Saturday, December 10, 2011

Don't be a fan when investing

My favorite team, the Green Bay Packers, have started selling shares of the team to the public to raise funds for a stadium expansion. Given the year the Philadelphia Eagles are having, it may seem like piling on to talk about the Packers, but as a long time fan, I have suffered through many barren years. I bring this up not to talk about the Packers, although I am always happy to talk about them, but to offer a few thoughts on the investment merits of buying stocks.

When you think of the Green Bay Packers, the team might seem like a pretty attractive investment. They have a rabid fan base with a decades’ long waiting list for tickets. They also are the reigning Super Bowl champions, are currently undefeated and have the top quarterback and likely league MVP in Aaron Rodgers. And, like other teams, they benefit from the billions of dollars the NFL gets for broadcast rights which increase with every new contract.

So, buying stock in the Packers may seem like a no-brainer but the Packer’s stock offering is very unique. For $250/share you can own a piece of the team but that ownership is very limited. You can only transfer your shares to immediate family members and you can only sell your shares back to the team for just $0.025. There are no dividends payable on the stock and in the event of liquidation, the money goes to “community programs, charitable causes and other similar causes,” not to the shareholders. Shareholders (and let me add that I am a shareholder, having bought stock the last time they issued shares in the late 90’s) are permitted to vote on certain items and attend the annual meeting in Green Bay. So stock in the Packers offers no real control, no hope of future capital gains and no hope of current income. All in all, not a great investment unless you are a fan and can proudly display your stock certificate on the wall in your home or office — then, as they say in the MasterCard commercials, it is “Priceless.”

If buying stock in the Packers does not qualify as a good investment in the traditional sense what then does make a good investment? I ask this because a lot of people I talk to are nervous about the markets today and rightly so given the state of the economy and the wild swings in stock prices. I suggest you start by looking at investments in stocks as investments in the underlying business, not as pieces of paper. You should only invest in a business in the belief that it will be worth more in future than it is today because its sales and profits will grow. You also may hope that the business will pay you a portion of its profits each year in dividends. The appreciation in the value of the business (which will eventually impact the underlying stock price) and the ongoing dividends you receive, represent the return on your investment. If it is positive, you will make money, if it is not you will lose money.

The risk associated with that business doing better or worse in the future is also a consideration in whether to invest in its stock or not. This is relevant in today’s roller coaster market. If you cannot handle the short term, wild swings in the underlying share price then perhaps individual stocks are not a good investment for you. You may be better off using mutual funds or hiring an advisor to manage your money for you.

Finally, what you pay for the stock is paramount. You can lose a lot of money buying a good business at a very high valuation. Instead, be patient and wait until the stock price is low and the valuation is attractive. You are not compelled to purchase a stock, so buy only when it reaches a price that you like.

We certainly think that if you take a long term approach to investing, this market will present you with lots of chances to buy excellent companies at even better prices. The key to remember is that stock ownership makes you an owner of a business, so be patient and only look to buy stock in those companies that you like and believe are undervalued.

If you want to buy shares of the Green Bay Packers, only do so if you are a fan--it is not a good investment. But when you look to make other investments, take the opposite approach. Don’t be a fan, but, instead, take a long, hard look at the company and make an unemotional decision on whether to invest.