Why Invest in Owner-Operators
What are owner-operators and why are they good investments
Dear reader,
Welcome to this new edition of Investing Topics.
Today, we’re exploring owner-operator companies—family and founder-owned businesses—and why they make better investments.
That's right, companies run by the founder or their family often create more shareholder value. Let’s dive in!
What are Owner-Operator Stocks?
While there’s no exact definition, an “owner-operator” firm typically refers to a firm where:
The founder is actively leading or heavily involved in the business, or
The founder’s family leads and/or controls the company.
Importantly, in either case, the founder or their relatives should hold a large equity stake.
Many studies show that owner-operators outperform their agent-operator counterparts. For example, a recent study by Credit Suisse found that family-owned companies have significantly outperformed since 2006.
“Other than in Japan, on a regional level basis, we find share price outperformance to be similar at between 300 and 360 basis points on average per year.”
300-360 basis points, or 3-3.6%, per year, is an enormous difference in alpha that can’t be ignored.
Why Do Owner-Operator Stocks Outperform?
There are several reasons owner-operators tend to outperform:
Alignment of Interests
Owner-operators have the same goal as shareholders: increasing the company’s value over the long-term. A CEO with a big stake is incentivized to try and raise the share price because their personal wealth is directly tied to it.
This is often referred to as having skin in the game. It’s both encouraging and reassuring to invest alongside a CEO who holds a large stake in the business.
Better Capital Allocation
Owner-operators approach capital allocation differently because they favor long-term value creation. Non-owners, by contrast, execute “flashy” acquisitions or pay out hefty dividends to please shareholders—funds that often could have been allocated to more meaningful projects.
What sets owner-operators apart is their stake in the business. With their wealth on the line, they’ll think twice before acquiring a company just to keep investors from getting bored. They also aren’t afraid to incur losses if it supports their vision.
Take Amazon. In its early years, the company operated at a loss or barely broke even due to extensive R&D investments. Founder and owner Jeff Bezos resisted the temptation to prioritize short-term profits. Today we see the result: Amazon is one of the largest companies in the world, and Bezos one of the wealthiest individuals. Even now, under Bezos’s role as executive chairman, Amazon reinvests heavily in its future. In 2024 alone, the company is expected to spend $75 billion on capital expenditures!
Greater Innovation
The same Credit Suisse study I mentioned earlier highlights how owner-operator businesses spend less on R&D yet achieve higher innovation output—they create relatively more products, patents, and business processes. Other studies agree on this.
A well-known example is Apple under founder Steve Jobs during his second tenure. Jobs introduced the iPod, the iPhone, and the iPad in a span of less than ten years, steering the company towards becoming the most valuable in the world. Before he came back, Apple was a poorly-led struggling company. Jobs restructured the product line, innovated, and left the company in a much better position. This is the impact of a founder—someone who deeply cares and has a long-term vision.
Looking Further
While finance and investing revolve around numbers, at its core it's about humans. It's your job to recognize the visionaries and innovators of today--those that lead with their wealth on the line.
Focusing on owner-operators won't guarantee success, but it shifts the odds in your favor. So next time you research a stock, dig deeper. Look past Wall Street’s earnings estimates and price targets, and take a closer look at who's at the helm and what truly motivates them.
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Disclaimer: the information provided is for informational purposes only and should not be considered as financial advice. I am not a financial advisor, and nothing on this platform should be construed as personalized financial advice. All investment decisions should be made based on your own research.
Skin in the game is a potent concept. As Charlie Munger is attributed to the quote "Show me the incentive and I'll show you the outcome", it is a good filter to have.
Coming from Indian markets, it is also important that the intent of the promoters is aligned with minority shareholders for wealth creation