recipients of huge contributions to their reelection campaigns.

Another serious impact of four decades of shareholder primacy is our democratic way of life. The affected Americans are losing hope in our government’s ability to be fair and just. Populist forces have exploited this group and authoritarian forms of government sprang forth in various parts of the world in the last 40 years (Turkey, Hungary, Poland). The same movement has been active and threatening our democratic institutions here in the United States.

This unjust version of capitalism is the driving force that created our vast socio-economic inequality here at home. It must be noted that the most egregiously affected and deprived groups in our society have been the black and brown communities as the Covid-19 pandemic so tragically demonstrated.

But if the shareholders do not own a public corporation, how can one continue to defend such a flawed and damaging form of capitalism? And this is why the question of who owns the corporation becomes an important part of why a better, more just, more balanced form of capitalism is absolutely America’s best choice moving forward.

So, Who Really Owns The Corporation?

Simply and clearly, the corporation owns its own assets. In the simplest terms, a private company became a public company when the original owners gave up ownership. In turn, they received a stock certificate outlining certain rights to profits and other privileges. What they got, again, was a stock certificate not a certificate of ownership. The word “ownership” does not appear in that document.

Additionally, while the shareholders are entitled to a portion of profits, as shareholders, they are no longer exposed to liabilities of the companies in which they hold shares. They are granted, in essence, total immunity! Furthermore, the shareholders can come into a stock whenever they want, and leave when they want (with very, very few exceptions). In today’s world, the stock owner may be a machine and shares may be held in a timeframe of milliseconds.

To me, these facts are ample and logical evidence that preclude a shareholder from being a true owner. Do you know any business “owner” large or small who assumes no risk or liability?  I highly doubt it. Legally, there is no evidence that stakeholders are owners. No law – absolutely none— can be found which states that shareholders own the corporation.

In her 2012 book The Shareholder Value Myth, Lynn Stout, who taught at Cornell University Law School, successfully argued that shareholders don’t own the company – this was the foundational insight of that book. The lie being purveyed was that the law required companies to serve shareholders with as much profit as quickly as possible. She was quick to dispel the notion, citing three core reasons:

  • Directors of public companies aren’t required by law to maximize shareholder value. Companies are formed to conduct legal activities, that’s all, and profit is not a mandatory requirement, though profitability is always an advantage.
  • Directors of a company have full control of it. Shareholders have no legal right to govern the activity of a company for their own benefit. Directors can decide to reduce, not increase share price, if they believe it’s in the best interest of the company itself.
  • Shareholder primacy, where short-term profits are the primary goal, often leads to tragic consequences for the common good.

How prescient Stout’s comments turned out to be.

For those desiring a more in-depth explanation, one can find it in the words of Marty Lipton, arguably one of the most respected iconic stewards of American corporate law. When participating in a roundtable discussion hosted by the American Enterprise Institute, Lipton concludes that the shareholder fundamentally does not own the corporation. In his own words, “I don’t view the shareholders as outright owners of the corporation in a way one would own a house or a car.

They’re investors in the corporation and own the equity, and they are thus important constituents, but they are not the owners of the corporation as a whole. And for that reason the company should not be run solely in the interest of the shareholders.” He adds, “corporations can only exist within the overall umbrella of government and society.” His dispassionate rigor and logic are most convincing.

The full roundtable transcript for those interested is here. Then there’s an “agency” ownership argument. Joseph Bower and Lynn Paine laid that argument to rest in a seminal piece in the Harvard Business Review in 2017. Conclusively, the shareholders are owners of stock in the corporation. They are not the owners of a corporation’s assets. There can be no further, reasonable argument.

The Best Path Forward For Business: Stakeholder Capitalism

Multi-Stakeholder Capitalism was the capitalist governance that started the modern capitalism era in America in 1945. It lasted for some 40 years. During this period, America became the most dominant economic and military nation in the world. In addition, America’s middle class grew to remarkable size and wealth. This group became the world’s largest economic market.

Remarkably, in this 40-year period, the middle class’s value grew more than twice the rate of America’s top one percent (by income). It was a period when most all segments in America saw significant economic progress (a tragic exception was most of the African American community). Business clearly understood the power and meaning of this multi-stakeholder capitalism.

The Johnson & Johnson Credo brilliantly encapsulated this business responsibility in a truly authentic document of historic importance. Thus, multi-stakeholder capitalism is not an experiment. It is a remarkable 40-year demonstration period in our business history. Moving from history to present day relevance, JUST Capital has become the leading not-for-profit organization promoting the adoption of stakeholder capitalism.

(As a disclosure, I serve as a director of JUST Capital.) It ranks the largest 1,000 corporations in America on a “justness” criterion — as defined by the American people via polling —a surrogate for the principles of stakeholder capitalism. The findings are dramatic. Many of the most “just” companies also deliver the greatest return to the shareholders. As I noted earlier, stakeholder capitalism works superbly well in producing long-term shareholder value. Think about it. Workers now receive a proper living wage.

They produce incremental value for the corporation, motivated by sharing in the incremental value they create. The key is that incremental value is now produced. Next, corporations invest more in R&D and Basic Research to compete with China and other nations. The planet will become more livable by their ESG commitments. All these activities in a synergistic and symbiotic way produce that greater long-term value for shareholders. This is what Milton Friedman truly advocated.

It turns out that shareholder primacy and its devastating consequences promptly belong in the dustbin of history. Freed of the false myth of corporate ownership and it’s dangerous governance, stakeholder capitalism opens the door to the entrepreneurial power of a truly free version of capitalism that can lift all boats and create inclusive prosperity for all Americans.

In the end, stakeholder capitalism is one of the essential pillars of a sustainable democracy and the journey to create an equal opportunity for all future generations. That vision is worth the battles we must fight today. So, onwards.

Follow me on Twitter or LinkedIn. Check out my website.

