Shareholder Base
We are often looking for broken growth stories, when a
once-great company is no longer considered to be great. The market tends to
overreact in these cases, as growth and momentum investors move on to the next
thing and the shareholder base turns. Since I wasn’t in the stock before, I’m
not disappointed if something is no longer a high-flier. All I care about is
the future potential relative to what I have to pay for it
Alan Schram, WellCap Partners
Most of the time we’re picking up the pieces after a
high-growth company hits the wall at 80 miles per hour, having made at least
one too many investments to try to sustain an unsustainable growth rate. Public
markets can actually conspire to screw companies up. When you’re growing fast,
you get this big p/e and pretty soon you have all the wrong investors with
ridiculous expectations and do things contrary to shareholder value.
Jeffrey Ubben, ValueAct Capital
Shareholder base…now there is a subject not too many
investors think about. It’s probably more important to the holders of smaller
growth orientated firms but its something every investor should be more aware
of.
Over the last 35 years or so, the marketplace has become
largely institutionalized. The retail investor is in the small minority (a
minority I’m proud to be a member of). Institutions (pensions and mutual funds)
have an established law or belief system that makes them a power onto them selves.
They often say one thing (we are here to serve you) but have hidden agendas (we
are here to serve ourselves). Behavior which would be looked down upon in an
individual is accepted practice in the world of institutions. These same
institutions have brainwashed the investing public into believing the myth that
handling their own financial affairs is too complicated and risky. So over time
they have come to dominate the investing landscape.
These institutions are in the business of growing assets
under management. In order to achieve this they continually try to attract new
money by trying to out perform the market on a quarterly basis. This puts an
emphasis on short term performance. If the quarterly numbers are not met fund
managers could lose their jobs. They have bills to pay and kids to put through
university just like everybody else so there is a tendency to do the safe
thing. To buy stocks when the market is going up and sell them when the market
is going down. “We can all go down together, but I can’t let them go up without
me”. Needless to say this does not help their long term performance as it
guarantees mediocrity. Another problem is if their funds under management get
too big they basically become the market (shadow indexers). Another problem
with expanding size is the growth of investment committees where everything
needs to be vetted out resulting in further mediocrity. Good long term
investing is a solitary game.
The implications of all of this, is that it spills over to
the equities they hold in their funds. If a CEO’s company fails to meet his
quarterly numbers these institutions dump the stock and move on to the next hot
thing. The price of the stock becomes the thing, not the intrinsic value of
it. The result of all of this is a
market dominated by short term performance with many CEO’s striving to meet
their quarterly numbers at the expense of long term value creation (cutting
R&D and advertising budgets). The strong CEO’s who put an emphasis on the
long term fundamentals of their companies often see their stock punished and
driven down by the lemming like behaviour of these institutions. The media has
bought into this game as well as they too put an emphasis on the short term
results of the marketplace.
Keep all of this in mind the next time you see a stock you
hold beaten down for missing their numbers.
Now that I have that off my chest lets talk about the minority, the long term value investors. The funds they run have low portfolio turnover as they hold their positions for a long time (years instead of months). They perform due diligence of a company by studying the business Model, the industry structure the company is in and the capital allocation ability of the management. They are concerned with the intrinsic value of a company (the present value of all the cash it will generate in the future). If you are looking for investment ideas these are the people to keep track of and they are the type of shareholders you want holding the same stocks you hold yourself.
Don't let the financial industry or the press take your power away from you. Investing for yourself can be an empowering experience.
