One constant criticism about how capitalism is set up in the West is that short-sighted shareholders beget short-sighted management. In other words, in a world where shareholders are constantly demanding higher share prices, it should come as no surprise that you will have management that does everything to hit that target- even to the detriment of the long-long prospect of that enterprise. Under this view short-term traders, rather than improving the allocation of capital, actually end up short-circuiting the entire process.
Which bring me to a conjecture of mine. Perhaps Warren Buffet is not a successful fund manager purely because he picks the right stock, but because he has a credible reputation as a patient shareholder who is known to take the long view. In other words, perhaps a CEO whose company stock was purchased en mass by Berkshire Hathaway is less likely to try to play to "maximize profit this quarter" game that in the long run could destroy the company and undertake long-run strategic investments simply because the said CEO knows that her biggest and most famous shareholder doesn't roll that way.
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Mille m...
5 years ago
2 comments:
I agree shareholder short-sightedness leads to short-sighted management. Look at a lot of the LBOs which loaded the acquired company with debt. The shareholders make a quick buck, the company usually struggle to get out from that mountain of debt. So instead of getting an egg from a chicken everyday, you kill the chicken, eat the meat, get some short term satisfaction at the expense of future gains.
But it's not the short-term traders that's the problem. They don't sit on a stock long enough for the proxie material to print. Rather it's the intermediate term investors who wants to see a spike in the stock and get out. They are the ones willing to accumulate a substantial holdings so they can start a proxie fight. (Think Carl Icahn)
The way I see it, Buffet is successful not because he's picking the right stocks, but because he gets great deals on whatever he invests. He made his shares of mistakes. But when you buy something for 50 cents on the dollar, there's not a whole lot of downside.
I use Warren Buffett, which you rightly pointed out as someone known for being a value investor, as an example.
My conjecture is that could there be a feedback system- if the CEO knows that he has a patient shareholder watching his back he might end up doing more long-run beneficial things so there is a bit of a self-fulfilling prophecy in that a patient shareholder who lets everyone know that he's a patient shareholder ends up owning a more successful company (other things being equal) simply by credibly communicting his patience.
As I said, it is a completely unsubstantiated conjecture on my part....
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