Peter Georgescu is the Chairman Emeritus of Young & Rubicam Inc., a network of preeminent commercial communications companies dedicated to helping clients build their businesses through the power of brands. I served as the company’s Chairman and CEO from 1994 until January 2000. For my contributions to the marketing industry I have been inducted into the Advertising Hall of Fame. I immigrated to the United States from Romania in 1954. I graduated from Exeter Academy, received my B.A. with cum laude honors from Princeton and earned an MBA from the Stanford Business School. In 2006, I published my first book The Source of Success, asserting that personal values and creativity are the leading drivers of business success in the 21st Century. My second book, The Constant Choice, was published in January 2013. My latest book is Capitalists Arise! which deals with the consequences of income inequality and how business must begin to help solve the problem

Source: The Shareholders Are Not The Owners Of A Corporation

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Closeup of blue poker chip on red felt card table surface with spot light on chip

Preferred stocks are the little-known answer to the dividend question: How do I juice meaningful 5% to 6% yields from my favorite blue-chip stocks? “Common” blue chips stocks usually don’t pay 5% to 6%. Heck, the S&P 500’s current yield, at just 1.3%, is its lowest in decades.

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Companies sometimes issue preferred stock rather than issuing bonds to raise cash. And these preferred dividends have a few benefits:

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But it’s not all gravy.

You’ll sometimes hear investors call preferreds “hybrid” securities. That’s because they act like a part-stock, part-bond holding. The way they resemble bonds is how they trade around a par value over time, so while preferreds can deliver price upside, they don’t tend to deliver much.

No, the point of preferreds is income and safety.

Now, we could go out and buy individual preferreds, but there’s precious little research out there allowing us to make a truly informed decision about any one company’s preferreds. Instead, we’re usually going to be better off buying preferred funds.

But which preferred funds make the cut? Let’s look at some of the most popular options, delivering anywhere between 4.2% to 6.9% at the moment.

Wall Street’s Two Largest Preferred ETFs

I want to start with the iShares Preferred and Income Securities (PFF, 4.2% yield) and Invesco Preferred ETF (PGX, 4.5%). These are the two largest preferred-stock ETFs on the market, collectively accounting for some $27 billion in funds under management.

On the surface, they’re pretty similar in nature. Both invest in a few hundred preferred stocks. Both have a majority of their holdings in the financial sector (PFF 60%, PGX 67%). Both offer affordable fees given their specialty (PFF 0.46%, PGX 0.52%).

There are a few notable differences, however. PGX has a better credit profile, with 54% of its preferreds in BBB-rated (investment-grade debt) and another 38% in BB, the highest level of “junk.” PFF has just 48% in BBB-graded preferreds and 22% in BBs; nearly a quarter of its portfolio isn’t rated.

Also, the Invesco fund spreads around its non-financial allocation to more sectors: utilities, real estate, communication services, consumer discretionary, energy, industrials and materials. Meanwhile, iShares’ PFF only boasts industrial and utility preferreds in addition to its massive financial-sector base.

PGX might have the edge on PFF, but both funds are limited by their plain-vanilla, indexed nature. That’s why, when it comes to preferreds, I typically look to closed-end funds.

Closed-End Preferred Funds

CEFs offer a few perks that allow us to make the most out of this asset class.

For one, most preferred ETFs are indexed, but all preferred CEFs are actively managed. That’s a big advantage in preferred stocks, where skilled pickers can take advantage of deep values and quick changes in the preferred markets, while index funds must simply wait until their next rebalancing to jump in.

Closed-end funds also allow for the use of debt to amplify their investments, both in yield and performance. Should the manager want, CEFs can also use options or other tools to further juice returns.

And they often pay out their fatter dividends every month!

Take John Hancock Preferred Income Fund II (HPF, 6.9% yield), for example. It’s a tighter portfolio than PFF or PGX, at just under 120 holdings from the likes of CenterPoint Energy (CNP), U.S. Cellular (USM) and Wells Fargo (WFC).

Manager discretion means a lot here. That is, HPF doesn’t just invest in preferreds, which are 70% of assets. It also has 22% invested in corporate bonds, another 4% or so in common stock, and trace holdings of foreign stock, U.S. government agency debt and cash. And it has a whopping 32% debt leverage ratio that really helps prop up the yield and provide better returns (though at the cost of a bumpier ride).

You have a similar situation with Flaherty & Crumrine Preferred and Income Securities Fund (FFC, 6.7%).

Here, you’re wading deep into the financial sector at nearly 80% exposure, with decent-sized holdings in utilities (7%) and energy (7%). Credit quality is roughly in between PFF and PGX, with 44% BBB, 37% BB and 19% unrated.

Nonetheless, smart management selection (and a healthy 31% in debt leverage) has led to far better, albeit noisier, returns than its indexed competitors. The Cohen & Steers Select Preferred and Income Fund (PSF, 6.0%) is about as pure a play as you could want in preferreds.

And it’s also a pure performer.

PSF is 100% invested in preferred stock (well, more like 128% if you count debt leverage), and actually breaks out its preferreds into institutionals that trade over-the-counter (83%), retail preferreds that trade on an exchange (16%) and floating-rate preferreds that trade OTC or on exchanges (1%).

Like any other preferred fund, you’re heavily invested in the financial sector at nearly 73%. But you do get geographic diversification, as only a little more than half of PSF’s assets are invested in the U.S. Other well-represented countries include the U.K. (13%), Canada (7%) and France (6%).

What’s not to love?

Brett Owens is chief investment strategist for Contrarian Outlook. For more great income ideas, get your free copy his latest special report: Your Early Retirement Portfolio: 7% Dividends Every Month Forever.

I graduated from Cornell University and soon thereafter left Corporate America permanently at age 26 to co-found two successful SaaS (Software as a Service) companies. Today they serve more than 26,000 business users combined. I took my software profits and started investing in dividend-paying stocks. Today, it’s almost impossible to find good stocks that pay a quality yield. So I employ a contrarian approach to locate high payouts that are available thanks to some sort of broader misjudgment. Renowned billionaire investor Howard Marks called this “second-level thinking.” It’s looking past the consensus belief about an investment to map out a range of probabilities to locate value. It is possible to find secure yields of 6% or more in today’s market – it just requires a second-level mindset.

