Lawrence A. Cunningham, Scholar and Author, George Washington University; Director and Vice-Chairman, Constellation Software Inc. in Washington, DC, was the Keynote Speaker at the Ben Graham Centre for Value Investing’s 2019 Value Investing Conference in Toronto, Ontario, Canada, and presented the topic “Getting the Shareholders You Deserve: How Quality Companies Attract Quality Shareholders”.
Lawrence A. Cunningham: Attracting Quality Shareholders
Many many thanks Prem for that delightful introduction and for the honor of joining you at this and I agree the premier value investing conference. I'm currently working on a book with that provisional title attracting quality shareholders and it's a work in progress but I'm delighted for the opportunity to share some interim discoveries and viewpoints with a perfectly relevant audience. When you think about the ideal shareholder base it helps to recall the insights of Phil Fisher. He was a legendary investor as you probably know who likened companies to restaurants. They all offer a menu attracting a corresponding clientele. Four restaurants five star menus attract Gore maze fast food shops attract eaters on the run and smorgasbord or buffets attract a discriminating crowd.
Warren Buffett to whom Prem referred took Phil fisher's point a step further. Companies draw particular shareholders by communicating a specific corporate message backed by action the message produces a self selected shareholder group with particular outlooks on various vectors such as Time Horizon concentration level and engagement. Buffett has practiced the art. Of shareholder cultivation since his earliest days running Berkshire. He has long promoted the menu in his shareholder letters a popular paraphrase of his early 1979 letter says you get the shareholders you deserve. Buffett saw and got what he calls high quality shareholders. These are defined as shareholders who buy large stakes. And hold for long periods. They contrast with indexes who may hold for long periods but never concentrate and transients who may bought by large stakes but never hold for long. Buffett refined Berkshire's menu in his 1983 letter. Saying we are going to communicate this menu in clear and consistent terms and provide no conflicting messages. He said he wants to attract shareholders who see themselves as part and permanent owners of the business. He wants people who will work to understand the company.
The managers in its philosophy. He wants shareholders who focus on the business and not on stock price. Back then Berkshire attracted almost exclusively high quality shareholders thanks to Buffett advertisements his letters 98 percent. Of Berkshire shares outstanding at year end were owned by those who own the stock. At the beginning of the year overruling five year periods at least 90 percent of Berkshire shareholders remain the same. From year one to year five. Almost all Berkshire shares were held by concentrated investors. Their position in Berkshire was twice as large as their next biggest position in any company's stock. Berkshire's record of attracting quality shareholders remains extraordinary. But all those figures are a little lower today largely due to the changed and fragmented shareholder universe nowadays index funds rule though they were novelties through the 1980s and into the 1990s. Today up to 40 percent. Of publicly traded equity is owned by index funds either declare or closet. You know what a closet inductor index rate is a person who proclaims to be a stock picker but actually assembles a a vast diversified portfolio that ends up hugging an index. These funds owning small stakes in hundreds or thousands of companies cannot possibly understand the vast majority of them transient traders have long prowled the stock markets but average holding periods fell greatly from the 80s and.