Why “Skin in the Game” is so Important to Your Investment Returns
Have you ever waxed and polished a rental car before returning it?
Chances are good that you’ve never done it. Chances are good nobody you know has done it. Chances are good nobody, ever, has done it.
If you take a moment to think about why people don’t wax and polish rental cars, you can correct a major investment mistake that is probably costing you money right now. And you can vastly improve your investment returns.
People don’t wax and polish rental cars for the same reason they don’t mow their neighbors’ lawns: They don’t own them.
Not caring about things you don’t own is simple human nature.
You might be thinking I’m just stating obvious.
But have you ever invested in a company ran by executives who owned little to no company stock? Have you purchased a mutual fund or an ETF that held companies whose managers owned little to no stock?
Have you ever trusted your hard earned capital with managers that don’t have skin in the game?
Chances are very good that you have. You probably own some of those companies right now.
Your holdings are the manager’s rental cars. And they just nicked a telephone pole while you read the last paragraph.
Don’t worry. You’re not alone.
Investing in a company whose managers have no skin in the game is one of the most common investment mistakes in the world. They don’t teach you this critical investment secret in high school, college, or business school. But once you think of it in terms of rental cars, it’s utterly obvious.
Ownership brings a respect and care for expenses, assets, and cash flows that has no substitute. It instantly transforms the mind.
Ownership will turn a salaried manager who thinks nothing of spending $3,000 on nice office chair into a guy who will sit on a bucket in order to save a few bucks.
Ownership will turn a conventional “9-to-5” employee into a guy who will happily work Friday and Saturday night.
On a larger scale, ownership transforms a reckless CEO who plays fast and loose with shareholder capital into a watchful, prudent shareholder advocate. It turns a CFO who uses aggressive, very questionable accounting into a boy scout.
Just think of the indifferent, uncaring people you’ve worked with the past.
It’s virtually guaranteed they didn’t own a piece of the business you were in. The might have stolen company property. They probably wasted supplies. They were hard on equipment. They left paper towels on the bathroom floor.
Now, think of all the extremely hardworking business owners you’ve worked with in the past. They treated equipment with respect. They used supplies carefully. They took pride in their work. They got to work early. If they saw a piece of trash on the floor, they picked it up.
Now take all those little differences and multiply them times a million. That’s the difference between a business operated by managers with no skin in the game versus a business operated by managers who own substantial amounts of company stock.
Which business would you rather own shares in?
What kind of people would you rather work with?
It’s an easy choice for me.
That’s why when I start analyzing a potential investment or talk to managers about placing money with them, my first question is always “How much stock do you own?”
If the answer is “not much” or “zero,” my analysis finished.
I don’t want my money treated like a rental car.
Neither should you.