Shareholder confidence vs. value investing

June 30, 2009

Brendan Woods– 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.


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”.


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.


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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…

Posted by Sylvia | Report as abusive

Energy, transportation, manufacturing and finance are all in a state of flux. Without a clear vision of the future, no incentive exists to invest long. Hence everyone watches the 800 lb. gorilla in the room, ready to jump at his slightest move. Profit taking abounds as investors look to quickly get in and out of the market. The herd mentality prevails.

Posted by Anubis | Report as abusive

The profit takers of the herd are those who have the latest information and can speedily afford to jump out and in of the market because they’re leading the herd. The back of the herd is everyone else, the punters who believe in the system of “value” but get punished for their convictions. However, if the punters dipped in and out like the leaders of the herd, there would be no market support. Recent turbulance, even though it hurt, was a welcome reallity check/bounced cheque!

Posted by Simon Drake | Report as abusive

Does morality have a place in financial markets? Has business come soley to mean profit generation? Best practices, corporate social responsibility, global citizenship and the like are themes that arise at Davos and Aspen and shed light on what rightousness the system is tackling, or trying to. If we were to add shareholder confidence to the things public companies would be required to hone in on, would Chairman, Boards,CEOs and top executives alike not have pre-emptively safeguarded investors from the recent market slaughter? Many investors suffered, have since exited the markets altogether or have changed their strategies becoming traders out for a quick profit. Shareholder activism is noble, but too late. Creating a standard that amplifies what shareholders are saying to public companies is a first step towards rightousness in financial markets.

Posted by Rightousness | Report as abusive

None of today’s billionaires is as rich as they were 12 or 18 months ago. But they are still getting by, I imagine. It’s the little guys that need people to speak on their behalf and BW is offering to let their voices be heard. Are we all a little wiser and poorer? Perhaps, but now what?

Posted by Wiser | Report as abusive

Shareholder confidence data would confirm the view that every company is a story in its own world.Some companies are firming up in shareholders’ minds as survivors with growth ahead.these are the “chosen few”.The market reflects broad sentiment.The individual outperforming stock, a potential “refuge” likely to beat the odds.

Posted by bwood | Report as abusive

The Real World of Shareholder Confidence and the Neverland of Market Theories.

Turning to different levels of Shareholder Confidence as a key to understanding current conditions in the market is in many ways a valuable new tool in a rediscovery of market thinking that concentrates on empirical evidence, rather than elaborate theory. To drive home the novelty of this approach, it is instructive to recall what investors and shareholders have been through, from the 1980s, when a crash at the start of the decade was followed by a long bull market, to the uneasy present.

Professional money managers who began their careers two or three decades ago have witnessed more than market booms and busts. To a degree that would have astonished investors of the first two-thirds of the 20th century, their successors found themselves deluged with new theoretical explanations, with exciting suggestions on how to make more money, a great deal less often showing the several ways it could be easily lost. Many had temporary impact, although the ‘value’ doctrines of Benjamin Graham continued to hold more consistent favour than more fashionable rivals, probably at least as much for their reassuring claim that ‘rationality’ ought to be rewarded, as for the erratic rewards they actually delivered.

But nearly all the other varieties of explanation sounded quite rational in their own way as well, even the bleak minimalism of the random walk. All the theorists had their own persuasive stories, increasingly backed up by more and more statistical number-crunching made possibly by each new generation of computers and business school graduates. There was the initial fine promise and eventual peril of junk bonds, the Maginot Line of protecting capital with portfolio insurance, the heady obscurantism of Modern Portfolio Theory and an even more impressive-looking and no more successful post-modern variant.

Then there were the thrills of joining in on merger and acquisition sprees, or attempting Buffetology after Warren Buffett had already made his moves and was about to display his own fallibility. In the end came the castles in the air of securitized and cleverly repackaged bad debts, with the depressing results in this case now familiar to all. The one common factor in nearly all of these changing theories and proposals has been the steadily increasing influence of academic economists, or economists working on Wall Street with essentially mathematical-statistical backgrounds.

