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Archive for Sunday, June 23, 2002

The Motley Fool

June 23, 2002

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Name That Company

I'm the world's leading ticketing company, selling more than 80 million tickets to 350,000 events annually and raking in hundreds of millions of dollars in revenues. I operate about 3,300 retail outlets, 20 worldwide telephone call centers, and a Web site. My clients number more than 7,000, and I'm the exclusive ticketing service for hundreds of arenas, stadiums, performing-arts venues and theaters. I also operate Match.com, a leading subscription-based online dating service, as well as Citysearch and ReserveAmerica, services that help people get the most out of their cities and outdoor recreation. I'm majority-owned by USA Interactive. Who am I? (Answer: Ticketmaster)

Know the answer? Send it to us with Foolish Trivia on the top and you'll be entered into a drawing for a nifty prize! The address is Motley Fool, Box 19529, Alexandria, Va. 22320-0529. Send questions for Ask the Fool, Dumbest (or Smartest) Investments (up to 100 words), and your Trivia entries to Fool@fool.com.

CEO pay

How can the CEO of a company that is losing money or has lost much of its value get a huge increase in his salary? M. Humphreys, Pennsville, N.J.

With major corporations, the CEO's compensation is typically determined by the compensation committee of the board of directors, in conjunction with consultants and the CEO himself. To some degree, it's a matter of a CEO seeing how much other CEOs are earning and making similar demands. Many boards of directors will tend to go along with whatever the CEO and the consultants suggest.

It's not an admirable state of affairs, and it will be hard to change, but some reforms have recently been proposed.

Why don't companies offer an incentive to buy their stock? For example, Wal-Mart could offer a $100 gift certificate for a purchase of 100 shares of stock. Wal-Mart would benefit by acquiring new shareholders, and the incentive would go directly back into their business. Scott Burgess, Chattanooga, Tenn.

The main reason is that when shares of a company's stock are traded on the market, they're not being bought and sold through the company. The firm collects its money when it first issues the shares. From then on, investors trade amongst each other, via exchanges, markets and brokerages. (It's kind of like baseball cards the company that issues them gets its income when they're first bought, but after that they trade between collectors, perhaps rising in value.)

In addition, if a firm issued lots of new stock to sell directly to new shareholders, it would create a problem for existing shareholders. The more shares a company issues, the more diluted the value of each existing share becomes.

The sportsman's guide

The Sportsman's Guide (Nasdaq: SGDE) is reinventing itself from a sleepy little business to one with quietly soaring profitability. The tiny catalog retailer of value-priced outdoor gear sports a debt-free balance sheet. Also, the managers and directors collectively own 26.3 percent of the company, so they're invested in its success.

Sportsman's Guide opened an online store in 1998, and online sales grew to more than $36 million in 2001, representing 23 percent of total sales. In 2000, the company launched a Buyer's Club, where for a $29.99 annual fee, members receive a 10 percent discount on most purchases. It's been a huge success, attracting more than 250,000.

The company's asset turnover (revenues divided by average assets) was an exceptional 4.5 during 2001. That means for every $1 in assets, the firm generated $4.50 in revenue phenomenal asset productivity. Mail-order catalog companies tend to sport figures below 2.0. Even mighty Costco's asset turnover is below 4.0.

Through high sales volume on a minimal base of assets, the company generated an 18.7 percent return on equity (ROE) last year. By way of comparison, Costco's 2001 ROE was only 13.2 percent. The companies sport identical profit margins of 1.7 percent. Consider taking a closer look at this firm.

Invest the rest

I have a story about the power of compounded growth and the rewards of investing for the long haul. A few months after I left college, I bought a car. Instead of buying a new car, I decided to buy a used one and to invest the difference. On the advice of a broker, I purchased $1,000 worth of shares of a new mutual fund. Through the years, I reinvested all of the dividends and capital gains. I held my shares for 32 years. Earlier this year, I sold the shares for more than $50,000. James M. Mann, New Haven, Conn.

The Fool Responds: Kudos! Through bull and bear periods you earned, on average, 13 percent or more per year, which beats the overall market. Investors should be careful with new mutual funds, though, as they have no track record.

When researching funds, look for, among other things, low fees, little or no loads and, most important, experienced and accomplished management whose philosophies are in line with your own. Learn more at fund company Web sites, in prospectuses and at www.morningstar.com.

Buffett, Munger speak

Here, for your edification, are paraphrased comments made by Berkshire Hathaway managers Warren Buffett and Charlie Munger at their company's annual shareholder meeting. Both are known for their investing savvy.

On learning to invest: A high IQ isn't needed for successful investing. Insulate yourself from popular opinion and spend time thinking for yourself. Read Benjamin Graham's "The Intelligent Investor" (HarperCollins, $30) and Philip Fisher's "Common Stocks, Uncommon Profits" (Wiley, $19.95). Think of a stock as a part of a business. Read lots of annual reports and focus on businesses you understand. Ignore those that you don't.

On competitive advantages: Some companies can develop them quickly (Microsoft); others take decades (Coca-Cola). You can also lose your advantage very fast (Arthur Andersen).

On growth expectations: When you already sell to half or more of the world, as companies such as Gillette and Coca-Cola do, and the world's population is growing by around 2 percent annually, it's crazy to think that earnings will grow at 15 percent to 18 percent per year. Most large companies can't grow very fast.

On index funds: There's nothing wrong at all with not knowing how to evaluate individual stocks. If you're reasonably sure that American business will do well over the long term, then invest for the long term in a broad index fund, perhaps based on the S&P 500. Buy in installments, over time. Look for low fees. Read books by Vanguard founder John Bogle, the father of index investing.

On stockmania: Widespread attention to stocks is not a good thing. We'd be better off with less interest in getting rich quick through stocks and also in legalized gambling, such as through casinos and lotteries. It's always a mistake when government encourages gambling. It's like offering 50 cents for a dollar. It's a tax on stupidity.

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