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Are you a stock investor with time and money? These top companies want you

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“Corporate managers get the shareholders they deserve.” That old saying has rarely been more important. In today’s corporate proxy battles, when the margin of victory can be slight, managers and shareholders alike are subject to control by thin majorities. That’s why savvy corporate leaders sculpt their shareholder base. 

How? One way is via the bully pulpit, to deter shareholders unaligned with corporate philosophy. For example, at a Starbucks
SBUX,
+2.32%

 shareholders meeting, CEO Howard Schultz once told a critic of the company’s hiring practices to sell the stock. In a letter to shareholders of The Washington Post Co., CEO Don Graham once stressed the company’s long-term outlook, adding: “If you are a shareholder and YOU care about our quarterly results, perhaps you should think about selling the stock.”

Besides hectoring to deter, many corporate practices are useful in attracting a certain shareholder base, one that is both patient and focused. This cohort was dubbed by Warren Buffett as “high quality shareholders” (QSs for short). While not rubber-stamps for incumbent directors or strategies, their voting records suggest a focus that makes them more knowledgeable than indexers or proxy advisers, and a patience that makes them more willing than transient shareholders to credit and support long-term thinking. 

Evidence shows an association between high densities of QSs in a company and the managerial quest for superior corporate performance. Why? One possibility is that QSs are drawn to companies which boast competitive advantages that boost performance and deflect rivals’ threats. Often referred to as “moats,” these include economies of scale, distribution systems, patents, network effects and brand strength. 

Rankings of some 500 companies by moat strength are regularly tallied by investment researcher Morningstar, and rankings of some 2,000 companies by QS density have been developed by the Quality Shareholder Initiative at George Washington University.

Comparing 200 companies common to both lists, one-third of the Morningstar moats are in the top 10% of the QSI ranking, two-thirds are in the top 25%; and the overwhelming majority — almost 90% — are in the top half. In other words, the data confirm widely known anecdotal evidence that moats attract QSs.   

Leaders in both moat strength and QS density

3M
MMM,
+2.06%

 

Accenture PLC
ACN,
+2.44%

 

ADP
ADP,
+1.71%

 

Colgate-Palmolive
CL,
+1.60%

 

Domino’s Pizza
DPZ,
+0.52%

 

Eli Lilly
LLY,
+0.51%

 

Jack Henry & Associates
JKHY,
+1.55%

 

Mastercard
MA,
+1.44%

 

Moody’s
MCO,
+1.22%

 

Roper Technologies
ROP,
+0.44%

 

Stryker
SYK,
+1.53%

 

VeriSign
VRSN,
+1.36%

 

Among moats, brand strength appears to be a particular magnet for QSs. There is a strong association between managers regarded as the best stewards of great brands and QSI rankings. For instance, among U.S. managers ranked in the global elite for brand guardianship, a total of 38 executives, all but one are in the top half of the QSI rankings. In short, managers wishing to attract more QSs should invest in brand strength and other moats.

Leaders in both brand strength and QS density

Amazon.com
AMZN,
+1.29%

 

Cisco Systems
CSCO,
+0.40%

 

Walt Disney
DIS,
+0.85%

 

Estee Lauder
EL,
+2.23%

 

FedEx
FDX,
+3.73%

 

Home Depot
HD,
+2.10%

 

IBM
IBM,
-5.48%

 

Johnson & Johnson
JNJ,
+0.94%

 

Procter & Gamble
PG,
+1.07%

 

UnitedHealth Group
UNH,
+1.16%

 

Visa
V,
+1.16%

 

Walmart
WMT,
+1.77%

 

A more intriguing reason why high densities of QSs are associated with corporate outperformance is that the QS cohort is itself a source of competitive advantage, akin to network effects.  These arise when a system’s value increases as more people use it.  In most cases, network effects represent a tangible benefit to customers, as with fax machines in the old days and social media today.  

Similar advantages can arise from a network of QSs. As a group, QSs are more likely than other major shareholder cohorts — such as indexers or transients — to care about the identity of fellow shareholders. This “birds of a feather” effect is visible among the companies held by leading QSs, such as those listed below.