Source: How To Squeeze Yields Up To 6.9% From Blue-Chip Stocks

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Critics:

A blue chip is stock in a stock corporation (contrasted with non-stock one) with a national reputation for quality, reliability, and the ability to operate profitably in good and bad times. As befits the sometimes high-risk nature of stock picking, the term “blue chip” derives from poker. The simplest sets of poker chips include white, red, and blue chips, with tradition dictating that the blues are highest in value. If a white chip is worth $1, a red is usually worth $5, and a blue $25.

In 19th-century United States, there was enough of a tradition of using blue chips for higher values that “blue chip” in noun and adjective senses signaling high-value chips and high-value property are attested since 1873 and 1894, respectively. This established connotation was first extended to the sense of a blue-chip stock in the 1920s. According to Dow Jones company folklore, this sense extension was coined by Oliver Gingold (an early employee of the company that would become Dow Jones) sometime in the 1920s, when Gingold was standing by the stock ticker at the brokerage firm that later became Merrill Lynch.

Noticing several trades at $200 or $250 a share or more, he said to Lucien Hooper of stock brokerage W.E. Hutton & Co. that he intended to return to the office to “write about these blue-chip stocks”. It has been in use ever since, originally in reference to high-priced stocks, more commonly used today to refer to high-quality stocks.

References:

Why Is China Cracking Down on Ride-Hailing Giant Didi?

Just days after Didi Global Inc., China’s version of Uber, pulled off a $4.4 billion initial public offering in New York, the Chinese cyberspace regulator effectively ordered it removed from app stores in its home market, citing security risks. The ruling doesn’t stop the company from operating -– its half-billion or so existing users will still be able to order rides for now. But it adds to the uncertainty surrounding all Chinese internet companies as regulators increasingly assert control over Big Tech.

1. What’s Didi?

It’s China’s biggest ride-hailing company. Didi squeezed Uber out of China five years ago, buying out the American company’s operations after an expensive price war. Its blockbuster IPO on June 30 was the second-biggest in the U.S. by a company based in China, after Alibaba Group Holding Ltd, giving Didi a market value of about $68 billion.

Accounting for stock options and restricted stock units, the company’s diluted value exceeds $71 billion — well below estimates of up to $100 billion as recently as a few months ago. The relatively modest showing reflects both investors’ increasing caution over pricey growth stocks, and China’s recent crackdown on its biggest tech players.

2. What is this investigation about?

The specifics are still very unclear. Two days after the IPO, the Cyberspace Administration of China said it’s starting a cybersecurity review of the company to prevent data security risks, safeguard national security and protect the public interest. Two days after that it said Didi had committed serious violations in the collection and usage of personal information and ordered the app pulled. There are no details on what precisely the investigation centers on, when or where the alleged violations occurred or whether there will be more penalties to come.

3. Are there any hints?

The Global Times, a Communist Party-backed newspaper, wrote in an editorial that Didi undoubtedly has the most detailed travel information on individuals among large internet firms and appears to have the ability to conduct “big data analysis” of individual behaviors and habits. To protect personal data as well as national security, China must be even stricter in its oversight of Didi’s data security, given that it’s listed in the U.S. and its two largest shareholders are foreign companies, it added.

4. Is it just Didi?

No. The Chinese internet regulator has widened its probe to two more U.S.-listed companies, targeting Full Truck Alliance Co. and Kanzhun Ltd. soon after launching the review into Didi.

5. Was this out of the blue?

No. In May, China’s antitrust regulator ordered Didi and nine other leaders in on-demand transport to overhaul practices from arbitrary price hikes to unfair treatment of drivers. More broadly, Beijing is in the process of a sweeping crackdown on the nation’s Big Tech firms designed to curb their growing influence.

In November 2020 the authorities derailed the planned IPO of fintech giant Ant Group Co. and in April hit Alibaba with a record $2.8 billion fine after an antitrust probe found it had abused its market dominance. Didi, however, said on Monday it was unaware of China’s decision to halt registrations and remove the app from app stores before its listing.

6. Why does Didi matter?

You can’t really overstate just how dominant Didi is in ride hailing in China, accounting for 88% of total trips in the fourth quarter of 2020. When Didi bought Uber’s Chinese operations in 2016, Uber took a stake in the company that currently stands at 12%. Didi’s U.S. IPO was shepherded by a who’s who of Wall Street banks. Its largest shareholder is Japan’s SoftBank Group Corp. with more than 20%, and others include Chinese social networking colossus Tencent Holdings Ltd. However, due to Didi’s ownership structure, Chief Executive Officer Cheng Wei and President Jean Liu control more than 50% of the voting power.

7. How’s the company doing?

While Didi had a net loss of $1.6 billion on revenue of $21.6 billion last year, according to its filings with the U.S. Securities and Exchange Commission, its diversity cushioned it against the worst of the pandemic downturn. The company reported net income of $837 million in the first quarter of 2021. With growth in its core market beginning to slow, it has expanded rapidly into fields from car repairs to grocery delivery and has pumped hundreds of millions into researching autonomous driving technology. It’s also said to be planning to expand services into Western Europe.

8. What happens now?

On Didi specifically the critical question is what the review regarding user data finds. But analysts are already looking at the likely wider impact. Key issues are whether the action is likely to discourage other Chinese tech firms from embarking on an overseas listing, and whether the action marks a new direction for the regulatory crackdown. Didi itself said in a statement in would fully cooperate with the review. It warned though that the removal of the app for new users may have an adverse affect on revenue.

Based on the laws cited by the regulators, Didi is probably being investigated over its purchase of certain products and services from other suppliers, which may threaten national data security, according to analysts from Shenzhen-based Ping An Securities. “Didi will inevitably have to check its core network equipment, high-performance computers and servers, large-capacity storage equipment, large databases and application software, network security equipment, and cloud computing services, sort them out and make necessary rectifications to meet regulatory requirements,” the analysts wrote in a note on Monday.

