Founder knows best. On Wall Street, everyone’s looking for an edge. Ironically, the elusive advantage that everyone from portfolio managers to private investors are seeking might not be so thoroughly hidden: many of the world’s…
Founder knows best.
On Wall Street, everyone’s looking for an edge. Ironically, the elusive advantage that everyone from portfolio managers to private investors are seeking might not be so thoroughly hidden: many of the world’s best stocks are led by founder-CEOs. A 2009 paper in The Journal of Financial and Quantitative Analysis found that even after controlling for factors like firm characteristics and industry affiliation, companies run by founder-CEOs outperformed by 4.4 percent annually between 1993 and 2002. Even casual investors will notice this checks out anecdotally in more recent years too, with many of the world’s most valuable companies guided by founders. Seven of today’s best CEOs fit that description.
One of the most lauded founder-CEOs in Silicon Valley, Hastings has taken longtime Netflix shareholders on a bumpy ride. A bungled attempt to split its DVD business from its streaming service in 2011, which came on the heels of a massive price hike, caused hundreds of thousands of subscribers to flee and a severe sell-off in NFLX stock. Hastings took his lumps, apologized, reversed the decision and doubled down on the consumer experience. The rest is history: today Netflix boasts more than 100 million subscribers, and shares soared from $7.58 in 2012 to highs of $423 in 2018. That magnificent rally has made for a much smoother ride.
Jeff Bezos is the richest man in the world. Amazon‘s founder and CEO hasn’t just created enormous wealth for himself, though — he’s done it for shareholders, large and small, to an extent rarely seen in the stock market. Shares have gone up tenfold since 2012 alone, and today the company is worth more than 2,000 times its valuation at the time of its 1997 IPO. Bezos’ outperformance isn’t accidental: the man who once ferried packages to the post office solo is one of the consummate long-term thinkers in business. Like Hastings, Bezos is guided by an obsessive focus on the customer. Plus, Warren Buffett’s a fan, which is basically the ultimate validation.
Speaking of the Oracle of Omaha, Buffett hasn’t done too shabbily for shareholders himself. In his more than 50 years as chairman and CEO of Berkshire Hathaway, Buffett has proven to be arguably the greatest and most time-tested capital allocator in the world. Brilliantly using the core insurance business as a source of seed money, Buffett used the “float” — insurance premiums that have been paid but not allocated for claims — to create a sprawling equities portfolio that walloped the market. Buffett’s acts of omission have been just as vital: when Berkshire acquires companies outright, it allows the executives to continue making all their own managerial decisions. Seems to have worked out.
Another case of founder-CEO magic, Huang co-founded Nvidia in 1993, just in time to catch the rapidly rising tide that was the 1990s dot-com wave. Unlike Pets.com though, Nvidia had more than just eyeballs and a Super Bowl commercial. Battling established leaders in the semiconductor space with decades-long head starts, Nvidia patiently built an enviable portfolio of technology and intellectual property. In 2015, shares began a multiyear bull rally fueled by the blowout success of Nvidia’s GPU chips, which had become best-in-class necessities for a number of specialized, high-growth industries. Huang’s vision made Nvidia chips vital for applications like artificial intelligence, cloud computing, gaming, cryptocurrency and autonomous driving.
Despite Square being the second-most visible company he’s founder-CEO of, Dorsey’s leadership of the mobile payments company Square has produced phenomenal returns for SQ stock owners. Dorsey, who pulls dual CEO duties at Square and Twitter (TWTR), is in an elite club of people who have founded multiple multibillion-dollar companies. The odds of that happening by luck alone are infinitesimal, which should convince Square shareholders — as if the three-year rally from $9 to highs above $100 weren’t enough — that Dorsey is the real McCoy. Analysts expect revenue to jump 57 percent in 2018, which is the sort of hypergrowth that’s caused Square to surpass even Twitter’s valuation.
It’s certainly true that not all founder-CEOs have been wildly successful. But it sure seems that many of the best stocks of the 21st century have leaders who oversaw their firms’ inception. Founded just before the turn of the millennium in 1999, Salesforce went from a twinkle in Benioff’s eye to a valuation of more than $100 billion in just 19 years. The company’s dominance in customer relationship management software and Benioff’s masterful propagation of the subscription model have driven routine annual revenue growth between 20 and 30 percent. A recent strategic partnership with Apple (AAPL) to exclusively integrate Salesforce into iOS devices will make the business even more untouchable.
Last but not least, Google’s parent company Alphabet rounds out the list of companies guided by visionary founders with a Midas touch. Larry Page, who co-founded Google in 1998 with Sergey Brin, has proven a savvy strategist, overseeing the 2015 decisions to hire chief financial officer Ruth Porat and reorganize as Alphabet. Like Salesforce, GOOG has been one of the rare companies to consistently compound at high rates, and will more than double revenue from an already colossal $60 billion in 2013 to an estimated $137 billion in 2018. Page’s aggressive efforts in cloud computing, AI, self-driving cars and tech gadgets provide many branches of possible growth beyond search.