Wednesday, April 19, 2006

Superior Stock Return by having "Founders Keepers" April 20, 2006

I have recently read a great article from Fortune Magazine called Founders Keepers.

Let me quote this interesting sentences from the article...

"The stocks of these 26 companies (plus Liberty Media, whose founder John C. Malone stepped down as CEO March 1, but remains chairman) returned an average of 18.5 percent annually from year-end 1995 through 2005, which is seven percentage points better than the FORTUNE 500's average return over the same period. Their profit growth has been superior, too, increasing at an average rate of 19.6 percent a year from 1995 to 2005, vs. 11.7 percent for the FORTUNE 500."

"Of course, 27 companies is a small sample, and we might have written this off as a statistical fluke had we not come across the research of an Ohio State University finance professor named Rudiger Fahlenbrach. Fahlenbrach analyzed the performance of the 2,300 largest U.S. companies from 1993 through 2002, and he discovered that those run by founder-CEOs (11 percent of the total sample) outperformed the broader stock market by eight percentage points a year."

I am very impressed by this significant findings of Rudiger Fahlenbrach.

"Fahlenbrach has a few theories on why founder-CEOs seem to be better corporate stewards. One is that they simply care more. Their companies are their life's work, so they're more likely to embrace long-term strategies. "

I totally agree with Fahlenbrach theory why founder-CEO companies perform better over long period of time.

This article also reminds me of Jim Chuong, the emerging great value investor with superconcentrated portfolio. Jim Chuong, in his partnership letters, also emphasized that he only invests in companies with significant insider holdings. Just look at his superior return, and you will agree that investing in companies with significant insiders' holdings could deliver wonderful returns.

Hope you will pay more attention to companies with founder-CEOs.

Happy investing,
Dah Hui Lau (David)

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