Yang Sirui, chief analyst for the computer industry at Bank of China International, said that Didi went for its public listing in the US hastily, probably due to investor pressure. “Listing Didi as soon as possible meets the demands of the capital,” he said. “But if [Didi] had arbitrarily collected user privacy data, abused it, or monetized it illicitly, it will inevitably be punished by Chinese regulators.” Since its founding in 2012, Didi has undergone a number of private fundraising rounds, raising tens of billions of dollars from venture capital or major tech firms. According to its IPO prospectus, SoftBank Vision Fund is currently the largest shareholder of Didi, with a 21.5% stake. Uber (UBER) and Tencent (TCEHY) followed with a 12.8% and 6.8% stake respectively.

The Reference Shelf

— With assistance by Coco Liu, Molly Schuetz, Abhishek Vishnoi, and Colum Murphy

By:

Source: Why China is Citing Security Risks in Crack Down on $UBER rival $DIDI – Bloomberg

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Critics:

Didi is a Chinese vehicle for hire company headquartered in Beijing with over 550 million users and tens of millions of drivers. The company provides app-based transportation services, including taxi hailing, private car hailing, social ride-sharing, and bike sharing; on-demand delivery services; and automobile services, including sales, leasing, financing, maintenance, fleet operation, electric vehicle charging, and co-development of vehicles with automakers.

In March 2017, the Wall Street Journal reported that SoftBank Group Corporation approached DiDi with an offer to invest $6 billion in the company to fund the ride-hailing firm’s expansion in self-driving car technologies, with a significant portion of the money to come from SoftBank’s then-planned $100 billion Vision Fund.

DiDi claims that it provides over tens of millions of flexible job opportunities for people, including a considerable number of women, laid-off workers and veteran soldiers. Based on a survey released by DiDi in March 2019, women rideshare drivers in Brazil, China and Mexico account for 16.7%, 7.4% and 5.6% of total rideshare drivers on its platforms, respectively. DiDi supports more than 4,000 innovative SMEs, which provides more than 20,000 jobs additionally.

40% of DiDi’s employees are women. In 2017, DiDi launched a female career development plan and established the “DiDi Women’s Network”. It is reportedly the first female-oriented career development plan in a major Chinese Internet company.

References

Building Resilience: The Importance Of Audit During Times Of Disruption

The COVID-19 crisis has exacerbated the existing challenges facing businesses and exposed new risks that must be addressed. To better understand these challenges, Deloitte Global conducted a survey of 351 respondents from around the world in April and May 2020, at the height of the initial global COVID-19 lockdown.

Through this survey, we sought to better understand the value that c-suite, finance and audit committee executives, investors, shareholders, and board members place on audit as a result of COVID-19.

The results unveil some of the most pressing COVID-19 concerns, many of which are still relevant today, as well as executives’ changing perceptions about the role of auditors in approaching these challenges.

The importance of assessing risk

Deloitte’s survey reveals respondents were seeking insights that could help them assess the risk presented by COVID-19 or similar “black swan events.” In fact, 90% of executives in our survey felt that management could benefit by taking a page from the auditor’s playbook in assessing risks from such events. For example, adhering to sound internal controls principles and practices, employing robust systems of quality control, and entrenching a culture of ethics and integrity can go a long way to helping an organization remain resilient in times of crisis.

Businesses that seek to understand the long-term impacts of the crisis on their operating models are more likely to find new ways to quickly adapt to the post-COVID-19 world. To navigate this emerging environment, all participants in the financial reporting ecosystem from companies and boards to regulators, auditors, and investors, will need to continue to participate in regular and transparent engagement.

Successful businesses will find opportunities to learn from the COVID-19 crisis and use their experiences to prepare for future disruptive events. For example, some companies—Deloitte included—are leveraging their cloud infrastructure and investments in innovative collaboration tools as well as virtual learning.

Addressing resiliency concerns

While the pandemic has exposed weaknesses in the ways some businesses operate, it’s also ushered in a new reality of virtual working. Driving a reliance on digital technology and collaboration tools has left many executives concerned about the long-term efficacy of their pre-COVID-19 business strategies. When asked about the resilience of their companies during COVID-19, the two largest concerns for respondents were viability of their business models (e.g., impacts on infrastructure, logistics, technologies, ongoing operations, and go-to market strategies) (57%) and accounting and financial reporting issues (54%).

When viewed by geography, respondent concerns shifted somewhat. Brazil, France, India, and the US rated business model concerns the highest. European respondents in general showed greater concern for the health and well-being of their employees (49%), and Asia Pacific respondents’ had the greatest concern for customer relationships and future demand (49%).

The pandemic has impacted industries in different ways, and the results reflected these differences in executives’ concern by sector.

For example, consumer products companies cited financial resilience (capital stability and liquidity) and liquidity as their top concern (64%), while companies in the financial services industry were most concerned with the brand and reputation of their businesses (55%).

Evolving the financial reporting ecosystem

The economic and health crisis resulting from the pandemic has also caused the process of financial reporting to be far more challenging than before. Professionals must now deal with travel restrictions which prevent routine in- person meetings and activities, market volatility that impacts estimates and valuations, challenges of cross-border data sharing, and complex tax implications of work-from-home mandates.

It is therefore unsurprising that 54% of executives shared that navigating accounting and financial reporting issues was a top concern—this was an especially common concern among investors. They are seeking objective insight about systems of control and quality that informs guidance in difficult decisions relating to forecasts, estimates, and other judgments related to valuations and complex accounting treatments.

Infographic: Covid-19 concerns
Deloitte Global

When asked what actions their businesses were planning to take to respond to COVID-19 challenges, 63% of executives said they were focusing on communications with investors and stakeholders on business challenges and impacts. This response amplifies the positive potential impact that constructive engagement throughout the financial reporting ecosystem could have on markets.

Many regulators have acknowledged the uncertainties created by COVID-19 and emphasized the need for high-quality reporting that includes the transparent disclosure of new risks and assumptions made. These comments have provided some assurance for reporters and users of financial statements alike, and more regulator input will go a long way in reinforcing trust and reliability.

Access to timely, transparent, meaningful data and insights to inform financial reporting and associated disclosures remains critical. It enables stakeholders— investors, employees, suppliers, governments, and regulators—to identify which companies have so-far mitigated the disruptive effects of the pandemic.

