Private vs Publicly traded businesses — what should you buy?

Private vs Publicly traded businesses
-- what should you buy?

Many of my friends prefer to invest only in privately held businesses.  Some of the arguments they use are that the stock market is way overvalued, it’s dominated by short-term, high-frequency traders, and it’s distorted by huge volumes of price-insensitive, passive investment flows into index funds, and by Federal Reserve money creation.

All true.  And I’ve said my bit on why I think index funds are a suboptimal thing to invest in, in an earlier column.

There’s also no denying some of the biggest and best companies in the world are privately held.  These include, Cargill, Koch Industries, Mars Confectionery, and S.C. Johnson, maker of household products like Baygon insect spray and Glade air freshener, to name but a few.

Problem is, you and I can’t invest in these big, long-established private companies.  So, invariably, investing in “private” companies, unless you are very well connected, means investing in start-ups.  And, with start-ups, the failure rate is so eye-wateringly high you’re statistically way better off taking your chance in the “overvalued casino” (as some of my friends think of it) that is the listed stock market.

I think having a binary view — that either you only invest in the stock market, or you only invest in private businesses — is counter-productive.  I happily invest in BOTH.  But only if the value I get is more than the price I pay.  Luckily, that’s not too hard.

I regularly discover hidden gems listed on public stock markets that are trading for way less than the same companies would trade for if they were private.  Sometimes it’s actually possible to buy part of a publicly listed company for less than the amount of net cash it has in the bank. 

I’ve done it successfully dozens of times all around the world.  And I’ve advised other people on doing so for many years in my published newsletter over at www.sovereignman.com, The 4th Pillar.

Again right now, after the 1st quarter 2020 market crash, there are many opportunities to buy bombed-out stocks trading for well under their cash backing.  One of my long-standing recommendations for example is Karoon Energy (KAR) on the Australian Securities Exchange. 

The latest quarter’s numbers aren’t out yet, but based on my best estimates, the company has well over A$0.70 per share in net cash on its books, yet the stock trades for just A$0.51.

The market must think management will burn through all that cash, rather than do the sensible thing, now that oil prices have crashed to under $20 (WTI Crude basis), and give up on its mooted Brazilian oil acquisition, and hand the money back to shareholders.

Time will tell what Karoon does.  But any time I am able to buy a stock for 30%+ below its net cash backing, I know I’m getting a better deal on the public equity markets than I would ever get in a private business transaction.

After all, what business owner in his or her right mind is going to sell you a company with $70 million in the bank for just $51 million?  The notion is absurd. 

That said, two of my most successful investments ever have been in privately held businesses.  One continues to pay me over 30% in annual dividends on my original investment.  And I long since got all my original capital back and collected over half a million dollars in dividends.

But opportunities to make those sorts of investments are very few and far between.  So, what I’m aiming to help you do is to duplicate that sort of success with publicly traded stocks around the world.  If that appeals to you, I’d love for you to join my mailing list.  That way, you’ll never miss any of my columns. Sign up below.