Stock Market

Common stock represents ownership in a company. When you purchase shares in a corporation, you become, in effect, a silent partner (unless, of course, you have the funds to acquire a meaningful percentage of the equity, in which case you can elect yourself to the Board of Directors and enact changes). As such, the value of your investment is directly tied to the operating results of the business over the long-run, just as if you had opened a coffee shop with your best friend, or bought a miniature golf course with your family.

This distinctionseeing common stock as ownership in a business rather than a meaningless symbol on the electronic tickeris one that can give you a very real competitive advantage over other investors. It gives you the freedom to ignore the noise of the market and focus on what really matters. This will help prevent unintelligent actions during the many financial crises you will encounter in your career.

TIP: In the late nineteenth century, stock quotes were transmitted over telegraph lines to ticker machines. As the information was received, the machine would print it on a small strip of paper known as ticker tape. Although computers came to replace ticker machines, stocks are stilled tracked by short combinations of letters known as ticker symbols. Coca-Cola, for example, has a ticker of KO; the Washington Post, WPO; Genera! Electric, GE; Wal-Mart, WMT; Microsoft, MSFT; Hershey, HSY; and so on. If you wanted to purchase shares Hershey, you would call your broker and say, "Buy 100 shares of HSY."

Imagine, for a moment, that you own an extremely profitable soda business. You have a strong balance sheet, a franchise that cannot be replicated by any competitor, a wonderful distribution system that lets you reach the far corners of the world, and pricing power that allows you to pass on increases in manufacturing costs to the consumer without hurting sales. As the owner of this dream company, you would never be foolish enough to sell it. In fact, if someone offered to buy your stake for half of what you believed it was worth, you'd probably laugh in their face.

Yet if this soda company was publicly traded and the share price dropped by half, many investors (i.e., business owners) would panic and sell their fractional ownership out of fear. Don't believe it? It actually happened! The story is frequently told by legendary investor Warren Buffett to illustrate the importance of focusing on the competitive advantages and economics of an enterprise over the short-term movements in the stock price:

In 1919, Coca-Cola went public at $40 per share. Due to conflicts with the company's bottlers and a dramatic surge in sugar prices, the shares had fallen to $19.50 by the end of 1920. Had you sold your position at that time, you would have experienced a substantial loss. Despite these short-term problems, a single share of Coca-Cola purchased in 1919 would have now grown into 4,608 shares through stock splits. That is, if you had purchased one share of Coke in 1919 at $40 and not reinvested the dividends, you would now own 4,608 shares with a market value of approximately $230,400. You would also receive around $5,160 in dividends annually.

Had you reinvested those seemingly paltry dividends each year into more Coca-Cola common stock, however, that one share would have grown into more than 100,000 shares; at today's stock price, a market value of more than $5 million. You would also receive nearly $112,000 in dividends per annum. Despite wars, depressions, recessions, stock market crashes, nuclear proliferation, a Presidential assassination, the invention of television, satellites, and the Internet, Coke's products remain relevant to today's consumer. That success translated into dramatic wealth for the owners of the business.

TIP: When Coke went public in 1919, it had two underwriters, each of whom earned a $100K fee for services rendered. One firm took payment in cash. The other firm, the predecessor to SunTrust Bank, took its entire fee in Coca-Cola stock. According to the company's most recent 1 OQ, SunTrust now owns 48,266,496 shares of Coke worth more than $2 billion! In addition, the investment provides SunTrust's shareholders with more than $43 million in dividend income each year. Also in SunTrust's Atlanta, Georgia, vault is the original copy of the Coca-Cola formula. It is said that only two executives from Coke have access to the priceless document.