Looking forward

As businesses continue to adjust to the new normal, understanding the long-term effects of the pandemic and what actions we all need to take is critical. COVID-19 has revealed just how disruptive events can be on “business as usual” and emphasized the need for future planning. With threats like climate change ramping up there is a lot to be considered and planned for. Further, the pandemic has brought into sharper focus the need for transparent and reliable information beyond historical financial statements.

Doing business has been forever changed, including how auditors operate. It is clear that the auditing profession has an important role to play in advancing economic recovery. This is why the conversation around the future of audit is so critical at this moment in time.

Jean-Marc Mickeler

Jean-Marc Mickeler

Jean-Marc Mickeler is the Deloitte Global Audit & Assurance Business Leader. He started his career at Deloitte in 1994, overseeing the audit of several major international banks. Jean-Marc holds an MSc in Management from Amiens Business School. He is a registered Statutory Auditor and an ACPR registered auditor. Jean-Marc has also served as the Chairman of the Professional Club Control Commission of the DNCG (Professional Football League) since 2017.

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AmandaLovesToAudit 39.1K subscribers

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For The First Time Netflix Name Checked TikTok As a Major Competitor

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Netflix acknowledged Disney, WarnerMedia, and NBCUniversal are among its main global competitors. But it reserved its praise only for TikTok.

In a July 16 letter to shareholders (pdf) tied to the company’s second-quarter earnings report, Netflix mentioned TikTok as a serious competitor for the first time. Then it offered plaudits for the Chinese-owned video app—something Netflix does not typically do for its traditional rivals in Hollywood.

“TikTok’s growth is astounding,” the letter stated, “showing the fluidity of internet entertainment.”

Since launching worldwide in 2018, TikTok has become one of the most popular apps in the world. It was the most downloaded app in the Apple App Store in both 2018 and 2019. Nearly half of its users are between the ages of 16 and 24—and about 90% of those users say they use the app every day. Last month, TikTok hired Disney’s head of streaming, Kevin Mayer, as its new CEO.

Netflix has long included a section in its earnings reports on competition, providing a window into the company’s thinking about which competitors it views as potential obstacles to growth. In 2014, the streaming service said its primary competition was traditional TV (including networks like CBS and HBO). A year later, Netflix began listing Hulu and Amazon in that group of rivals.

Over time, Netflix’s idea of its competition has expanded to include pretty much anything that takes place on screens: YouTube, Facebook, and even video games. “We compete with (and lose to) Fortnite more than HBO,” the company said in 2018.

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But, other than YouTube, Netflix has not considered the most popular social media and video apps to be threatening enough to single them out. It has never name-checked Instagram, Snapchat, or Twitch in its earnings reports, for instance. (Nor has it ever bothered to acknowledge the existence of Quibi. Poor Quibi.)

That makes it all the more significant that Netflix is now lumping TikTok with Disney and other entertainment behemoths.

As of now, all of TikTok’s bite-sized, shareable videos are user-generated. There is no scripted Hollywood content made exclusively for the service. But Mayer’s hiring, coupled with the app’s immense popularity with young people around the world, means it could eventually compete directly with Netflix for access to the top talent.

Even if it decides to stick with only user videos, TikTok is still occupying a big chunk of consumers’ finite screen time—time Netflix would much prefer they spend watching Stranger Things or Floor Is Lava.

The good news for Netflix is TikTok definitely will not be making any deals with Hollywood studios if it is banned in the United States. Because of its ties to China, the app has already been blacklisted in India, while the US is now mulling a similar ban over security concerns.

Also positive for Netflix is that it is still winning its original crusade: the streaming TV wars. In the same earnings report, the company announced it added another 10 million subscribers this quarter to go along with almost 16 million last quarter—its two best quarters ever. Its stock is vastly outperforming those of its Hollywood television and film competitors, who are hamstrung by the coronavirus-induced theater and theme park closures.

But another global entertainment war has already reached Netflix’s shores, and it poses an even bigger threat to its quest to become the world’s go-to source for all things entertainment. Every minute the next generation spends TikTok-ing instead of binge-watching is more time their media consumption habits change.

By Adam Epstein

Source: https://qz.com

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The Funds With The Smartest Investors, And The Funds With The Dumbest

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Are mutual fund investors impulsive? Do they jump into a fund after a winning streak and then sell out, in despair, after a bad stretch?

I tested this hypothesis by going to Morningstar MORN , the securities analysis outfit in Chicago. The Morningstar Direct database, the version of its service sold to investment pros, has performance details that shed light on timing decisions by fund buyers.

The answer to the question: Yes, fund clients are impulsive. Bad timing causes them to earn considerably less than they would have earned by buying and holding. On funds of domestic stocks, they’re throwing away something like $54 billion a year.

The key to this analysis is a number that Morningstar calls “investor return.” It measures the average results taken home, as opposed to the performance of the fund.

The usual performance number reported for a fund assumes a hypothetical buyer putting a single sum of money in at the beginning and leaving it untouched until the end of some measurement period, like a decade. Example: The Schwab 1000 Index fund delivered a 233% cumulative performance over the ten years to May 31. That amounts to a compound annual 12.8%.

The investor return on this index fund is a bit less, at 12.6%. This figure takes into account the monthly flows of money into and out of the fund. More precisely: If fund shareholders had been earning a constant 12.6% on every dollar they kept in play, they would have wound up with the fund’s ending assets. In short, the 12.6% measures average investor experience.

Where does the 0.2% shortfall come from? It means that buyers of this fund had a slight tendency to add money, or to take it off the table, at the wrong times. We’re human. After a bullish run we’re in love with stocks and buy more—maybe near a top. A correction in stocks makes bonds more appealing and we hold back, just when stocks are a bargain.

The mistakes among Schwab’s clientele pale in comparison to those of fund buyers generally. Morningstar has 827 domestic-stock funds with both ten years of history and sufficient detail on asset balances to permit a calculation of investor return. At 527 of those funds, not quite two-thirds of them, timing decisions lowered the annualized gains experienced.

