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Common Stock
THE MOTLEY FOOL
Ask the Fool
Published: June 27, 2023
Q. What's "common stock"? -- B.B., South Bend, Indiana
A. If you've ever bought stock in a company through your brokerage, you've probably bought common stock. A share of common stock in a company represents a share of actual ownership in it, entitling you to benefit when the company does well (via stock price appreciation and/or dividends) or suffer a loss when it does poorly. Common stock usually gives its holders the right to vote, too, on matters such as company policies and in elections for board directors. (Some companies have multiple classes of stock, including one with voting rights and another without.)
Q. What's a reverse takeover? -- T.N., Dalton, Georgia
A. A "reverse takeover" (or "reverse merger") is a maneuver allowing a company to "go public" without having an initial public offering (IPO) in a way that can be faster and less costly.
In a reverse takeover, a privately held company buys a controlling stake in a company that's already publicly listed on the stock market; in the process, the purchasing company becomes a listed company itself. (Some foreign companies have used reverse takeovers in order to be traded on U.S. markets.)
As an example, the Dell computer company had been public for many years before being taken private in 2013. In 2018, it executed a reverse takeover of VMware and returned to the public market that way. Warren Buffett's company, Berkshire Hathaway, is also a product of a reverse takeover. Back in the 1960s, Buffett merged his growing insurance business into a small, publicly traded textile company called Berkshire Hathaway -- and kept that name. (Many reverse takeovers involve name changes.)
Fool's School
Wisdom From Omaha
Warren Buffett and his business partner Charlie Munger recently helmed the Berkshire Hathaway annual shareholder meeting in Omaha, Nebraska, answering dozens of questions for tens of thousands of attendees. Here are a few nuggets, paraphrased.
-- On the riskiness of banks: Buffett explained that there have always been bank runs, but they make less sense since the Federal Deposit Insurance Corp. was created in 1933. It insures deposits -- up to $250,000 per depositor, per insured bank.
-- On tension between the U.S. and China: Buffett and Munger see it as harmful to both countries. Said Munger: "(It's) stupid, stupid, stupid" -- each side should respond to stupidity with kindness and enjoy a lot of free trade.
-- On partisanship in the U.S.: "Partisanship, it seems to me, has moved toward tribalism, and tribalism just doesn't work as well," said Buffett. He said tribalism means not hearing the other side, and it can lead to mobs, so we need to refine our democracy.
-- On estate planning and children: Buffett noted that in his family, "I do not sign a will until my three children have read it, understand it and made suggestions. ... You're dealing with human beings and ... you want your children to get along." If they don't, he said, once they read the will, "within about 15 minutes" each one of them will have a lawyer.
-- How to avoid mistakes in life: Buffett suggested, "If you want to figure out how you want to live your life, you write your obituary and reverse engineer it" -- i.e. figure out how to live up to it. Munger said, "It's so simple to spend less than you earn and invest shrewdly and avoid toxic people and toxic activities and try and keep learning all your life and do a lot of deferred gratification. If you do all those things, you are almost certain to succeed. If you don't, you're going to need a lot of luck." He also added, "I think the best road ahead to human happiness is to expect less."
My Dumbest Investment
$1,000 From Grandma
My worst and most regrettable investment? Well, it was around 1979 or 1980, and I was a young teenager. My grandmother gave me $1,000 and my dad suggested investing it in gold. He bought gold for me, at a near-peak price, after which gold kept falling.
My first lesson in commodities was a harsh one, but it taught me well. I also learned that just like any human, my dad wasn't always right. Looking back, he was more of a stock trader (gambler?) than an investor. Thanks to The Motley Fool, I know the difference. -- C.G., Texas
The Fool responds: Gold cost $500-something per ounce back then, only to fall to an average price of $400 in 1981 and down near $300 by the end of 1984. It was recently trading for around $2,000 per ounce. That might look like you should have hung on, but if you quadruple your money in an investment over around 44 years, that's an average annual gain of only 3.2%.
Gold has many fans among investors, but detractors have good points. There have been periods in which gold has rewarded investors well, but over the long haul, gold has significantly underperformed alternatives such as stocks and bonds. Anyone who wants gold in their portfolio might want to limit it to a relatively modest portion.
Foolish Trivia
Name That Company
I trace my roots back to the 1986 opening of my first store, in Brighton, Massachusetts. Within two years, I had 16 stores, succeeding by targeting a layer of office products distributors. I bought direct delivery and online sales specialist Quill in 1998. Today, I boast roughly 1,000 stores, and employ more than 34,000 people; I serve millions of customers including small businesses, remote workers, parents, teachers, students and others, offering everything from furniture to pens to cleaning products. I'm no longer a publicly traded company, as I was bought by the Sycamore Partners private equity firm in 2017. Who am I?
Last Week's Trivia Answer
I trace my roots back to the 1976 opening of a store in San Diego called Price Club that catered to small businesses. It later opened to other members and became a warehouse club pioneer. Meanwhile, another business (with my current name) opened its first warehouse store in Seattle in 1983, then grew its revenue from zero to $3 billion in just six years. The two companies merged in 1993, forming me. Today, with a recent market value north of $220 billion, I boast almost 850 warehouses worldwide and more than 300,000 employees. Who am I? (Answer: Costco)
The Motley Fool Take
Human Capital Management
Paycom Software (Nasdaq: PAYC) specializes in human capital management (HCM) software, which handles functions such as payroll, recruiting, scheduling, training and benefits administration. Its advantage is that it allows businesses to manage the full employee lifecycle from a single platform, freeing them from having to rely on multiple vendors.
HCM software may not be cutting-edge technology, but Paycom has differentiated itself through product innovation. For example, in 2021 it launched the industry's first self-service payroll software, which automates payroll by requiring employees to review and approve their pay prior to processing. That reduces the time administrators spend correcting payroll errors.
Paycom delivered stellar financial results in its first quarter of 2023; revenue jumped 28% to $452 million, and net income rose 30%. The company has consistently delivered solid financial results. Revenue has increased by 24% annually over roughly the last five years. CEO Chad Richison has stated that Paycom has captured just 5% of its current total addressable market (TAM) and is now expanding internationally.
Paycom would likely struggle during a recession if employment levels fall. But that would be a temporary problem. The stock is attractively priced at recent levels, and looks promising as a long-term investment. (The Motley Fool owns shares of and has recommended Paycom Software.)
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