Take Care of Your House…

By: Yale Bock

Many people are fascinated by nice homes. Television programs and covers of architectural and better living magazines are adorned with videos and photos of all kinds of stunning places where people reside. If you are a guest at one of these incredible residences, as you enter, the reaction is often an astonishing gasp as you witness a living space where people obviously care deeply about the environment in which they conduct their daily affairs. Often, a fabulous house is adorned with unique art and artifacts, which are colorful and interesting to view. It is spotless, with great care given to the alignment and symmetry of the furniture. You don’t have to be Elon Musk to understand most people would prefer to live in a nice place. So how does this pertain to the investment world?

When you invest in a security, you own a piece of paper (now a digital representative of that paper). It is typically in either the form of debt or equity. There is a precise amount that is created (underwritten) at the beginning of the enterprise. As a company grows, more capital can be raised, and more equity is potentially issued. By issuing more stock, the existing shareholders will not own as much of the company as they did before the new underwriting (issuance). Conversely, if a company buys back stock that is available to the public, existing owners will own more of the company. The best example of this would be a high-profile advertising company that starts with the letter A (it used to be a G). For the last five years or more, it has been buying back stock and reducing the number of shares outstanding. In the last few weeks, it has been announced it would issue more stock, probably because the stock has recently gone up a great deal. Let’s look at a few examples to highlight my point.

Here is an example of the progression of the number of shares outstanding of a microcap company over the last seven years-

160.9 159.5 139.9 122.2 116.9 93.5 7.1 5.80 .1

They went from 100K to 160.9 million. Revenues went from 1.4 million down to 1.1 million. There are no profits anywhere to be found.

Now, let’s look at a different microcap company over the same seven years-

11.3 11.3 11.6 11.9 12.3 12.7 13.0 13.9 14.5 14.5

The number of shares outstanding has been reduced from 14.5 million to 11.3, which is a 22% reduction, or about 3% per year. Revenues have grown from 16.5 million to 33 million, but with a recent acquisition (with 250k shares of additional dilution), revenues will approach 75 million with earnings of over 15 million per year.

The difference between the two examples, both currently listed companies, is dramatic. One treats its existing equity like toilet paper, essentially turning it into something of no value. The other places the highest priority on it’s equity as something to treasure, build, and grow into a valuable asset. Make no mistake, growing the earning power of the business is the number one priority for most companies, listed or not. Still, how the equity is treated by its owners is a crucial aspect of investing. Turning back to our example of houses, one could make the analogy that the industry and competitive position of the company an investor chooses is like the state, city, and neighborhood where you select a house. In real estate, three things matter. All start with the letter l. It is similar in investing, but how the equity is cared for, no matter what size of company we are referencing, plays a critical role in determining the kind of returns investors ultimately realize. 

A crucial point for investors is how to think about deal structures during mergers and acquisitions. The pertinent question is what we are getting versus what we are paying, and you must consider how we are paying. Top-quality management teams issue stock for mergers or acquisitions when their own stock is at a high price relative to what they are acquiring. Using all cash, if possible, is always a good alternative because there is no dilution for existing shareholders. In the prior example, the company had cash on the balance sheet because it is profitable and cash built up over time. It used its own cash, borrowed some money by issuing debt, and issued a little bit of stock. In combination, the result is good, provided the company they are acquiring continues to grow its revenues and profits. What you often see are deals where an acquirer is paying too much for a purchase, financed by stock which is not valued highly, resulting in plenty of dilution, and buying an asset which turns out to be a stagnant or declining business. Not good.

Like selecting a house to buy, you want a good neighborhood, meaning an attractive industry. You want the best house in it, or the top company relative to the competition. Above all, you want a management team and board of directors who treat their equity with the highest priority, with great care in building its worth.

Originally published on July 5, 2026 in Y H & C Investments newsletter

DISCLOSURES:

Y H & C Investments may have positions in companies mentioned in this newsletter. Nothing in the newsletter should be taken as an offer to buy or sell individual securities. It is the responsibility of each investor to research the investments mentioned so they can decide on the appropriateness and suitability of the investments consistent with their risk tolerance, risk constraints, and return objectives.