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Among all 827 funds the average impact, with both positive and negative impacts included, was a loss of 0.64% a year. Keep that up for 30 years and you shortchange a $1 million retirement portfolio by $175,000.

It is important to understand what Morningstar is measuring. A shortfall does not occur when a customer is invested for only a portion of the ten-year period, since both the reported performance figure and the investor return are compound annual percentages. (Morningstar’s investor number is an internal rate of return. For an explanation of how that arithmetic works, see this article on how to compare your results to a yardstick.)

A shortfall will show up, though, if people jump into a style or sector after an upswing, only to be disappointed and then move into another kind of fund that seems to be the new ticket to wealth. Such performance chasing depresses investor returns at both funds.

Some funds have customers who are either lucky or smart. Their timing is good. They do better than the performance figures indicate.

These ten funds all beat the market, as measured by the Schwab index fund, and had customers who improved on those good results by being invested at the right times:

Noteworthy on this list are two funds from the Kayne Anderson Rudnick subsidiary of Virtus Investment Partners VRTS . KAR leans toward concentrated, quirky portfolios of stocks like Teladoc Health and Morningstar. (Forbes profile here.)

Winning funds with well-timed investor moves are the exception. More common: funds where investor flailing depresses gains. These ten underperformed the market and had customers who magnified the damage with their stumbling:

I asked the operators of the second group of funds for comments and got one, from Needham:

“Our mission is to create wealth for long-term investors. Those who trade mutual funds or try to time the market may see returns that are less than those who stay invested and have been rewarded with excellent long-term returns.”

Moral of this story on investor returns: Follow Needham’s advice. Invest with enough conviction that you can stay put.

And if your attention is fleeting? Maybe you should discontinue the search for market beaters and just own an index fund.

Here’s one more statistic from that Morningstar data set. The average investor experience in the 827 funds was a compound annual 10.5%. That’s 2.3 points less than the return on the Schwab 1000 fund. This shortfall comes from both bad timing by customers and a parallel flailing by the funds. In their struggle to beat the market the fund managers ran up trading costs as well as their own management expenses.

Yes, 2.3% is a gigantic loss. Keep it up for 30 years and you cut your $1 million retirement in half.

Follow me on Twitter.

I aim to help you save on taxes and money management costs. I graduated from Harvard in 1973, have been a journalist for 45 years, and was editor of Forbes magazine from 1999 to 2010. Tax law is a frequent subject in my articles. I have been an Enrolled Agent since 1979. Email me at williambaldwinfinance — at — gmail — dot — com.

Source: https://www.forbes.com

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Dow Surges 500 Points As Investors Bet On A Coronavirus Vaccine Breakthrough

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The stock market finished sharply higher on Tuesday, jumping over 2.5% as Wall Street continued to grow more optimistic about a reopening of the economy and a potential coronavirus vaccine.

KEY FACTS

The Dow Jones Industrial Average rose 2.2%, just over 500 points, at Tuesday’s open, while the S&P 500 was up 1.2% and the Nasdaq gained 0.2%.

Shares of Maryland-based biotech company Novavax jumped 4.5% after the company said it had started the first human study of its experimental coronavirus vaccine.

Merck shares rose nearly 1.5% after the pharmaceutical company announced that it is working in collaboration with scientific research organization IAVI to develop a vaccine.

Last week, another biotech company, Moderna, reported positive results from its vaccine trial. In total, there are 10 vaccines currently in clinical trials and another 114 in preclinical evaluation, according to a tally from Fundstrat.

marketboost

stockmarketboost

Economic data released Tuesday helped boost market confidence: Consumer confidence jumped by more than expected to 86.6 this month, up from 85.7 in April, while new home sales last month also topped estimates.

Progress is also being made on the reopening front, lifting markets higher as several states start to lift lockdowns and allow businesses to resume. Stocks that would benefit from a reopening jumped on Tuesday, including MGM Resorts, Carnival, United Airlines and Southwest Airlines.

Crucial quote

“Stock markets posted another day of gains as investor optimism was stoked by easing social distancing restrictions and an economy poised for action,” says Peter Essele, head of portfolio management for Commonwealth Financial Network. “The nation’s largest banks, JP Morgan and Bank of America BAC , neared double-digit returns as long-term Treasuries rates rose more than shorter maturities causing a slight steepening of the yield curve, a positive for names in this sector,” he adds.

Surprising fact

The New York Stock Exchange partially reopened for trading on Tuesday, after being closed for more than two months due to workers testing positive for coronavirus. Some 80 brokers will be allowed back onto the floor—about 25% of the number before the pandemic hit. “I’m ready,” a floor trader told CNBC about returning to work.

What to watch for

Rising U.S.-China tensions. Some experts are worried about a derailment of the phase one trade deal—something Trump has repeatedly threatened to do. White House National Security Advisor Robert O’Brien said last Sunday that the U.S. is likely to impose sanctions on China if the country implements a new national security law that would give it greater control over Hong Kong.

Key background

Stocks are fresh off their best weekly performance since April: The S&P 500, Dow and Nasdaq NDAQ all rose by more than 3% last week. The S&P is up over 30% from its March 23 low.

Follow me on Twitter or LinkedIn. Send me a secure tip.

I am a New York—based reporter for Forbes covering breaking news, with a focus on financial topics. Previously, I wrote about investing for Money Magazine and was an intern at Forbes in 2015 and 2016. I graduated from the University of St Andrews in 2018, majoring in International Relations and Modern History. Follow me on Twitter @skleb1234 or email me at sklebnikov@forbes.com

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CNBC’s Bob Pisani looks ahead at the day’s market action. Stocks jumped Thursday, erasing steep losses from earlier in the day as sharp gains in big-tech shares led to a sharp turnaround. The Dow Jones Industrial Average traded 440 points higher, or 2.2%. The S&P 500 was up 2% while the Nasdaq Composite outperformed with a 4% surge. Shares of Netflix and Facebook rose 9% and 7.6%, respectively. Amazon gained 5.3%. Earlier in the session, the Dow was down 721 points, or more than 3%. The S&P 500 briefly fell more than 3% as well.

