In the original, and innocently campy, Star Trek series, Scotty would confound everyone by using his time off to happily catch up on his technical journals. I had a couple of spare hours the other night and did something similar. I grabbed my box of Annual Reports from one of my investments, MicroVision (MVIS) and went through every annual report since 2000. Recently they, we, had the annual stockholders meeting. Before I attended I made a quick calculation that was humbling. Stock dilution had kept the company alive, but dramatically reduced the power of my earliest shares. It was time to do a more detailed analysis. Cue up Netflix and stream Star Trek: Enterprise, the prequel for a background soundtrack.
Startup corporations start with some money (probably not enough), shares of stock (a surprisingly arbitrary number), and a plan. If the money starts to run out before the plan succeeds, then the company finds more money somewhere. Sometimes they go into debt, which leaves them with expenses and another set of financiers to report to. To avoid that potential trap, others will issue more shares of the company. If they started with 10,000,000 shares, they can issue more shares. That sounds simple, but the number of shares to issue, the price of the shares, and finding a large enough buyer gets complicated. Issue another 10,000,000 and find that owning 50% of the company has become 25% of the company, and welcomed new owners and influences into the corporation. Done right, a bit of dilution can bridge a small gap in the plan. Taken to an extreme, and dilution can turn something flavorful into something bland.
My investing strategy has been Long Term Buy and Hold. MVIS has been testing this. My quick calculation was to determine the power of my earliest shares. Shares are frequently valued by their price, but they also represent a fractional ownership in the corporation. I’ve held MVIS since 2000. Those first few shares have been reduced to 1/46th their original fractional ownership, about 0.02% of their original influence on votes. My curiosity kicked in. What about the shares I bought along the way? How quick was the dilution? How frequent was it? Did that change when management changed? At the ASM, the CEO or the COB pointed out that more dilution was possible to either cover a shortfall or fund growth. It was time to better understand the history. Two data points, 2000 and 2017, weren’t enough.
I thought it would be eye-squinting enough to go through the Annual Reports. In those 17 years, I’ve collected 23 reports and announcements where the company published a share count. Squint, scribble, type, sort, and coerce Excel into producing some simple results and charts. The most recent number I found in a report was for April 13, 2017, 68,122,274 shares. That means that owning one MVIS share effectively means owning 1/68,122,274th of the corporation. Want to own 1%? Buy 681,223 shares. Simplistic, and for many investors immaterial, but once upon a time I strived to own 0.01% of my investments. That way, if the corporation became worth a billion dollars, my investment would be worth a hundred thousand dollars. Billion dollar corporations are considered as small (corporations get BIG), which means that if the company was truly successful and reached ten billion my investment would make me a millionaire. I prefer my personal finance to be simple.
The blue line on the chart represents the data from the Annual Reports. In that first decade, the number of shares increased about ten-fold. Then, there’s a dramatic drop (that should be vertical but I didn’t want to take the time to force it in Excel.) That was the dreaded reverse split, an event the company undertook to keep the share price artificially high and hopefully avoid delisting from the stock exchange. The other two lines provide two perspectives based on that split. The red one takes today’s shares and tracks them back as if the split started with the start of the company. The green line assumes the split never happened. If you bought after the split, you may not care about the early years. If you’ve held MVIS for over a decade, the early line may have more meaning for you.
A share is a share. The ones I bought in 2000 are as valuable as the ones I bought within the last year. But, buying ~11,000 shares in 2000 effectively bought 0.1% of the corporation. If a shareholder didn’t buy any more shares, those 11,000 shares represent about 0.002% of the corporation. A share is a share, but a share is also a vote. The voting power of a position is diluted with every dilution. While long term shareholders are appreciated, their influence is reduced with every dilution unless they buy more shares.
I haven’t been able to keep up. I’ve rarely sold, and have been buying more as the corporation, the technology, and the market progress. With ideal hindsight, the best investment would’ve been to invest in something else and now buy MVIS shares. Ideal hindsight is a fantasy. One of the reasons for Long Term Buy and Hold is because dynamic companies can be dull for years and then become overnight successes. Guessing that timing is guessing. I may write another post based on my view of MicroVision after every ASM. Every year had reasons to buy more. Maybe this is the year. Maybe this time is different. It seems so, but that dilution curve doesn’t show signs of stopping. Plot it on a logarithmic scale and it is closer to a straight line, as if it is engrained in the corporation.
This is intended as less of a commentary about MicroVision and MVIS, and more as a learning experience for long term investors of small corporations. I also know that the MVIS investing community is so starved for information and data that they may be the most engaged readers.
Investing treated me well for over thirty years. Then my Triple Whammy hit. Six years out of four decades doesn’t sound so bad, unless you’re living in the lean years. I could write thousands of words more about my strategy, and did. (Dream. Invest. Live.) Want more? The book’s available in print and as an ebook.
Dilution is one of the realities of investing in individual stocks. I’ve written before about how dilution, share price, and market capitalization interact, but rarely have I had such a chance to analyze (even simply) the effect of dilution on what it means to own a piece of a corporation. Being able to invest in stocks is one of the ways for people’s money to make money for them. It is one of the ways to build wealth or fund a lifestyle that doesn’t rely on working forever. It is also one of the ways that individuals can do more than complain about corporations. Buy a share and vote; but don’t be surprised if that vote doesn’t count quite as much as it ages.
Scotty retreated to his room to read technical journals. I just spent a Friday evening typing this post. I think it’s time to polish, publish, and share it – and then watch the next episode or two of Star Trek: Enterprise. “I’ve got faith…”
This post is now available as a video with additional content.