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Bermuda Investment Primer Series

 

 

Stocks: Owning An Equity Slice of Pie

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The Concept Of Capital Equity; Launching a Successful Mom And Pop Pizza Operation

 

Stocks (shares) are equity ownership in a company, a slice of pizza in the pie.

There are hundreds of investing books along with millions of investment information product websites listing do-it-yourself information, focused investment products, and some very, even extraordinary investments managers. These do not address the specific localized investment industry here. This Bermuda Investment Primer segment focuses in a general overview on Bermuda resident investors and investments that are available and relevant to the Bermuda offshore jurisdiction.

Some readers will stop right here with thoughts of “I don’t have anything to invest, and it doesn’t mean much to me.” If you are working (even if you are unemployed currently) almost everyone has a pension that is managed and invested in global securities markets.

From a basic perspective, the second thought is, “why should I invest when I can be just as comfortable with fixed deposits, real estate, and my pension saved for later?”

What investing can mean to you is hidden in plain sight in the last five words of the preceding sentence. Investing in stocks (and other securities in your pension for instance), is the act of handing over your hard earned cash to a financial salesperson, a financial institution, or an investment fund manager in exchange for a piece of paper that says you own shares of one or a number of publicly traded companies. You do this, in confidence that way down the road, your investment will be worth much more than when you started. Do not assume that once you invest, everything proceeds as planned. You need to pay attention to what you own and how it is invested – that means a learning curve for you.

There are numerous reasons to invest, and it starts with understanding the investments that you do have by breaking them down to their basic components: cash, stocks, bonds, and real property. Investing in stocks in capital markets can provide the following:

• Outpace relentless Bermuda inflation pressure on every day living costs. Full discussion on inflation and your purchasing power to follow in another article.

• Achieve long-term appreciation gains generally higher than bank deposits.


• Participation in financial success of globally diversified companies by becoming an owner, not just a customer. You would be amazed at how you have contributed to the financial success of these companies, just by buying their products, every day, every month, every year.


• Diversification away from concentration risk in one country, one real estate market, and one soft dollar currency .

 

 

What is the difference between owning bank deposits and stocks?

• Deposits are held in banks (on their balance sheets) in your name, subject to certain holding requirements, interest rates and time frames.

• Interest rate paid to you is controlled by bank and their assessment of market interest rates.


• Your interest rate of return is determined by pure math compounding on your cash, i.e. five year fixed deposit @ 2% annually is for example, year 1 - $102, year 2 - $104.04, year 3 - $106.12, and so on. Straight maths, what you calculate is what you receive – no surprises. Your cash is not converted into anything else. The interest each year is added to the principal amount of the fixed deposit, but it remains just that, cash.


• Deposits have lockup periods to achieve higher rates, and penalties, often, if you cash your deposit earlier than the projected time frame.


• Deposits in Bermudian financial institution deposits are only minimally protected ($25,000BMD) by bank deposit insurance - as proposed, but not yet in law.

Investments in stocks, on the other hand,

• Can generate unlimited upside potential gains when owning shares of successful companies (and complete loss of your investment in a failed operation).


• Long-term appreciation of equity capital is not mathematically figured like fixed deposits. Appreciation is driven and dependent upon performance, capital market value of the company, and success (or failure) perceptions of investors.


• Generally, you have direct ownership of these intangible assets accomplished by purchasing shares of a publicly owned company on the open market. You can buy or sell the shares when you wish.


• Historically, investments in stocks have returned higher returns than the rate of inflation.


• Publicly traded stocks (and their companies) financial information is readily (for the most part) available on the Internet. Full disclosure is mandatory.

• Performance (rate of appreciation – return) is not guaranteed. Some investments may decrease in value, while others will significantly increase in value, i.e. Berkshire Hathaway – 40 year performance appreciation in excess of 250,000% since inception.

 

Thus, fixed deposits are considered linear – they earn a rate of return in a straight line, while stock market investments fluctuate over time, generally in an upward trend. Note that neither deposits or stocks are guaranteed as to rate of return or safety, except for the $25,000 protection on deposits.

What is a stock? How does a stock evolve into a capital market investment (or a mutual fund of many stocks in your pension)? Where does a business start? Very, very small! We will demonstrate with Mom and Pop’s decision to open MamaZinas Pizzarina™ Pizza Bermuda (hypothetical firm).

Before we introduce our hypothetical family owned company (and because your eyes are probably glazing over at this point) let us take a quick look at two examples of powerhouse pizza chains to demonstrate this concept.

Pizza production can become extremely profitable. Mr. Herman Cain (former CEO of Godfather’s Pizza) is now campaigning for President of the United States. Domino’s pizza chain was sold by its owner, Tom Monaghan, for an estimated $1 billion US dollars.

Each of these pizza businesses started out as small fledgling operations. Mr. Cain built the Godfather pizza into a powerhouse chain during his tenure as Chief Executive Officer, while Mr. Monaghan and his brother grew a tiny local pizza store in a small town to an international household name.

And how did they accomplish these financial feats? Both men are very, very smart businessmen; however, in order to be financially successful, your company has to consistently deliver exceptional goods with service and a smile. Mr. Cain, while employed at Pillsbury (owner of Burger King at that time), established the successful BEAMER program for Burger King employees – “when you smile, your patrons will smile, too.”

Slice of the equity pizza pie

 

A smile is great, but the customer and capital investors have to buy in to the product.

Did they ever? Both companies had huge growth in customer sales. Both companies had many shareholders investing cash by owning stock in each corporation. Today, Domino’s pizza is a publicly traded stock listed on the New York Stock exchange (NYSE:DPZ), while Godfather’s pizza is privately owned, holding the number five largest pizza chain position in the United States.

Stocks (shares) then are nothing more than equity ownership in a company, a slice of pizza in the pie.

LEARN more about the family and MamaZinas Pizzarina™ Bermuda here.