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Oil Giant Total Maintains Dividend Despite ‘Exceptional’ 35% Plunge In Profits

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Oil and gas major Total (EPA:FP) posted a massive decline in quarterly profits on Tuesday (May 5) in the wake of historically low crude prices. However, it stopped short of cutting its dividend despite what it described as “exceptional circumstances” due to demand declines caused by the coronavirus or Covid-19 global pandemic.

The French company posted a first quarter net profit decline of 35% to $1.8 billion, down from $2.8 billion recorded over the same quarter last year. Patrick Pouyanne, CEO of Total, said: “The Group is facing exceptional circumstances. The Covid-19 health crisis is affecting the world economy and creating major uncertainties, and the oil market crisis, with the sharp drop in oil prices since March.”

Major crude markets are in temporary lockdowns with factories shut, airlines grounded and people staying at home. Both major oil futures contracts – Brent and WTI – are currently trading 60% lower since the start of the year, with the latter contract registering negative prices on April 20.

Total said its oil and gas production rose by 5% on an annualized basis to 3.09 million barrels of oil equivalent a day (boepd) partly boosted by projects in the UK, Nigeria, Norway and Australia.

However, the company expects production to come in between 2.95–3 million boepd for 2020, a 5% annualized reduction due to curtailment measures in Canada, Organization of the Petroleum Exporting Countries’ (OPEC) exceptional quotas, disruption in Libya and lower demand.

Total will also institute cost cuts across the board with CEO Pouyanne taking a 25% fixed salary pay cut for the remainder of the year. However, the French major stopped short of cutting its dividend, maintaining it at €0.66 ($0.72) per share.

It also proposed an option that shareholders receive 2019’s final dividend in cash or in new shares of the company with a discount, subject to approval at its shareholders’ meeting on May 29.

Total’s decision follows similar moves to maintain dividends by rivals BP, ExxonMobil XOM and Chevron CVX . But Royal Dutch Shell slashed its dividend to shareholders for the first time since World War II on April 30, and Norway’s Equinor did likewise even before the publication of its financials which are due on May 7.

Total also reaffirmed plans to cut its emissions with the objective of being carbon neutral from its operations and energy products in Europe by 2050. The company and the sector as whole is coming under pressure to meet climate objectives.

In April, a group of 11 European investors led by asset manager Meeschaert, currently representing just under 1.5% of Total’s capital, said they planned to present a resolution at the company’s shareholders’ meeting on Paris Climate Agreement commitments.

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I am a UK-based oil & gas sector analyst and business news editor/writer with over 20 years of experience in the financial and trade press. I have worked on all major media platforms – print, newswire, web and broadcast. At various points in my career, I have been an OPEC, Bank of England and UK Office for National Statistics correspondent. Over the years, I have provided wide-ranging oil & gas sector commentary, including pricing, supply scenarios, E&P infrastructure, corporations’ financials and exploration data. I am a lively commentator on ‘crude’ matters for publications and broadcasting outlets including CNBC Europe, BBC Radio, Asian and Middle Eastern networks, via my own website, Forbes and various other publications. My oil market commentary has a partial supply-side bias based on a belief that the risk premium is often given gratuitous, somewhat convenient, prominence by cheeky souls who handle quite a few paper barrels but have probably never been to a tanker terminal or the receiving end of a pipeline. Yet having done both, I pragmatically accept paper barrels [or should we say ‘e-barrels’] are not going anywhere, anytime soon!

Source: https://www.forbes.com

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I’m thrilled to share my complete oil stock portfolio in today’s investing video. Out of my 38 dividend paying stocks, 3 are oil companies. If you have been following my dividend investing channel, you know that I own BP. Today, I’m excited to cover BP and also two other positions never before disclosed on my channel: Chevron (CVX) and Royal Dutch Shell (RDS-A).

Three Conclusions From The 2019 Berkshire Shareholders Meeting

A Berkshire Hathaway shareholder arranges her shopping next to a large drawing of Chairman and CEO Warren Buffett, during a shareholders shopping event in Omaha, Neb., Friday, May 3, 2019, one day before Berkshire Hathaway's annual shareholders meeting. An estimated 40,000 people are expected in town for the event, where Chairman and CEO Warren Buffett and Vice Chairman Charlie Munger will preside over the meeting and spend hours answering questions. (AP Photo/Nati Harnik)

A Berkshire Hathaway shareholder arranges her shopping next to a large drawing of Chairman and CEO Warren Buffett, during a shareholders shopping event in Omaha, Neb., Friday, May 3, 2019, one day before Berkshire Hathaway’s annual shareholders meeting. An estimated 40,000 people are expected in town for the event, where Chairman and CEO Warren Buffett and Vice Chairman Charlie Munger will preside over the meeting and spend hours answering questions. (AP Photo/Nati Harnik)

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Berkshire Hathaway’s shareholders’ meeting as in past years yielded various insights on Warren Buffett’s and Charlie Munger’s insights on the markets, politics, tech stockspast mistakes and many other topics.

Further Buybacks On The Cards

It should come as no surprise that Buffett and Munger are considering further buybacks of Berkshire stock. With a large, and growing, cash pile and limited deal opportunities to date, they are likely to use cash to repurchase Berkshire shares as the fallback option. In fact, the pair used answers to certain questions, such as regarding Brexit in the U.K. to remind the audience that they are very willing to make acquisitions in Europe should they see the right deal at the right price. They feel that Berkshire is typically considered for deals in the U.S.. Yet, internationally they have more work to do to have Berkshire in consideration for a large business sale. Still, the emphasis on buybacks suggests that there is little in the deal pipeline for now, though of course that could change quickly. Buffett and Munger would love to see more attractive deals, but absent attractive opportunities, stock buybacks are the default.

Another Bite Out Of Apple?

Buffett and Munger were both very positive on current holding Apple, and Apple CEO Tim Cook was also at the event. It seemed clear that Buffett was quite willing to up his Apple stake at the right price.