Leading QSs that may draw fellow QSs 

Baker Brothers

Baupost Group

Berkshire Hathaway
BRK.A,
+0.80%

 

BRK.B,
+1.07%

 Blue Harbour

Cantillon Capital     

Capital Research Global

Fiduciary Management

Gates Foundation

Kensico Capital

Lone Pine Capital

Southeastern Asset Management

Temasek Holdings

Companies tap into the broader QS ecosystem, where members tend to know one another or know of one another. Resulting network effects reinforce all the advantages of a high-density QS base of patient and knowledgeable shareholders.

The QS cohort may also help brand a company. After all, consumer brands become competitive advantages when they assure that consumers recognize product features. A corporate reputation for attracting QSs is a competitive advantage when a company repeatedly commits to the values patient focused shareholders appreciate, including long-term performance metrics and rational capital allocation policies. 

To reach patient and focused individual QSs, many companies cultivate reputations among both consumers and shareholders. Examples include Churchill Downs
CHDN,
+1.97%

 , where shareholders enjoy many racing days throughout the year and enthusiastic support of the Kentucky Derby day; Harley-Davidson
HOG,
+3.83%

 , where shareholders ride their “hogs” in caravans to the annual meeting, and others whose brands and owners focus on particular sustainability commitments, such as Patagonia.  

Whatever explains the association between high densities of QSs and corporate outperformance, managers and companies alike benefit from having many QSs on the shareholder list. When ownership of corporate equity is dominated, as it is today, by unfocused indexers and impatient traders, such a cohort of QSs will often be the swing vote in corporate proxy battles. Properly courted and catered to, these loyal shareholders can determine the outcome of elections, as well as the course of corporate prosperity. 

Lawrence A. Cunningham is a professor and director of the Quality Shareholders Initiative at George Washington University.  He owns shares of Berkshire Hathaway. His new book is Quality Shareholders: How the Best Managers Attract and Keep Him.  Register for his upcoming free book talk hosted by the Museum of American Finance and Fordham University here.

More: Here’s evidence that putting customers and employees first turns out to be profitable for a company’s stockholders too

Plus: Warren Buffett knows these are the best investors to follow with your own money



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‘I could live on my Social Security and still save money’: This 66-year-old left Chicago for ‘calming’ Costa Rica — where he now plans to live indefinitely

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Editor’s note: This article was first published in September 2019.

A school break changed 66-year-old Martin Farber’s life forever.

In 2007, his daughter — who at the time was attending Illinois State University — decided she wanted to spend a college holiday volunteering in Costa Rica and staying with a local family, he explains. She came home raving about the experience, so, in 2008, Farber — who at the time was living in Evanston, Ill., just outside Chicago, and selling cars — took his first trip there.

“It was a big surprise to me — bumpy roads, dogs barking in the streets,” he says. “I wasn’t enamored at first.”

But as his daughter began traveling there more and eventually moved there for a year, he took additional trips to Costa Rica. It quickly grew on him — in particular, the people. “The Costa Rican people are warm, open and friendly. I felt less invisible in a strange country in a strange town where I didn’t speak the language than I did in Evanston.”

And the more time he spent there, the more it impacted him: “On one of my trips there, I thought: My daughter’s life makes more sense than mine,” he says. “There was nothing wrong with my life, but I felt that my life was out of context with who I’d become. … I would have bills and make money to pay them, but that had ceased to be satisfying,” he recalls. “I knew I needed to change my life — there was no more joy in what I was doing.”

What’s more, when he’d return from his Costa Rica trips, people noticed. “I would come back, and my friends and therapist would say: You seem better after you go,” he says with a laugh.

A view from the hot springs near Martin Farber’s home in Costa Rica.


Martin Farber

So in 2014, he packed up and moved to Orosi — a picturesque, lush small town with waterfalls and hot springs a little over an hour’s drive from San Jose — promising himself he’d stay for two years. It’s been five, and he now plans to stay in Costa Rica indefinitely. (Though Farber notes that, to him, “it’s not a retirement; it’s a chance to lead a new and different life.”)

