- Brendan Wood is Chairman of Brendan Wood International, a global intelligence advisory firm. Recently, BWI published the World’s TopGun CEOs as ranked by 2500 institutional investors, which provides insight into the executives in whom shareholders feel the greatest confidence. The opinions expressed are his own. -
The Brendan Wood International’s panel of 2500 institutional investors suffered through last year’s markets believing value would somehow prevail. Those value investing “diehards” indeed died hard.
Conversely, those who correctly read the status of shareholder confidence and acted on it were spared. In short, shareholders that had lost confidence in the system abandoned their value criteria and sold good companies along with lesser ones.
As a result, “value” investors were left holding a bag full of stocks with hidden value. Sadly, the value remained undercover while the price of these stocks plummeted. Many portfolios catapulted through risk tolerance levels and took their investors’ savings along with them. Capital preservation was sacrificed in favor of the mantra “the market always comes back.”
But as advocates of Shareholder Confidence, we ask why take that ride and lose the most important strengths an investor has, namely, capital and a willingness to assume reasonable risk?
If half your life savings or more was lost, what capital or willingness to assume further risk would you have? Shareholder confidence trumps hidden value. If value in a company is credible to those holding the stock, the price will at least remain stable, if not indeed rise.
Should this not be the case, one may be stuck owning the most costly secret in town. This may be so because value investing relies on shareholder confidence coming to the forefront.
ON THE CONTRARY!
A majority of investors classify themselves as contrarians. Surprisingly, they agree with one another about 70 percent of the time. This raises two obvious questions. What is the benefit of contrarianism? Why is it considered a quality? If the majority of investors disagree with you (or you with them), the future of a portfolio relies upon them changing their minds. How much success can an investor expect via changing other people’s minds? Are contrarians delusional about being contrarians? It appears so. Like it or not, the success of contrarians depends on consensus, that is, other contrarians agreeing with them. BWI may have thus uncovered the “quiet contrarian majority”.
SHAREHOLDER CONFIDENCE AND THE CURRENT MARKET
Prior to the 2008 downturn, the number of companies at the top of the Shareholder Confidence Index approached 33 percent. Since the dramatic weakening of markets, that number has been running at 17-18 percent. With no change in the recent quarter, investors remain wary and are not yet ready to assert top levels of confidence (i.e. buying behavior) except in the Top 18 percent.
If investors were to follow the example of Brendan Wood International’s panel, they would only be buying the best of the best.
If only others would take heed and listen to the people who actually own shares in the companies. If I have understood this right, Mr. Wood maintains that by not selling at distressed prices, downward plummeting is avoided. The share price of companies is in the hands of its shareholders for if firms do what they ought to, to weather this economic period and move forward, there is no reason to sell strong companies with healthy balance sheets. Identifying these companies from their ownership satisfaction point of view is simple, sound and salutary to capital market investing. Why has this type of information been kept secret for so long? What is the media waiting for...
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I know proper care by Investment Advisors involves speaking frankyl about the risks that buying certain companies entails. Shareholder confidence should be a value on par with price earnings and/or credit rating etc.
Allison
Brendan Wood International identifies TopGun performance in the capital markets. Identifying TopGun investment bankers, CEOs, CFOs and Boards of Directors reflects the “voice of the client” in investment banking deals, and the “voice of the shareholder” in terms of confidence expressed by 2500 institutional shareholders in more than 40 countries. There is a lot of due diligence that goes into these nominations. Not only does Brendan Wood International monitor the performance of TopGuns in the capital markets, but it identifies the financial strength and measures the quality of disclosure management puts forward. These are all critical aspects of analyzing investor confidence in general. The Brendan Wood International Shareholder Confidence product is a perfect tool for any investor seeking a new direct approach to doing due diligence on any company.
Clearly the shareholder confidence study perpetuates the real instrinsic “value” of a company. Investors take note, shareholder confidence needs to be at the forefront of decision making.
The relationship between the shareholders’ confidence and the value of companies is a direct ratio relation. The more confidence that the shareholders have the value of the company will be higher. The versus is the same. I won’t touch anything that I am not confident with or not understand well. Companies should be ready to be transparent to the investors if they are going to go public.
Shareholder Confidence? …perhaps we should really be digging at the truth of what that means. Confidence is a relative term. I am a finance instructor and when students get good grades, they love me, have confidence in my abilities as a teacher, tell me that I am the best professor in the world and are lining up to take other courses with me. The students, who perform poorly, make it very clear to myself, my superiors and who ever will listen that I am a poor instructor, have no understanding about the subject matter being taught and that they wasted their time by coming to class and would have performed better had they stayed home and taught themselves. Now translate that into the world of stocks…an investor is going to look at a company’s fundamentals, the track record of the company getting good returns and have confidence that if they stay invested, the company will continue to deliver on those returns. When that company hits a rough patch, investors’ confidence will dwindle as the company falls short on delivering the EPS and returns forecasted. And it is off to the races with a sell off. Investors only love and have confidence in the immediate short run – what they made today. In my opinion, the total return in any investment is comprised of two parts – the expected return (based on fundamentals and what the company forecasts) and the unexpected return or surprise element (being a company having to deal with unexpected issues such as interest rate changes, political uncertainty, etc.). Currently, it appears that investors over the years have conveniently forgotten that the markets throws us curves balls every now and then and have placed their confidence in the expected return. Investors ignore risk and a company’s ability to deal with risk. If it appears that they will not make the same return today as they did yesterday, they sell.
If a stock delivers the promised EPS, we, the investors, love it. We praise the CFO and put the CEO on a pedestal. My next comment is not to insinuate that the role of a CEO is easy, but if a company does not have any obstacles, be it self imposed or market/economy imposed, if it does not have to deal with unexpected surprises then it is easy to deliver on the results the company has forecasted. The realty is that when surprise knocks at the door of many of the companies that we as investors claim to have confidence in, the CEOs will and do fall off their high thrones. Investors had confidence in AIG, Fannie Mae, Chrysler, Bear Sterns, Lehman Brothers…and looked what happened when market forces came knocking. Perhaps we are placing our confidence in the wrong place? Perhaps we have placed the wrong CEOs on the pedestal. In my opinion, our confidence should lie in the companies that are able to deal with market turmoil, unexpected surprises, and still get the job done and still deliver at the end of the day, even if the delivery is $1 dollar short Those are the real and true masterful CEOs.
And if you were any at all concerned about the CEO getting hurt when he fell off his throne…not to worry. A golden parachute caught him on the way down. And did I mention that he had short positions on the very same company that he asked us investors to have confidence in? So, he is doing okay. His wife is still able to get her manicures, have her spa days and still shop at Saks and Bergdorf Goodman.