Comments on: Does “shareholder value” make any sense? A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: Ken Houghton Thu, 21 May 2009 21:36:51 +0000 “But in order to believe that shareholder value makes sense, you also have to believe that if you buy a stock at $100 and it drops to $50, then you haven’t lost any money so long as you haven’t actually sold the stock. And there aren’t many people who really believe that.”

NO. I have to believe that the original Value Proposition is still intact (at which point I double- or treble-down, liquidity permitting.

Example 1: A judge declares a software company a monopoly and told to break up. I see this as a Value Proposition for the otherwise-bloated company. I buy the stock.

A year or so later, another, higher judge says, “eh, forget that. Keep making larger, more bloated, memory-hogging O/Ses as a long-term strategy.”

I sell the stock. (Whether I make or lose money is an accounting matter.)

Example 2: A small fast-food franchise specialising in rotisserie chicken and interesting side salads at a time when its main, Well-Established Competitor is fried-chicken-and-potato-product-specifi c gains some market share and launches an IPO.

The purpose of the IPO is to expand the franchise, placing it in direct competition with the Well-Established Competitor.

The WEC–knowing full well that a rotisserie chicken recipe is a non-rival good–expands its menu and adds a few sides. Whether it is as good may motivate some buyers, but most will stay with the Brand Name, and the small franchise with a relative monopoly is now competing with a Deep-Pocketed Near-Equivalent Rival, and taking on debt.

If you bought the IPO, you certainly sell it. In fact, if you’re looking for Value Proposition and reading the Prospectus, you probably don’t buy it in the first place–unless you’re buying to flip. And, again, profit or loss is an accounting consideration, not a Value Proposition.

Any similarity to real corporations above is entirely a matter for Google.

By: Mattyoung Wed, 20 May 2009 20:13:28 +0000 Felix,

Your assumption is that owners do not count.

Owners are the managers. If the crowd is demanding short term value, then the crowd will manage the company into products that have short term distribution networks, or exit the stock.

Didn’t Keynes make the same mistake? Didn’t he erroneously assume that voters do not manage government, that stockholders do not manage corporations; and didn’t that severe bias ruin his entire life’s work.

By: halkopous Wed, 20 May 2009 12:01:03 +0000 The fact is that the share price of companies that consistently make profits on their goods and services will go up. Those of us saving for retirement must take a long term view and accumulate those shares over our working life time. There’s really no other choice.

By: umair Wed, 20 May 2009 11:26:41 +0000 interesting, but i think you’re confusing creating “shareholder value” as the goal of strategy with simple measures of economic value added. see comment 2 for an example of the logical flaw.

By: OneEyedMan Tue, 19 May 2009 19:55:44 +0000 It doesn’t require investors who are investing for the long haul to get prices reflecting long term value. You can get the same results with short term investors who plan to sell their investments to new investors with short time horizons. They in turn plan to sell to others and so on.

This can value a security at the same price as a single investor with a longer horizon.

By: chrismealy Tue, 19 May 2009 18:57:09 +0000 How long is long-term? Should companies strive to last forever, or have a good profitable run and call it a day?

Are shares just a convenience for rentiers?