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The Small-Investors' Guide to Activist Investing

By Joe Magyer - Updated Apr 7, 2017 at 7:24PM

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How even small-fry investors can fight for big changes.

You might think it takes Carl Icahn's deep pockets or Bill Ackman's silvery mane to be an effective activist investor. Wrong. It might feel like the stock market is rigged against the little guy, but the truth is you don't need big bucks to effect change on Wall Street. The information age has made it easier than ever for small-fry investors to make their voices heard and rally others to a cause.

Don't believe me? Just look in the rearview mirror, Fool. It has been almost 12 years since thousands of Fool community members joined forces to help sway the SEC to pass Reg FD. Happily, the same tools and strategies that allowed Fools to connect and effect change are available to you today, only they're even better. A social web and greater transparency have made it even easier for little guys like us to demystify investing and make ourselves heard.

I'll explain in a moment just how you can follow our playbook with both regulators and companies that you think can do better by shareholders. But first, here's a quick example of the way your typical activist story plays out.

A typical activist tale
Activist investing usually plays out along these lines. An investor with deep pockets, connections, and great attorneys identifies a company that isn't living up to its full potential for shareholders. Sometimes the target company has issues with execution -- that is, management stinks -- but the investor might also have what he or she thinks is a better vision for capital allocation. Usually, that's code for breaking up the business to unlock value or returning more cash to shareholders through dividends or stock buybacks.

If the stock is cheap and investors think they might be able to build a coalition of like-minded rabble-rousers, they'll start quietly building a toehold stake in the company. Once they've mustered enough shares to be taken seriously or have tipped a regulatory threshold that forces disclosure of their ownership, they reach out to management to forge a partnership or, when that usually fails, launch a costly, aggressive PR campaign for their plan, trash the company's leadership, and seek a board seat.

Your path
The bad news is you don't have a crack legal team, deep pockets, or a pack of hungry, underpaid junior analysts doing your bidding. The good news is you don't need them in order to build buzz around your ideas.

Here are five ways little guys can score with an activist mindset:

1. Talk to investor relations
Square one: Talk to the company to fill out the gaps in your knowledge and understand the company's perspective. Email investor relations to arrange a time for you to bounce some questions off them. Do your homework in advance -- read the company's latest earnings release, annual report, and investor presentation -- and come armed with a handful of informed questions. The bigger the company, the longer it will take for you to land a discussion. Be persistent, though, and eventually you'll get through.

Don't be hostile or overbearing when dealing with investor relations, though. Bombarding them with aggressive questions or "SHOUTING IN ALL CAPS" might scratch your emotional itch at the time, but they make you look like a crazy person. You're more likely to be listened to if you keep your interactions concise and considerate. Keep a good rapport with investor relations and it could open the door to chatting up executives or even getting to ask a question on the company's quarterly earnings conference calls.

2. Rally support online
This is where the fun really starts. Start out by batting around your thoughts and ideas on online discussion boards focused on the company's stock. You'll get some great feedback and begin building a base of like-minded supporters.

"It's best to rally your support before you take your actions," says Brad Allen, a senior vice president at Laurel Hill Advisory Group and speaker at the upcoming Activist Investor Conference. "The best way we see in retail investors working is to try and be collective, form a strong group, and formulate a concise message and then get out on Twitter, discussion boards, etc. We do look and see if there are some current developments."

Don't underestimate social media as a tool. Many large businesses have social media teams dedicated to responding to comments on Twitter, so don't hesitate to speak up -- someone is listening. You should also take to Facebook. The 81,000 comments Facebookers hurled at Netflix (Nasdaq: NFLX) when the company announced its ill-fated plan to separate its streaming and DVD businesses last year may not have directly led to the company's strategic backpedaling, but the rousing push-back helped.

Finally, look into sites like ProxyExchange, Sharegate, ProxyDemocracy, and MoxyVote, all of which are working to bring proxy power to the people in one form or other.

3. Vote!
Here's a dirty little secret: Most of the professional investors I know don't bother to cast their proxy votes for their personal holdings. The ones who do typically sign off on whatever the company's board recommends to shareholders. Read your proxies carefully and vote with an independent mind. Even better, make a proposal of your own if you think the company can do better. You're unlikely to upend the status quo, but your votes and proposals get noticed and force the issue of discussion.

4. Show up to annual meetings
As Benjamin Disraeli once said, history is made by those who show up. There's no better way to make your voice literally heard than by showing up to an annual meeting. Tens of thousands might show up for Berkshire Hathaway's annual meeting, aka Woodstock for Capitalists, but most annual meetings are small and subdued. Even companies under siege from activists might pull a light crowd. For perspective, there was only a small, half-full auditorium at the Denny's (Nasdaq: DENN) annual meeting I attended two years ago when the company's leadership was under siege from activist Jonathan Dash. If even a hotly contested proxy battle can't fill seats, just imagine what an average year looks like.

Show up dressed to impress and prepared with a few concise questions that you can pose during the formal meeting. You might even be able to rub elbows with management immediately afterward.

5. Ride a bigger activist's coattails
This might go against the spirit of the list, but you can always ride a bigger activist's coattails. You can apply the same techniques discussed above to help further the cause of an activist who you're aligned with. Active activists like Ackman, Icahn, and Third Point's Dan Loeb provide a nearly nonstop source of bandwagon opportunities.

Enterprising investors shouldn't just limit their opportunity sets to the U.S., though. Activist investing is on the rise in Canada thanks heavily to lower hurdles for company outsiders to effect change, according to Sander Grieve, a partner at Fraser Milner Casgrain who is also speaking at the upcoming Activist Investor Conference.

Your next steps
You've got some tools on your belt. I challenge you to put them to use! Get started by throwing your weight behind the STOCK Act. Then, get active in the comments box below and share how you plan to get active in 2012.

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