Investment Ideas – Great Capital Allocators

A follow-up in the Investment Ideas series of posts. Be sure to check out my earlier post on Family Owned Businesses as a method of screening and finding good investment opportunities in this series.

Good capital allocation is the most important trait for a company. Generally speaking, a company has a handful of options:

  • Reinvest in the business
  • Pay down debt
  • Pay dividend
  • Buyback stock
  • M&A to grow the business
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Investment Ideas – Family Owned Businesses

Lately I stumbled upon a few research reports that concluded what I had just heard as off-the-cuff comments about the advantage of owning stocks in family owned businesses. I had heard that there was research on the topic, but had never seen actual hard, cold data on this front until recently. At a basic level, the argument is fairly straight-forward: family-owned businesses have a better track record at taking a long term view and taking better decisions for the survival & growth of the business. As a result, the stocks in these companies consistently outperform their peers in the market, thus generating alpha for shareholders.

There are various slightly different terms used to indicate this kind of company control. Commonly used ones are owner-operator, or family-owned, or founder-run businesses. But no matter the term, the objective is the same: Build and grow a business; leave a legacy and/or continue the legacy of the business after inheriting from family members.

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