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:
- As well as long-term investors, although not holding the majority of shares, there obviously are also many shorter-term investors
- 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)
- Not all long-term investors are equally long-term in their outlooks
- 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!