The Intelligent Investor_ The Definitive Book on Value Investing - Benjamin Graham [200]
the shareholders are a complete washout. As a class they show neither intelligence nor alertness. They vote in sheeplike fashion for whatever the management recommends and no matter how poor the management’s record of accomplishment may be…. The only way toinspire the average American shareholder to take any independently intelligent action would be by exploding a firecracker under him…. We cannot resist pointing out the paradoxical fact that Jesus seems to have been a more practical businessman than are American shareholders.1
Graham wants you to realize something basic but incredibly profound: When you buy a stock, you become an owner of the company. Its managers, all the way up to the CEO, work for you. Its board of directors must answer to you. Its cash belongs to you. Its businesses are your property. If you don’t like how your company is being managed, you have the right to demand that the managers be fired, the directors be changed, or the property be sold. “Stockholders,” declares Graham, “should wake up.”2
The Intelligent Owner
Today’s investors have forgotten Graham’s message. They put most of their effort into buying a stock, a little into selling it—but none into owning it. “Certainly,” Graham reminds us, “there is just as much reason to exercise care and judgment in being as in becoming a stockholder.”3
So how should you, as an intelligent investor, go about being an intelligent owner? Graham starts by telling us that “there are just two basic questions to which stockholders should turn their attention:
Is the management reasonably efficient?
Are the interests of the average outside shareholder receiving proper recognition?”4
You should judge the efficiency of management by comparing each company’s profitability, size, and competitiveness against similar firms in its industry. What if you conclude that the managers are no good? Then, urges Graham,
A few of the more substantial stockholders should become convinced that a change is needed and should be willing to work toward that end. Second, the rank and file of the stockholders should be open-minded enough to read the proxy material and to weigh the arguments on both sides. They must at least be able to know when their company has been unsuccessful and be ready to demand more than artful platitudes as a vindication of the incumbent management. Third, it would be most helpful, when the figures clearly show that the results are well below average, if it became the custom to call in outside business engineers to pass upon the policies and competence of the management.5
THE ENRON END-RUN
Back in 1999, Enron Corp. ranked seventh on the Fortune 500 list of America’s top companies. The energy giant’s revenues, assets, and earnings were all rising like rockets.
But what if an investor had ignored the glamour and glittering numbers—and had simply put Enron’s 1999 proxy statement under the microscope of common sense? Under the heading “Certain Transactions,” the proxy disclosed that Enron’s chief financial officer, Andrew Fastow, was the “managing member” of two partnerships, LJM1 and LJM2, that bought “energy and communications related investments.” And where was LJM1 and LJM2 buying from? Why, where else but from Enron! The proxy reported that the partnerships had already bought $170 million of assets from Enron—sometimes using money borrowed from Enron.
The intelligent investor would immediately have asked:
Did Enron’s directors approve this arrangement? (Yes, said the proxy.)
Would Fastow get a piece of LJM’s profits? (Yes, said the proxy.)
As Enron’s chief financial officer, was Fastow obligated to act exclusively in the interests of Enron’s shareholders? (Of course.)
Was Fastow therefore duty-bound to maximize the price Enron obtained for any assets it sold? (Absolutely.)