Various objections such as potential regulation of Apple’s app store were raised in questions, though Buffett didn’t dismiss those concerns entirely, he mentioned that what has hurt the most is that the stock has gone up. That, the CEO’s presence and the fact that Buffett didn’t go out of his way to make the detailed bull case on Apple all suggest he make be angling to up his stake at the right price, even though Apple is currently Berkshire’s second largest public holding behind Coca-Cola.

A More Flexible Approach To Value Investing

Over his lifetime, Buffett’s investing approach has evolved and it continues to. In his early years, Buffett loved buying so-called cigar butt stocks, as popularized by his early mentor Ben Graham. This means stocks that may have been poor companies, but were trading well below the value of assets that could be sold realizing a profit for investors. Such deals are harder to come by now. As such Buffett looks more for great businesses at reasonable prices, a direction that Munger has clearly prodded him in. However, now Buffett talks of value investing in broader more creative terms, such that any stock where the likely expected cashflows exceed the price can be attractive, even if not cheap in on the traditional metrics and ratios associated with value investing.

So though Buffett’s approach continued to be refined, its core principles remain the same in looking for great businesses at attractive prices with sound management in place. In reviewing Buffett and Munger’s comments, one is left with the feeling that they are seeing few bargains in this market and buybacks paired with watching and waiting for certain key holdings such as Apple to fall so they might add more is the current strategy. Aside, from the comments at the meeting, the fact that the company is sitting on over $100 billion of cash and short-term securities at the end of 2018 reinforces that Buffett and Munger aren’t seeing the opportunities they would hope for in the current environment.

Articles educational only, not intended as investment advice.

Follow @simonwmoore on Twitter. Simon is Chief Investment Officer at Moola, and author of Digital Wealth (2015) and Strategic Project Portfolio Management (2009).

Source: Three Conclusions From The 2019 Berkshire Shareholders Meeting

How Blockchain Technology Is Helping Remodel the Private Equity Industry – Peter Daisyme

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Private equity investment funds have made many people and institutional investors billions. However, structural issues prevent all parties from experiencing the full benefits of this powerful investment vehicle.

Real estate investment has proven inaccessible to many investors across the marketplace. It has required massive initial buy-ins and/or intimate market knowledge for profitable participation.

Private equity today

Historically, private equity funds have been a reliable and steady source of income for investors and fund managers. Unlike public companies, a limited number of in-the-know partners hold private equity. Shares can’t be bought and sold on the stock market. Now, this is where shareholder governance and reporting are significantly easier. Unlike venture capital, private equity is traditionally used to invest in established businesses seeking to expand or restructure.

Therefore, a growth-oriented private equity fund invests the capital it raises in companies seeking growth capital to facilitate expansion, an acquisition strategy, and/or restructuring.  In addition to providing capital, the fund’s investment team will use its expertise to assist a portfolio company in achieving its growth goal.

After a prescribed amount of time, the fund divests its interests in the portfolio companies. Hence, this provides a return to the fund’s investors.  After divesting its holdings, the fund will be wound down. Then, the private equity firm will start a follow-on fund and repeat the cycle.

Stiff structure

In the past, this investment model has been successful. However, it also has struggled with several inefficiencies.

Private equity fund managers have sought to work with a relatively limited number of investors to minimize shareholder reporting needs. Hence, the amount of cash typically required for participation means only large institutional investors like pensions or wealthy individual investors can buy in. A huge portion of the investing world simply isn’t able to participate in this profitable investment structure.

Furthermore, private equity fund structures have defined liquidation deadlines. These deadlines drive certain behavior that isn’t always in the best interest of maximizing underlying asset value.  After the downturn, many funds liquidated their holdings. And, as a result, suffered tremendous losses. These structural deadline elements oftentimes constrain the investment manager from generating the best returns for their investors.

Blockchain token solutions

Blockchain’s immutable ledger can be used to tie real-world assets to tokens. This strategy combines the benefits of blockchain — its transparency, accessibility and security — with the reliability of real-world investments. Smart contracts and an immutable ledger means ownership of those real investments can be secured within the blockchain itself.

Cryptocurrency has made a few people very rich over the past six months. Yet, many tokens have experienced price drops almost as dramatic as their price increases.

People who need lower-risk investment opportunities have been shut out of the cryptocurrency boom. No one wants to sink a large portion of their kids’ college fund into a cryptocurrency that might be worthless tomorrow. This is where asset-backed blockchain tokens come into the picture.

A secure option for investment: Asset-backed tokens

Founded in 2012, Muirfield Investment Partners is a private equity firm. It will launch a TAO for a new generation of private equity investment. Murfield built MIF, a security asset token. And, a private equity real estate investment portfolio managed by the private equity real estate firm will back the token.

Initially, a limited number of U.S. accredited investors and non-U.S. approved parties will receive tokens. Then, public exchanges buy and sell MIF tokens. This can happen after a lock-out period of 90 days to a year. This groundbreaking model presents several opportunities.

Breaking the rigid structure of private equity investment

Tokenization allows a lower barrier of entry to participation. Anyone who owns just one token is participating in the fund.

Furthermore, tokenization allows liquidity that was previously impossible in private equity fund structuring. As a result, this helps optimize the private equity fund structure. Investors in need of redemptions can sell their tokens in exchanges. Someone else acquires the token.

Fund managers face far lighter redemption burdens under the tokenization model. Plus, the fund doesn’t have a liquidation deadline. Therefore, they can manage the fund far more efficiently and drive greater economic returns for their investors.

In fact, tokenization means no fund liquidation. Instead, managers can focus on maximizing the fund’s long-term net asset value rather than reaching a target exit date.

Now, Muirfield wants to improve the traditional private equity fund world. Tokenization opens this world up to a larger participant pool. As Thomas Zaccagnino, Founder of Muirfield Investment Partners, explained, “We are very excited to bring a new and much improved private equity investment structure to the market.

A structure offering better alignment between the investors and investment manager, improved ability to maximize assets values, and enhanced liquidity allowing investors the ability to control how long they participate in the growth of the underlying real estate portfolio.”

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