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JacobAldridge

Define Value:

Person A wants long term growth of the share price so they can sell down in many years to fund their retirement.

Person B wants rapid growth in the share price (even if it eventually kills the company) so they can sell it soon.

Person C isn't much concerned by share price growth, as long as the dividends keep coming each year.

Person D invested because they want to support environmentally-friendly companies.

Person E isn't concerned about tree-huggers, but a lot of people in his town are employed by the company so he wants to support them.

Your challenge, should you choose to accept it: Which of these Shareholders' Value will you maximize?

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Examples like the ones you give are the best way I know to point out that risk is a component of value, too.

The governance wonk's answer is that shareholders should elect board members who will guide management to the risk profile they desire from the investment ... or sell to fund purchases of alternative securities better aligned with their needs. This poses all kinds of real-world problems, from ensuring that management doesn't adopt its own preferred risk profile (where that differs from shareholders'), to the relative costs of organizing many smaller block holders, on the one hand, and consolidated institutional investors, on the other, to the existence (or non-existence) of liquidity and alternative investments.

That line of thinking leads to lots of hard questions about how micro-level market and governance structures play out in the large, as well as the extent to which small-scale investors can organize or consolidate interests (say, via funds) and stay true to their interests as scale.

Google at some point stated they will always prioritize long term interests of their users vs. short term interests of their shareholders (paraphrasing). I think that's the key - when you focus on your users, financial success follows and stock price will reflect that.

As far as satisfying the shareholders, A and C wouldn't invest in the same company (growth vs. mature), Bs are speculators which you should almost always ignore (except when you need to throw them a bone to avoid activist situation). D/E don't really exist in the world of institutional investors, which are the investors you would have a dialog with (retail investors are generally just along for the ride).

"when you focus on your users, financial success follows"

This is _extremely_ naive. Google is a good example: you could immediately find a dozen examples where everybody, including them knows that a given solution/service/feature does not serve their users' interest -- it's for money.

It's exactly the other way around, that's why free market works. You focus on financial success, and THAT is going to lead to making your users happy. There are a lot of stories where the best alternative died because of the lack of a reasonable business model; and there are almost zero examples where most successful market participant was not the one with the best _overall_ solution. (Best overall == that is chosen by most of the people. And yes, Microsoft is one of them: we all remember how crappy Win95 was, but some of us might even remember that it did things nothing else on the market was able to do.)

> ...where everybody, including them knows that a given solution/service/feature does not serve their users' interest...

The "users" being referred to are the advertisers.

> Google at some point stated they will always prioritize long term interests of their users vs. short term interests of their shareholders (paraphrasing)

They say that, but they don't actually do that. If they were prioritizing the long-term interests of their users, they wouldn't be giving away their core services for free and funding them with advertising revenues. That may seem better for users in the short term, but in the long term it means that only services that promise advertising revenues are available; services that lots of users like (e.g., Google Reader), but which don't generate enough advertising revenue, get shut down, no matter what the impact is on users. The best thing for the long-term interests of users is for Google to charge users directly for services; yes, figuring out how to do this for something like Google search is a hard problem, but what is Google for if not to solve hard problems that no other company is in a position to solve?

More here:

http://blog.peterdonis.com/opinions/monopoly-money.html

Yes, the past 10 years have shown that Google's management has been disastrous for the company's long term profits and goals.

No, it's disastrous for the users' goals.

All of them except B.

Unfortunately, B is the only one whose interests are commonly represented in publicly traded US companies these days. B is the prototypical Fortune 500 CEO.

This is the reasoning behind why some companies are staying privately-traded (e.g. Epic Systems) with some success. It makes it hard to raise money, but gives more control over executive management and company direction.

It's also why the B-Corp is becoming increasingly popular, as it can shield management against being sued for not profit maximizing.

Not a challenge I expect to ever really face, but if I were in a position to face it, I'm guessing my answer is:

The person with the most shares.

I suspect that that's about the only way I ever even get a chance to accept this challenge.

The concept goes beyond the current shareholders too. In order to drive the stock price up, the company has to align itself towards the group of outside investors with the largest amount of capital.

Give those shares votes, and let shareholder interests define value for you.

Letting other people define value for you sounds like an incredible bad idea.

Then don't sell equity? Most stock comes with contractual ownership and decision making power.

If 1) having your definition of value dictated is a bad thing and 2) selling equity equals having your definition of value dictated then 3) selling equity is a bad thing.

I believe 1) is mostly true but 2) is not necessarily true and especially should not be true.

Selling equity is a situational cost-benefit analysis, every time.

It all matters on how badly you want cash. They're not a shareholder unless you've already decided to sell them equity.

Pure democracy is nonsense. It relies on a foundation: a constitution or charter, that entices shareholders to buy in in the first place.

F, neither.

You give B a swift kick out the door, because there is where all the trouble comes from.

Once there, balancing up the interests of A, C, D and E become easier as long as nobody within A, C or E take extravagant living for granted.

Most investors are impatient. Sure, many of them invested for the long-term (whatever that means) but demand results in the short-term.

Additionally, there is no 'wrong' time horizon for an investment. If one's goal is to buy now and sell in 3 months at a profit, they can absolutely do that.

If management's goal is to maximize growth over the next quarter, even at the expense of long-term results, they can do that. Caveat emptor, my friend.

Persons F through Z. Almost none of them own any shares but half of them are regular customers and the other half might be interested.

This choice doesn't exist.

The market is not 100% efficient, but it's not extremely far from it either.

Share prices are not something you can 'grow'. The company's future prospects change, and that affects share prices. If the companies will start targeting B, then the market will (very quickly) learn that this doesn't work (i.e. lot of people lose their money because they buy close to the top), and then share prices won't increase.

Person A, B, C don't exist in isolation. C _is_ concerned by share price growth because growing share price still means (despite all the bullshit people read and believe about investing) that the expected future dividends will increase. Person B _does_ care about long-term prospects because he's not the only smart guy in the town and if the company is doomed in the long run then chances are somebody else will sell before B sells. Person A _does_ care about short-term growth -- again because he's not the smartest all the time therefore if the share price drops today then it's usually a good signal about the prospects of tomorrow (I hope nobody argues with that -- if one does, then he's free to make a fortune on the stockmarket...).

D and E is a completely separate story.

> Share prices are not something you can 'grow'.

Tell that to companies that have used the ZIRP environment to borrow cheap money to buy back their shares. According to Barclays, companies with the largest buyback programs have outperformed the market by 20% since 2008[1].

[1] http://online.wsj.com/articles/companies-stock-buybacks-help...

Ex ante returns are not the same as ex post returns. Borrowing cheap money to buy an S&P500 ETF would have paid off handsomely since 2008, because the market's gone up. If the market had crashed, you'd be in trouble. Similarly, given the fact that the market as a whole has gone up in period X, it should be no surprise that companies buying their own stock on margin have outperformed the market.

That's something different -- share buybacks are the same as dividend payments.

They often have similar effects but no, they are not[1].

This notwithstanding, you stated unequivocally that "share prices are not something you can 'grow'" when it is evident that companies have a number of tools at their disposal that can be used quite effectively to manipulate share price, especially over shorter periods of time and in certain kinds of markets.

[1] http://aswathdamodaran.blogspot.com/2014/09/stock-buybacks-t...

B promotes the bubble/burst-cycle. It is an endemic possibly extrinsic motivator in the business culture now. When did it begin?

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