The Intelligent Investor: The Definitive Book On Value part 33. The purpose of this book is to supply, in a form suitable for laymen, guidance in the adoption and execution of an investment policy. Comparatively little will be said here about the technique of analyzing securities; attention will be paid chiefly to investment principles and investors’ attitudes. We shall, however, provide a number of condensed comparisons of specific securities - chiefly in pairs appearing side by side in the New York Stock Exchange list in order to bring home in concrete fashion the important elements involved in specific choices of common stocks | 306 Commentary on Chapter 11 a cement or underwear company suddenly declare that they were on the leading edge of the transformative software revolution These questions can also help you determine whether the people who run the company will act in the interests of the people who own the company Are they looking out for No. 1 A firm that pays its CEO 100 million in a year had better have a very good reason. Perhaps he discovered-and patented-the Fountain of Youth Or found El Dorado and bought it for 1 an acre Or contacted life on another planet and negotiated a contract obligating the aliens to buy all their supplies from only one company on Earth Otherwise this kind of obscenely obese payday suggests that the firm is run by the managers for the managers. If a company reprices or reissues or exchanges its stock options for insiders stay away. In this switcheroo a company cancels existing and typically worthless stock options for employees and executives then replaces them with new ones at advantageous prices. If their value is never allowed to go to zero while their potential profit is always infinite how can options encourage good stewardship of corporate assets Any established company that reprices options-as dozens of high-tech firms have-is a disgrace. And any investor who buys stock in such a company is a sheep begging to be sheared. By looking in the annual report for the mandatory footnote about stock options you can see how large the option overhang is. AOL Time Warner for example reported in the front of its annual report that it had billion shares of common stock outstanding as of December 31 2002-but a footnote in the bowels of the report reveals that the company had issued options on 657 million more shares. So AOL s future earnings will have to be divided among 15 more shares. You should factor in the potential flood of new shares from stock options whenever you estimate a company s future Form 4 available through the EDGAR database at .
