ikkyu2 (99.52)

Whose Market Is It, Anyway?

December 19, 2006 – Comments (0)

I just hit the #24 spot on the CAPS overall player rankings. I wonder if anyone will read this, and if so whether they'll think more or less of it because of that? Hopefully yes and no, in that order.

I like the idea of owning a company. Imagine if you will a corner drugstore - say on State Street in Chicago. It sells goods, drugs and toothpaste and such, to folks who walk in. It marks them up from wholesale and, after expenses, realizes a tidy profit.

Imagine you liked the profit - the return on investment - and decided to buy the place. Not only that, you've got some ideas. The sign on the outside needs a fresh coat of paint. Self-serve checkout keeps customers happier. The store currently sells Crest and Colgate, but you'd also add Tom's of Maine. You think that with these changes, you could buy the store at 15x current quarterly earnings, but actually realize 20x quarterly earnings over the next 3 years. So you do it. You're CEO of Standard Drug now. That's the kind of transaction I like to think about.

The stock market exists to make it easy to participate in this kind of transaction. You out there reading this, you own 500 shares of GE. You took part in that kind of transaction when you bought those shares.

"But wait a minute," you say. "I think GE appliances need a redesign. Their controls are old and shoddy. The logo is fuddy-duddy. GE appliances could double their market share if they would just take my advice." And yet, the GE Board of Directors isn't listening. That's because you only own 500 shares. To you - to me, certainly - that's a lot of value, represents a fair amount of our respective net worths. But to Jeff Immelt, it doesn't earn you a spot at the table.

Have you ever filed a form with the SEC indicating that you were about to buy more than 5% of a publically traded company? Have you sat on the board of such a company? No?

Then you would do well to remember: this isn't really your market. This market exists to do transactions for the folks who want to do the kind of transaction I talked about in the beginning, buying Standard Drug and directing its evolution. A great deal of regulation exists - the SEC, the GAAP - that levels the playing field. It levels it for the big players, but has the side effect of leveling it for you and me, too. We're allowed to play in the sandbox with the big kids.

And sometimes - often, even - the big kids' interests dovetail with ours. We all want to grow bigger and better and play in bigger and better sandboxes. But at the end of the day, the big kids brush the sand off their wingtips, get together and decide what color the sandboxes are, where new sandboxes are going to be built next year, and a lot of other things that you and I have no say in. We're not invited to that gathering.

That's worth remembering.