Monday, September 13, 2004

Stock markets and long-term shareholder value

Sometimes I get a little tired and discouraged of reminding people "it was price, not value, that caused the stock market boom and bust of the late 1990s and early 2000" as Paul Lee, a financial Journalist and Shareholder Engagement Manager at Hermes Investment Management in London, puts it in an excellent article in the Book "Questions of Value".

"Everyone knows the market gets things wrong. Few have the temerity still to cling to the perfect-market hypothethis. Those of us who have experienced stock-market sentiment from the inside know that often there is no explanation other than psychology for apparent failures to recognize value - until some external event changes the mood and makes it impossible to ignore - or for overvaluations going unquestioned untill the destruction of value becomes so great it can't be ignored".

I agree with Mr Lee. Also to his view that it should not be a radical view that shareholder value is something longer-term than the market's short-term price fluctuations. Indeed the bulk of investment is long-term in any case, understanding pension funds, life insurers, asset funds, and other professional investors in many countries hold over 50-60% of all equities. Everybody knows these parties take a long term view towards value creation, 10-20 years or even more is not execeptional. Add to the 50-60% an extra 10-20% long-term retail investors and the conclusion is that typically a healthy three quarters of all investors are interested in long-term value creation!

Ending the above misunderstanding once and for all is important, because it is one of the factors that cause stock markets crises. Lee actually mentions 4 reasons why share prices do NOT always reflect the intrinsic value of a company:
  1. As well as long-term investors, although not holding the majority of shares, there obviously are also many shorter-term investors
  2. Sometimes the agents that work for the long-term investors may not work to the long-term timescales that would benefit their clients (in particular many fund managers have short term performance targets)
  3. Not all long-term investors are equally long-term in their outlooks
  4. Most funds have strict rules about the type of companies in which they can invest. This can also cause strange price effects in circumstances

Not withstanding these factors, once and for all: the majority of investors in stock markets are in for the long run!


Anonymous Anonymous said...

i just finished reading the NyTimes best selling author Robt kyobashi(Rich Dad/Poor Dad) on Prophesy. He prophesizes that as the baby boomers hit 60,70 age of retirement they will be looking to drain all their hard saved equity investments and will cause a nightmare on the world equity markets.
In 2010 and subsequent years, the rush from equities will crash the market. i am po'd that this will no doubt come true as I am one of those BBoomers who had planned to retire by age 62.
If the euity market retracts as bad as it did in the 99-2000 sell-off and then a subsequent cataclysmic event happens, Ritirement is a MYTH.
Any ways to prepare in advance for this event other than buying cd's and treasury notes. I would love to hear any erudite thought.I have toyed with Modern Portfolio theory, but it is less than satisfactory.
Another thought is buying an annuity, but then you lose flexibility.
Rich dad says build up Income producing assets like businesses ans income properties. That is too labor intensive for me.

6:04 PM  

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