Security Analysis Series: Chapter 44 Summary

“Implications of Liquidating Value. Stockholder-Management Relationships

Chapter Summary

  • This chapter deals with the point that liquidation value is mostly unimportant, because almost all companies do not intend to liquidate. Thus it examines the relationship between a shareholder and management. (pg 575).
  • The purchase of a common-stock is a single act, but far more importantly, the ownership of it is a continuing process! Care, judgement, and analysis is just as important when being a stockholder, than when becoming one. (pg 575).
  • While it is true that management might be in the “best position to judge which policies” are optimal at a given time, it does not mean that those policies are always followed or adopted, or that those policies will ultimately benefit shareholders. A conflict of interest can exist in a number of different situations:
    • Compensation to management, expansion of the business, dividend payments, etc. (pg 578).
    • Thus, clearly management should not be given free reign to make all decisions unquestionably in running a company.
  • Directors in a company also can have a conflict of interest with shareholders. Often times, they have close ties to management if they are not already an officer. Thus, absolute trust cannot be afforded to them, either. (pg 578).
  • The primary lesson to be learned in this skepticism of management is to conduct as much analysis as you can on their history, and what their current views for the company are. Have they historically returned capital to shareholders when deemed necessary? Or are they “loath to return any part of the capital to its owners”, in Graham’s words? (pg 580).

Chapter Thoughts and Analysis

  • The best lesson this entire chapter had to offer, in my opinion, was the single paragraph that emphasizes that due diligence on a company must be maintained well after the original purchase. It is not enough to simply sit and wait. Companies and markets and economies are all dynamic and ever-changing, and a security analyst that stops his work after buying is sure to be burned.
  • The other thought that this chapter brought to my attention is that when analyzing management, history and experience ought to be examined thoroughly. How did they act in similar situations before? The past is the most accurate yardstick we have to predicting the future. Successful, honest management teams that, in past experiences, placed a primary focus on returning value to shareholders.
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