[Economics Terms] What Does Skin in the Game Mean?

Hello, this is Bitpunk. Today we're going to look at what the term "skin in the game" means. Written in English, it's 'Skin in the Game.' The meaning is a bit puzzling, isn't it? So what exactly does it mean?

Meaning of Skin in the Game

Skin in the game is a phrase made famous by legendary investor Warren Buffett, who used it to describe 'a situation in which high-ranking corporate insiders use their own money to buy shares of the company they run.' It's a phrase often used in business, finance, and politics as well.

The situation skin in the game describes is one where a company's owners, executives, and employees hold a significant portion of the company's stock. Because management is deeply involved in the company's interests, it's a very important situation from investors' point of view. For reference, the U.S. Securities and Exchange Commission (SEC) requires this kind of insider ownership and securities trading to be disclosed to the general public.

Here, "skin" doesn't mean skin in the sense we usually know it; it refers to the people involved or their money, and "game" is a metaphor for the situation. In other words, you can understand it as meaning 'the company's key people hold a major position in the investment.'

Is Skin in the Game a Bad Thing?

Not at all. It's not unusual for company officers or executives to own shares or to be compensated with them. On the contrary, from an investor's point of view, the fact that a company's stakeholders hold a lot of its own stock can be read as a sign that they believe internally in the company's growth potential.

That said, many banks and financial institutions do restrict their employees from holding their own company's stock. This is because front-running can occur, such as buying shares in advance before a particular event or announcement and pocketing the profit.

An Example of Skin in the Game: Tesla's Elon Musk

Tesla's Elon Musk is a good example of skin in the game. As of December 2019, Tesla CEO Elon Musk held 34 million shares of the company's stock. In a skin-in-the-game situation like this, investors can interpret it as a sign that Elon Musk has that much confidence and faith in Tesla's future growth.

Wrapping Up

That's it for our look at skin in the game. Skin in the game is a situation in which a company's owners, executives, employees, and others hold a significant amount of the company's own stock, and investors can interpret this as the company showing confidence in its future growth.