Float

• The Bottom Line: The float is the number of a company's shares that are actually available for public trading, and for a value investor, it's a powerful clue about who is really in control and how much “skin in the game” the insiders have.
• Key Takeaways:
• What it is: Float represents the shares held by the public, excluding shares held by insiders like executives, directors, and large founding families.
• Why it matters: A low float often signals high insider_ownership, aligning management's interests with yours. However, it can also lead to extreme volatility, a characteristic that value investors typically avoid.
• How to use it: Use it not as a valuation tool, but as a qualitative indicator to gauge management's conviction and to understand a stock's potential for price stability or wild swings.

Imagine you're at a neighborhood pizza parlor, “Geno's Pizza Inc.” Geno decides to “go public,” meaning he's selling slices of his business to raise money. He bakes a giant pizza with 100 slices. These 100 slices represent the company's Total Shares Outstanding. Now, Geno, his family, and his head chef are the heart and soul of the business. They're not selling their personal slices—they plan to own them for decades. Let's say they collectively keep 40 slices for themselves. These are “closely held” or “restricted” shares. They are part of the company's ownership, but they aren't for sale in the front display case. What's left in that display case for any customer to walk in and buy? 60 slices (100 total slices - 40 insider slices). In the world of investing, those 60 slices available to the public are the float. The float is simply the portion of a company's stock that is available for trading on the open market, like the New York Stock Exchange or NASDAQ. It's the total number of shares issued by a company minus the shares that are held by insiders—such as executives, directors, controlling-interest investors, and government bodies. These insiders are long-term holders who aren't likely to be trading their shares day-to-day. The float is what you, me, and all other public investors (including mutual funds and ETFs) trade amongst ourselves.

“Show me the incentive and I will show you the outcome.” - Charlie Munger

This famous quote from Warren Buffett's long-time partner gets to the heart of why the float matters. By revealing how many shares insiders are holding back for themselves, the float gives us a powerful hint about their incentives.

A value investor's goal is to buy wonderful companies at fair prices and hold them for the long term. We are business analysts, not stock market speculators. The concept of float, while seemingly technical, provides crucial insights that align perfectly with this philosophy.

• 1. Skin in the Game: This is the most important takeaway. When a company has a low float, it often means that the founders, executives, and directors own a significant percentage of the company. This is a powerful positive signal. When management owns a large stake, their financial interests are directly aligned with those of outside shareholders like us. They feel the pain of a poor decision and reap the rewards of a good one. They are incentivized to think like owners—because they are owners—and build long-term, sustainable intrinsic_value. This is far preferable to a hired-gun CEO who is more focused on short-term stock options than the company's ten-year health.
• 2. A Thermometer for Volatility: A low float can be a double-edged sword. Because there are fewer shares available for trading, a small amount of buying or selling pressure can cause a large swing in the stock price. This creates high volatility. Speculators and short-term traders love this environment, as it provides opportunities for quick profits (and quick losses). A value investor, however, views this with caution. Our focus is on the underlying business performance, not an erratic stock price. Extreme volatility can test an investor's emotional discipline and can be a distraction from the fundamental analysis that truly matters.
• 3. Understanding Liquidity: A high float, typical of large, mature companies like Coca-Cola or Microsoft, means there is immense liquidity. Millions of shares trade hands every day, and a large institution (or an investor like Warren Buffett) can buy or sell a significant position without dramatically affecting the stock price. For the average individual investor, this is less of a concern, but it speaks to the stability and maturity of the company.
• 4. Avoiding Speculative Mania (The “Short Squeeze”): Companies with a very small float are prime targets for a phenomenon called a short_squeeze. This is where a group of investors aggressively buys shares of a heavily shorted stock to force the price up, causing short-sellers to buy back their shares at a loss, which pushes the price up even further. This creates a spectacular, but fundamentally unjustified, price spike. A value investor must recognize that such price action has nothing to do with the company's intrinsic value and is pure speculation. Analyzing the float helps you identify these potential powder kegs and steer clear.

In essence, float helps a value investor look past the stock price ticker and understand the ownership structure of the business. It helps answer the question: “Am I partnering with owner-operators, or am I just buying a trading vehicle?”

You don't need a complex financial model to figure out a company's float. The information is readily available on most major financial data websites (like Yahoo Finance, Bloomberg, or Morningstar) and in a company's official filings with the Securities and Exchange Commission (SEC).