Here’s what his life is like, from costs to health care to residency to everyday life:

The cost: While many expats spend way more living in Costa Rica, Farber says: “I could live on my Social Security and still save money.” He says “a person can live on $1,200 per month, two people on $2,000.” The key, he says, is to live more like he does and as the Costa Ricans do — in a modest home, eating local food and purchasing local goods.

Indeed, Farber himself spends just $300 a month for rent (he rents a home from a friend who moved recently and gave him a good deal), roughly $225 a month on groceries and just $50 a month total on water and electricity (the temperate climate in Orosi means you rarely need heat or air conditioning). The veteran Volkswagen
VOW,
+0.96%

 
VLKAF,
+0.98%

salesman saves money by not owning a car (those over 65 ride municipal buses for free), which can be a significant expense in Costa Rica; for his cellphone, “I pay as I go … roughly $10 may last me a couple weeks or more,” he says, adding that “many people handle there their cellphones this way. You can get them recharged anywhere.”

His major expense is travel: He goes back to the U.S. to visit his mother in Florida several times a year and lately has spent part of the summer in Chicago helping out a friend with a dealership there. He also spends a good amount of money on health care. He says that while flights can be had for as little as $350 roundtrip during offseasons, the cost can be much higher the rest of the year.

In the saddle.


Martin Farber

Health care: Farber, who has permanent resident status in Costa Rica, says he pays about $90 per month to participate in the country’s health-care system — adding that the health care he’s received has been very good. (A 2018 study of health-care quality and access in more than 190 nations ranked Costa Rica No. 62.)

When he developed a detached retina, though, he paid for the procedure out of pocket so that he didn’t have to wait for the required surgery, he says — adding that the entire procedure cost him about $5,000. “I would have had to have waited four days,” he says, if he had not paid to expedite matters. “That might have been fine, but it might not.” And he adds that the quality of care depends on where you get it in the country.

Lifestyle: Though Farber says that he “moved here with no goals and no agenda,” he’s found plenty to do. “I take Spanish lessons two days a week for two hours a day. It’s been great. I never thought I would acquire a usable language in my 60s,” he says. He also rides his bike all around the area, does some writing and belongs to a community group that undertakes projects to improve the area.

And he often simply takes in nature, which he says has been an essential part of why he feels calmer and more relaxed in Costa Rica than in the U.S. “I live at 3,000 feet but in a valley surrounded by coffee fields and lime trees and water. At night, if I open the windows, I can hear the river rushing by,” he says. “It is very calming … hundreds of trees everywhere … you know the Earth is alive.”

The historic Iglesia de San José de Orosi.


iStock

Cons: “I don’t want to overglorify. It’s not without its problems,” Farber says of Costa Rica. “There are social problems and downsides.” He notes that crime and petty theft can be a problem (“I am cautious,” he says of his approach) and seem to have increased since he moved there, and adds that he misses out on some cultural things because of where he lives. And, he says with a laugh, “I can’t order Thai food at 9 at night.” But, he adds: “These are trade-offs — in the afternoon, I get to walk in the coffee fields and see flocks of parrots.”

Residency: To qualify for Costa Rica’s pensionado visa, expats must prove that they have a pension of at least $1,000 coming in each month. (Here are the details of that program.) Once you have lived in Costa Rica for three years, you can apply for permanent residency. Farber used a lawyer to help him figure out the ins and outs of residency options; his entire path to permanent residency took about a year, he says.

The bottom line: “After five years I am still amazed and surprised that I made the decision to lead a life I never thought I would,” he says. And while he may not stay in Orosi forever — “the town doesn’t have an ambulance, [and] I don’t know what it will be like to be 80 there,” he says — he does plan to stay in Costa Rica in no small part because of the people and sense of community. “I have the feeling that life is good here,” he says. “It’s hard sometimes, but we are all in it together.”



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