“The key to mega-stock investing is not focusing on the industry, but rather on the entrepreneurial leadership characteristics of the CEO. This strategy is what Renn Capital Group uses to provide, in some cases, soaring returns for investors. You might just find the next Wal-Mart, Starbucks, or eBay.”
-Russell Cleveland, President, RENN Capital Group, Inc.
In his new book, “Finding Midas,” Russell Cleveland talks about some of the things you should know and do as an investor in the complicated world of building wealth. He offers great tips, says bet on the CEO, not the company or industry, and he gives some pretty helpful general rules. Like these:
Russell Cleveland’s “Big 4” investment criteria:
1. The CEO must have significant ownership in the company.
2. The CEO must have a big vision and a clearly defined plan designed to make that vision a reality.
3. The company must be profitable (or at least be making progress toward profitability).
4. The stock must be reasonably priced.
He puts a stake in the ground on CEO’s ownership.
“We want to partner with and invest alongside entrepreneurs. Thus, we prefer CEOs that have invested their own money in the companies they run. When a CEO has ‘skin in the game’ we don’t have to worry about his motivation. To be clear, stock options can be motivating, but they do not constitute skin in the game.”
Makes sense.
“In general, companies run by entrepreneurs are more successful than companies run by professional managers. Professional managers tend to be more concerned with their management contracts than they are with building a successful company.”
Also, notice number two on his list up there: The vision thing.
We talk about vision a lot here at Big River because it is so important in building a successful brand. Mr. Russell, not exactly a hipster ad guy who runs his business on emotions, comes to the same conclusions on company success – don’t invest in a company run by a CEO without a shared vision; pretty strong statement from a hardcore financial analyst with an extremely successful track record.
We try to address this with clients through our Vision In Action program (helping CEO inject their vision throughout their organizations). Sometimes, we get strange looks from people who see no value in infecting the troops of an organization with the CEO’s vision. Some see it as a waste of time, saying it’s not geared toward building sales. But that’s exactly what it is geared toward. There are a lot of stories in the naked investment world, to be sure. If you don’t believe in spreading the vision of the company, you won’t be one of those stories for long. Don’t argue with us, tell it to Warren Buffett and Steve Jobs, Sam Walton and Howard Shultz, just to name a few. Tell it to Russell Cleveland. Are you more successful than any of those people? If not, there’s your answer.
On the investment side, here is more good advice from Mr. Cleveland’s experience in making billions of dollars over the last 30-something years:
ADVICE TO AVOID: 5 STOCK MARKET MYTHS
“When investing, stay with the winners unless there is a substantial reason to sell, such as the CEO dies or is selling off substantial portions of his stock. When someone says a stock has grown enough, or fears the market will crash or believes the economy is too weak, they will bully you into selling a good performing stock. Resist that temptation-and you’ll be richer for it.”
Here are five myths of investing that Russell advises we ignore:
MYTH 1: You never go broke taking a profit. If a stock doubles, take more of your money out and then play for free with the rest. Many believe once a stock gains substantially, say doubles in its price, it’s time to leave it. But the fallacy with this strategy is that you’re leaving a stock that is still a winner. If the same principles hold true now as for when you began investing in the stock, why would you leave what is sound fundamentally? †
MYTH 2: Invest in a company that seems due to finally turn a profit, after it suffered millions in losses during its launch. Only invest in people with a winning track record. Losing a lot early on as a company first starts out is not a necessary requirement for success later. †
MYTH 3: Invest with a CEO that has a great education pedigree. Most CEOs have college degrees, but the most successful entrepreneurs are self-educated and do not rely on advice from Ph.Ds in any one specific area. The best CEOs are lifetime students. †
MYTH 4: Inherited CEOs inherit success. False. The best CEOs did not come from wealthy families. Frequently, the fact that they did not come from a wealthy family base actually motivated them to work hard to achieve their goals.
MYTH 5: Invest by industry only. There is nothing wrong with looking at an industry to see where a hot sector may be developing, but when it comes to looking at a specific stock, what you’re looking at is not just its association to an industry, but core fundamentals about price to earnings ratio, who is the CEO, and how invested that CEO is in the company. It’s easy to pick a wrong stock in the right industry, so only pick stocks that stand on their own merits.
4 STOCKS TO WATCH
In Finding Midas, Russell Cleveland identifies four stocks worth tracking and buying, as each one follows the principles of Entrepreneurial CEO Investing. “Today’s greatest opportunities lie in the emerging businesses led by the types of entrepreneurial CEOs who have led before,” says Russell.
Google, Inc. has already increased more than fivefold from its initial offering price and is poised to continue with solid growth. “Google is the best near-term example of what entrepreneurship can do in a short time,” says Russell.
Whole Foods Market, Inc. has increased 22 times its initial offering price, capitalizing on the trend of consumers eating healthy food, including naturally grown organic foods. “This company is a classic example of how a strong leader with a clear vision can create value by being in a business that is doing good in the world,” says Russell.
Omnivision Technologies, Inc. has increased five times its initial offering price, making its money by providing integrated single-chip semiconductor imaging devices. “We think this company has the makings of a mega-stock, with its strong entrepreneurial CEO who has a clear vision for the future,” says Russell.
Comtech, Inc. has increased by 429% since its initial offering price. It is poised for growth, serving the 200 largest tech companies in China. “If the Entrepreneurial CEO Investing philosophy is correct, you should be able to ‘ride’ this investment for a long time,” says Russell.
10 That Would Have Made You Rich
In “Finding Midas,” Russell Cleveland also identifies 10 different companies that best illustrate Entrepreneurial CEO Investing. As case studies, he explores how these CEOs would have been worthwhile investments when they took the helm.
The CEOs and their companies below would have yielded great returns if you had invested in their infancy. A $10,000 investment in Berkshire Hathaway in 1965 would be worth $54.4 million today. The same investment in 1970 with Wal-Mart would be worth $60 million. Even a recent investment of $10,000 in eBay, less than a decade ago, would now be worth $427,000. Here are the 10 CEOs and companies:
Warren Buffett – Berkshire Hathaway
Michael Dell – Dell
Bill Gates – Microsoft
Herb Kelleher – Southwest Airlines
Meg Whitman – eBay
Lowry Mays – Clear Channel
Sam Walton – Wal-Mart
Angelo Mozilo – Countrywide Financial
Howard Schultz – Starbucks
That list up there is a “duh” today because of how synonymous those visionaries have become with our business culture. They are also billion-dollar proof that vision, like faith, without works, is dead. No matter if you’re in branding, marketing, operations, sales or the CEO, if you don’t find a way to get everyone in your company on the same page, nobody will listen to your story. Would you invest every dime you have in your company right now, the way it’s currently running?
How you answer that question is the answer to your company’s success.
Many quotes and comments in this blog were taken from Russell Cleveland, President, RENN Capital Group, Inc., and his new book, Finding Midas.
