Do You ‘Own’ the Stock You’ve Bought?

Everonn Education’s stock tumbles 20% on arrest of MD

NALCO plunges +8% on chairman’s arrest

What do these news headlines mean to you?

Nothing, if you don’t own shares in any of these companies (and you’re lucky!).

But a lot, if you own or have owned shares in them.

As if the scandals in the financial world were not enough for investors to lose their shirts, there have been several such damning cases that corporate India has seen over the past few years that has led to investors in tainted companies losing their shirts, pants, and what not.

Are shareholders a complete washout?
In the original version of his investing masterpiece The Intelligent Investor, Ben Graham began his discussion of a chapter on “The Investor as Business Owner” by pointing out that, in theory…

“…the stockholders as a class are king. Acting as a majority they can hire and fire managements and bend them completely to their will.”

But he changed this part in the subsequent editions of the book.

In practice, says Graham…

“…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 to inspire the average American shareholder to take any independently intelligent action would be by exploding a firecracker under him.”

Well, this is a fact that is true for not just American shareholders, but all shareholders. Even you and me.

Just ask yourself these two questions if you have been an investor in stocks –

1. How many times have I disliked what the management of a company I had invested in, was doing?
2. How many times have I communicated my dislike to the management?

For most investors, the answer to the first question will be ‘never’. And that will automatically make the answer to the second question ‘never’ as well.

You’ve ‘bought’ the stock. But do you ‘own’ it?
You buy a house, and you own it. It’s your private property.

The same goes with anything else you buy – car, television, timeshare holidays etc. You buy, and thus you own.

But when it comes to stocks, do you really ‘own’ the stocks you hold in your portfolio?

Ownership means you don’t allow anyone else to do anything with what you own without our permission.

Ownership means keeping a keen eye on things happening around what you own.

Ownership means if someone is acting smart to play around with what you own, you have all the right to chide him away.

And if that is what ownership really means to you, with respect to your stocks you must know that…

1. The company’s managers, all the way up to the CEO, work for you, the shareholder.
2. The company’s board of directors must answer to you for any major decisions that might impact the future of the company.
3. The company’s cash belongs to you.
4. You have a claim on the company’s assets.
5. If you don’t like how the company is being managed, you have the right to demand that the managers be fired, the directors be changed, or the property be sold.

But for that, you need to know that you ‘own’ a part of the company via its stock.

And if not, you should wake up and know your rights as a shareholder.

As Graham suggests, “There is just as much reason to exercise care and judgment in being as in becoming a stockholder.” This suggestion is something very basic but incredibly important.

Be open-minded and know fully about the company you own.

Ask tough questions to the managements during shareholder meetings.

You see, owning small amount of shares in companies may be a “small voice,” but it can be turned into a “large moral voice” by bringing up corporate governance issues at shareholder meetings.

Agreed that shareholder activism is still in its evolution stage in India.

But is there a willingness on your part to act when things go wrong with the companies whose stocks you hold?

Are you willing to take the wrongdoing managers to task?

Believe me, if you do that – raise your voice against bad managers and their bad decisions – you’ll be better than 99% of shareholders who just see their stocks as pieces of paper and not as ownership in businesses.