The concept is straightforward: `Float = Total Shares Outstanding - Closely Held Shares` Where:

• Total Shares Outstanding: This is the total number of shares a company has issued.
• Closely Held Shares: These are shares owned by insiders. This category primarily includes:
• Shares held by company executives and board members.
• Shares held by individuals or entities that own more than 5% of the company (often founding families or strategic investors).
• Shares held by other corporations or governments.

¹⁾ A more useful metric is often the Float Percentage: `Float % = (Float / Total Shares Outstanding) * 100` This percentage tells you at a glance what proportion of the company is in the hands of the public.

The number itself is meaningless without context. A 50-million-share float might be tiny for a mega-cap company but enormous for a small-cap one. Here’s how a value investor should think about the results:

• Low Float (e.g., < 60% of Shares Outstanding):
  • The Good: Suggests significant skin_in_the_game. Management's interests are likely aligned with yours. These are often founder-led companies or family-controlled businesses where there is a strong culture of long-term ownership. This is a very attractive quality for a value investor.
  • The Caution: Be prepared for potential volatility. The stock price might swing wildly on little news. Ensure you have a strong conviction in the business's fundamentals and a solid margin_of_safety to withstand the bumps. Don't let market noise scare you out of a good long-term position.
• High Float (e.g., > 90% of Shares Outstanding):
  • The Good: Indicates high liquidity and likely price stability. These are often large, mature, widely-held companies. It's easy to buy and sell without moving the market.
  • The Caution: Could indicate a lack of significant insider ownership. You'll need to dig deeper into management's compensation structure to ensure they are still incentivized to think like owners. It can also sometimes be a result of a company repeatedly issuing new shares, which dilutes the ownership of existing shareholders.

There is no “perfect” float percentage. It's a piece of a larger puzzle. A low float can draw your attention to a potentially wonderful, owner-operated business, but it doesn't replace the hard work of analyzing the company's financial health, competitive advantages, and intrinsic_value.

Let's compare two fictional companies to see float in action.

Analysis from a Value Investor's Perspective:

• Steady Founder's Hardware Inc.:

The float is only 50% of the total shares. This is a huge signal. The founding family and management own half of the entire company! Their personal wealth is directly tied to the long-term success of the business. This gives you, as a potential co-owner, immense confidence that they will act in the best interest of the company. You'd be investing alongside people with serious skin_in_the_game. However, with only 25 million shares available for trading, a big order from a mutual fund could cause the price to jump or fall sharply. You must be prepared for that volatility and focus on the business, not the stock's daily gyrations.

• Mega-Blue-Chip Corp.:

Practically all the shares (99.5%) are in the public float. The 25 million shares held by insiders, while a large number in absolute terms, represent a minuscule fraction of the company. This is typical for a company of this size. It's highly liquid and stable, owned primarily by index funds, mutual funds, and individual investors. While you don't get the same strong signal of owner-operator alignment, it doesn't automatically make it a bad investment. It simply means you must place more emphasis on other factors, like the quality of its economic_moat and the rationality of its capital allocation decisions.

• Reveals Management Alignment: It's one of the quickest and clearest indicators of “skin in the game,” a core tenet of value investing.
• Provides Context on Volatility: Float helps an investor anticipate a stock's potential behavior, allowing them to mentally prepare for price swings and not panic-sell a good company.
• Highlights Potential Speculation: A very low float combined with high short interest can instantly flag a stock as a potential battleground for speculators, which a fundamental investor should approach with extreme caution.

• Not a Valuation Metric: A low float does not mean a stock is cheap, and a high float does not mean it's expensive. Float is about ownership structure and potential behavior, not intrinsic_value. Never buy a company based on its float alone.
• Oversimplifying Insider Motives: While high insider ownership is generally positive, it's not a guarantee of success. A founder might be a poor manager, or a family could make irrational decisions. Always complete your full due diligence.
• The “Diworsification” Trap: Some founders who retain huge stakes refuse to ever sell shares, even to reinvest in higher-return projects, potentially hurting long-term growth. High ownership can sometimes lead to conservative, entrenched management.
• Data Lag: Information on insider holdings is not updated in real-time. There can be a delay between an insider's transaction and when it is publicly reported.

• insider_ownership
• shares_outstanding
• liquidity
• volatility
• short_squeeze
• market_capitalization
• skin_in_the_game