My Personal Finance Journey Homepage
This post was selected as the #3 top post in the 107th Best of Money Carnival at Small Biz Big Dreams.
While reading through the December 2010 edition of Smart Money magazine (page 34 to be exact), I came across a brief article that brought up the idea that companies with upbeat and happy employees often times achieve better results, and similarly, higher stock returns.
If you have a been reading the blog for a while, you probably can guess that I really enjoyed this article - since I really enjoy when personal welfare and/or environmental benefits can be obtained by partaking in an monetarily beneficial activity.
One thing that I did not like about this article was that it was too short. It only gave one brief fact about a Wharton finance professor finding that companies listed in Fortune magazine's 100 Best Companies to Work for list outperform comparable firms by approximately 2% per year between 1984 and 2009.
To me, I feel this is very vague. First of all, what defines a "comparable" company? Ok, I have a couple guesses at that. Furthermore, how does this compare to my current investment strategy of using index mutal funds?
Would this method of investing in these companies with happy employees pay off?
As many of you know from reading about my investment strategy, I am not a big proponent of investing in individual stocks. However, I cannot deny that individual stocks are very interesting. And, this type of historical comparison/analysis is just the sort of thing that I love to do!
So, let's get started!
Literature Review
As always when beginning one of these analyses, I find it is helpful to gain perspective about what has currently been discovered about this topic.
From reviewing internet records, the best record of this type of study to date was published by Cullen F. Goenner, an Assistant Professor of Economics at the University of North Dakota. His detailed manuscript can be accessed using the link below.
While this study was very robust and extensive, I feel that expecting individual investors to hold all 100 stocks of the 100 companies listed in the Fortune 100 Best Companies to Work For is unrealistic. Additionally, the study was restricted to looking at performance in the years of 1998-2005 - a time period too short to accurately judge performance going forward.
I hope to improve upon these aspects in my analysis.
Assumptions
Every analysis needs to also start with key assumptions. The assumptions that I will use are listed below.
- Assume only hold the common stock of the top 5 companies on Fortune's list of the 100 Best Companies to Work For. I believe this is more realistic for the common individual investor - data source - Fortune's Top 100 Companies to Work For
- If the stock is not publicly traded, it is naturally not invested in. The study could be expanded to include more stocks in the list, but I feel we should stick with only the best of the best companies.
- We will perform the analysis for the past 10 years - 2001-2010
- We will assume that the top 5 companies' stocks are purchased on the exact publication date of the list each year.
- We will assume that the companies' stock is held until it no longer places in the top 5 (at which time it is sold).
List of Companies
After doing some serious digging around (mainly for the 2001-2003 data), I compiled the following lists of the top 5 companies for the past ten years.
One thing that immediately sticks out in my mind is that the majority of these companies are private. Very interesting......I wonder if not having shareholders to report to allows for additional flexibility for employees....Any one have any thoughts?
2001
- Container Store - private
- SAS Institute - private
- Cisco Systems
- Southwest Airlines
- Charles Schwab
2002
- Edward Jones - private
- Container Store - private
- SAS Institute - private
- TDIndustries - private
- Synovus Financial
2003
- Edward Jones - private
- Container Store - private
- Alston & Bird - private
- Xilinx
- Adobe
2004
- J.M Smucker
- Alston & Bird - private
- Container Store- private
- Edward Jones- private
- Republic Bancorp
2005
- Wegmans - private
- W.L Gore - private
- Republic Bancorp
- Genentech
- Xilinx
2006
- Genentech
- Wegmans - private
- Valero Energy
- Griffins Hospital - private
- W.L Gore - private
2007
- Genentech
- Wegmans - private
- Container Store - private
- Whole Foods
2008
- Quicken Loans - private
- Wegmans - private
- Edward Jones - private
- Genentech
2009
- NetApp
- Edward Jones - private
- Boston Consulting - private
- Wegmans - private
2010
- SAS - private
- Wegmans - private
- Edward Jones - private
- Nugget Market - private
Performance of Companies Versus Benchmark Index Mutual Fund
The table below shows the performance of each stock during its respective holding period and shows the comparison with the benchmark index mutual fund that I frequently use, The Vanguard Total Stock Market Index Mutual Fund (Ticker symbol VTSMX).
At first glance, I have to admit that this data is looking promising. Believe me, I want to believe in individual stock investing, but just haven't found an investment system with enough data to support it.
However, the true test of the metal of the performance of these stocks is whether or not investing in these individual stocks would make you money overall after the 10 year total investing period.
To do this, let's take a look at two scenarios:
Scenario 1 - Invest $100,000 10 years ago in the index mutual fund, VTSMX, and let it sit.
The total return over the past 10 years has been 10% - meaning that our money would be worth $110,000. This is not too promising of a return for the past ten years!
Scenario 2 - Invest $100,000 starting amount in the individual stocks, according to the schedule above and assuming that we are fully invested at all times.
- Year 1 - Invested $33k in Cisco, Southwest Airlines, and Charles Schwab - resulted in loss of $40k. Yikes!
- Remaining money to invest = $60k
- Year 2 - Invest $60k in Synovus - results in 25% loss
- Remaining money to invest = $45k
- Wait a second! We've lost 50% of our money already! Yikes again!
- Year 3 - Invest $22.5k in both Xilinx and Adobe - results in heft gains of 79% and 44%, respectively.
- Remaining money to invest = $72.7k
- Things are looking a little better!
- Year 4 - Invest $36.4k in both J.M Smucker and Republic Bancorp (hold two years) - results in respectable gains of 3% and 21% (but after two years), respectively.
- Remaining money to invest now = $37.4k
- Year 5 - Invest $18.7k in both Genentech (hold until 2009) and Xilinx - Xilinx results in gain of 6.46%
- Remaining money to invest = $64k (from selling Republic Bancorp and Xilinx)
- Year 6 - Invest $64k in Valero - obtain loss of 12%
- Remaining money to invest = $56k
- Year 7 - Invest $28k in both Google (hold for three years) and Whole Foods - results in gain of 24% for Google and a 25% loss in Whole Foods
- Remaining money to invest = $21k (from sale of Whole Foods)
- Year 8 - No additional purchases in this year - so add $21k to Google
- Remaining money to invest = $0k
- Year 9 - Sell Genentech, invest $18.3k proceeds in NetApp
- Remaining money to invest = $0k
- Year 10 - NetApp goes up 106%, Google has increased 24%
- Final total money remaining = $98,450
Conclusions
Even though there is a certain allure and "sex-appeal" of investing in individual stocks, even the method of investing in companies with the most satisfied employees falls short.
This can be seen from the fact that investing in scenario 1 with the index mutual fund produces a final investment value of nearly $12,000 more.
Scoreboard Update
Index mutual funds - 100000, individual stock investing still 0.
How about you all? Have you ever invested in companies listed on Fortune's 100 Best Companies to Work For? How did it work out?
Share your experiences by commenting below!
Did you like this article? You can get the complete text of all the latest articles at My Personal Finance Journey in your email inbox each evening by clicking the link below and entering your email address. Your address will only be used for mailing you the articles, and each one will include a link so you can unsubscribe at any time.
Subscribe to My Personal Finance Journey via Email
***Photo courtesy of http://kolorkube.com/klick/wp-content/uploads/2010/09/Happy-Employees.jpg
1 comments:
thanks
Post a Comment