As paradoxical as it may sound, the key to finding a great company – and by extension, a great investment – may lie with figuring out the ones who actually care the least about making a profit To that point, I recently came across these interesting passages from a May 2012 article that my colleague Morgan Housel wrote: “Which of these two companies would you rather invest in? The first boasts in its annual report that it has a single goal: “maximizing shareholder value.” A few lines later, it promises: “We are deeply committed to building the value of…
As paradoxical as it may sound, the key to finding a great company – and by extension, a great investment – may lie with figuring out the ones who actually care the least about making a profit
To that point, I recently came across these interesting passages from a May 2012 article that my colleague Morgan Housel wrote:
“Which of these two companies would you rather invest in?
The first boasts in its annual report that it has a single goal: “maximizing shareholder value.” A few lines later, it promises: “We are deeply committed to building the value of the Firm … in everything we do, we are constantly identifying and evaluating ways to add value.”
Its CEO repeats the line frequently in conference calls with analysts. Between discussing ways to boost the company’s share price, he reminds that “our goal is simple; that’s to create value for our shareholders.”
The other company takes a different approach. Its annual report states that the business “was not originally created to be a company.” Customers that are key to its future “believe in something beyond simply maximizing profits,” it reads.
Its CEO once stated bluntly, “We’re definitely not in it for the money,” and admitted to a friend that “I don’t know business stuff.” One analyst wrote that the company’s management simply “doesn’t care that much about making money,” which is probably true.
What are these companies? The first is Lehman Brothers. The second is Facebook.”
Lehman was an investment bank that went bust during the Great Financial Crisis after getting drunk on debt; in the process of destroying itself, it nearly dragged the entire U.S. financial system down with it.
Facebook (which needs no introduction), on the other hand, has seen its shares more than double after its May 2012 IPO. Along the way, its profit had ballooned from US$53 million in 2012 to US$2.94 billion in 2014.
As Morgan wrote, “The irony here is too much to ignore.” The firm which had obsessed over “maximizing shareholder value” ended up burning itself to the ground in search of its goal while the company that was, at best, nonchalant about earning a profit, ended up being the one making big bucks.
Facebook’s experience is not unique to itself. Here’s what Jonathan Ive, Apple’s design chief, said about the company in 2012 (emphasis mine):
“We are really pleased with our revenues but our goal isn’t to make money. It sounds a little flippant, but it’s the truth. Our goal and what makes us excited is to make great products. If we are successful people will like them and if we are operationally competent, we will make money.”
Then, this is what a senior Google executive said in a 2014 conference about mobile payments (emphasis mine):
“Making money, all this kind of stuff… that comes later. Google really wants to drive mobile payments forward, and focus on the customer.”
Apple has seen its profits soar from US$1.33 billion in the year ended September 2004 (FY2004) to US$39.5 billion in FY2014. Meanwhile, Google, the search giant, has experienced a nearly 10-fold jump in earnings from US$1.465 billion in 2004 to US$14.44 billion in 2014.
As it is, all three companies – Facebook, Apple, and Google – have ended up making huge profits and benefitted their shareholders enormously because of their intense focus on delivering something wonderful for their customers and leaving profit-considerations way down in the priority scale.
The point here is not that great companies shouldn’t care about making money – it’s that great companies tend to focus first on building something awesome for their customers and that in turn is what brings in the dough.
Healthcare services provider Raffles Medical Group Ltd (SGX: R01) is so far the only Singapore-based company I’ve come across that has a similar ethos to the likes of Facebook, Google, and Apple. In a February 2014 interview, the company’s executive chairman Dr. Loo Choon Yong said:
“We have a little aphorism of our own – “look after the patients and the business will look after itself”. I preach this all the time because we should do what is the best of our patients.”
Placing patients first hasn’t hurt Raffles Medical’s business and shareholder returns in the least bit. The firm’s profits have jumped from S$12 million in 2005 to S$68 million in 2014; its shares have gained nearly 800% over the past decade.
Finding companies with a purpose beyond making a profit is certainly not the only way to find a winning investment (and there would almost certainly be such companies who overdo it or just fall flat on their faces and end up being poor investments). But for investors who are out looking for great companies, the experience of Lehman and Facebook can be an instructive example.
As Morgan wrote, “Lehman obsessed over profits and failed miserably. Facebook has obsessed over products and flourished – with incredible profits and shareholder wealth as a result. Neither is likely a coincidence, and the comparison says a lot about what it takes to become a great company.”
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing owns shares in Apple and Raffles Medical.