One of the problems with investing in companies, says Nassim Taleb in his book Antifragile, is that the interests of investors and company executives aren't always aligned.
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Because executives earn a salary and bonuses that often dwarf the value of stock that they own in the company, they generally benefit more from the upside of taking risk without suffering as much downside. The harm tends to primarily accrue instead to the shareholders.
The ancient Romans had an ingenious way of dealing with this when it came to building bridges, Taleb notes, requiring the engineers who built the bridges to spend time underneath the completed structures. The English took this a step further, requiring the engineers' entire family to spend time under the bridge after it was built.
Image source: iStock/Thinkstock.
Taleb refers to this as having "skin in the game," and it translates easily from bridge building into investing. To ensure that shareholders' and executives' interests are aligned, the people running companies should be required to own a significant number of stock in their firms, as this exposes them to the downside of taking excessive risk.
It's for this reason that JPMorgan Chase (NYSE: JPM) is such a solid stock for investors to own. A majority of CEO Jamie Dimon's net worth is tied up in JPMorgan Chase stock. According to the bank's latest proxy statement, he owns 6.7 million shares outright, valued at around $604 million -- and that doesn't include the options he owns as well.
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In no other industry is skin in the game as important as it is in banking. Banks are highly leveraged institutions, typically borrowing $10 in debt for every $1 in equity. The net result is that a mere 10% decline in the value of a bank's assets can render it insolvent.
On top of this, there's a huge demand for a bank's product -- money. The only limit to how fast a bank can grow by making loans comes from the bank itself, as anyone in their right mind would take a loan if the price (i.e., interest rate) is right. When you combine these two fundamental aspects of banking, in turn, it's clear that a bank's executives must always keep the downside risk of growing too quickly at the forefront of their minds.
The best way to do this is by ensuring that the executives of the banks you invest in have a lot of skin in the game. And no other bank executive that I'm aware of owns more stock in their institution than JPMorgan Chase's Dimon.
Jamie Dimon, the chairman and CEO of JPMorgan Chase. Image source: JPMorgan Chase.
Dimon isn't content just satisfying the bank's baseline requirement of owning a minimum of 1 million shares. His stake is nearly seven times that. On top of this, as JPMorgan Chase notes in its 2016 proxy statement:
Mr. Dimon not only complies with all of these ownership guidelines and retention requirements, but has not sold a single share of JPMorgan Chase common stock or, prior to the merger, Bank One Corporation common stock, whether acquired as part of his compensation or on the open market, since he became CEO of Bank One in March of 2000.
And it's not as if Dimon just accumulates shares of JPMorgan Chase from stock and options granted by the bank; he's also an avid purchaser in his own right. When bank stocks bottomed out at the beginning of last year, he ponied up $27 million to purchase 500,000 additional shares.
In sum, if you want to invest in a bank that's looking out for your interests as a shareholder, you can't do much better than JPMorgan Chase.
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