These latter quants are now almost as much scorned as once they were worshipped, as Fools’ Gold, the very title of the most recent book about the original hubris of the bright young quantifiers at J. P. Morgan Chase, suggests. It would be a foolishly excessive reaction to dismiss entirely the new techniques. The mathematically-sophisticated John Paulson, it should be remembered, recently made $12 billion for his fund, and $3 billion for himself, by short-selling on a grand scale. But that was a brilliant winning bet; it was achieved over the slaughtered remains of other quant-designed long positions. The broader weakness of intelligent, independent, and ‘rational’ Wall Street advice for the last two decades has been excessively theoretical abstraction. Real companies and real financial securities were too often treated almost as if they were like atoms and molecules, removed too far from the character and behaviour of CEOs and CFOs, shareholders and traders, save for the single assumption of an invariable profit-maximizing rationality. The most promising move away from this in recent years has been the growing interest in ‘behavioural economics’: economic explanation which tries to be grounded in empirical evidence of what market participants actually do, as opposed to what they are supposed to do.

The close evaluation of Shareholder Confidence is a kind of behavioural economics par excellence, not even depending on empirical investigations of investor psychology, but simply reporting what key main investors actually think. This is a story about the conservation of capital, one that all present would-be conservers of capital need to know. It is a better guide to the small overall proportion of firms (after the crash, less than a fifth of all those rated in the Brendan Wood SC Index) that are still assigned the highest level of support; it offers as well signals about which firms are most likely to be jettisoned, or at least further downrated. No mathematical formula in existence can do anything like that. Knowing the SC Index scores can not guarantee making money in the stock market: there is no kind of information that can guarantee that. But it can certainly provide a great deal better guidance than any of the countless explanations that have lost touch with the real world.

Neil Cameron

Posted by Neil Cameron | Report as abusive

The best bet now are invetments in Diversified ETF’s which can be traded intra day and are more sensitive to interst rates than ordinary common stocks and mutual funds.

Posted by NORMAN ZELVIN | Report as abusive

I have this vague unease that the wonderful thing about “Shareholder Confidence” is that it’s one of those phrases that can mean whatever you want it to mean.

I’m sure those who had money in Mr Madoff’s funds were supremely confident right up until the last moment. (In fact, courtesy of a recent BBC documentary, I know that many of them were.) One also needs to know the basis upon which that confidence rests. (And the basis upon which those who rejected his funds lacked confidence.) And the least fickle such basis, one suspects, is value….

Posted by Ian Kemmish | Report as abusive

Being mindful of Reuters threat to Modify my comments, I shall accuse Mr Wood of no more than a serious dose of fuzzy logic. I think many well coiffed and preening CEOs would be dismayed to discover how little ice their expensively PRd images cuts with shareholders. Shareholder confidence is a simple notion, it goes up in good times and down in bad times, much like bank managers confidence in their customers. Shareholders actions since October 2007 have been exagerated by liquidity problems and a crisis of confidence in banks and the Governments that have chosen to bail them out. Thus the traditional smart move policy at the top end of a long bull market, namely to bail out into cash or Gilts, was and remains risky. It is certainly unsurprising that there may have been a boom in Contrarianism since, when all goes topsy turvey, almost any and every view can ligitimately be termed contrarian. Although the last 18 months have been trying, I am delighted to be among Mr Woods Value investors left holding a bag full of stocks with hidden value. Whilst I may look carefully at the Directors of Companies I am interested in, it is the businesses, their assets and their prospects for survival and growth that are paramount to me. I fail to see any need for a Shareholder Confidence Industry based on the image of CEOs to be founded by anyone, particularly someone who is already apparently fully employed in the Global Intelligence Advice industry!

Posted by Christopher Cossins | Report as abusive

Contrarians United

In response to the view that a dose of fuzzy logic underpins an intended industry called shareholder confidence, it seems reasonable to point out that shareholder confidence is a factual analysis of the shareholder selection criteria applied to companies. More to the point, those criteria “include” the positioning of the business, the assets, the market opportunity of the particular value offering, the power and reach of the brand, the credibility of the covenant with shareholders, the board and the depth of management. All these assets are nonetheless driven onto the field of achievement by people amongst whom the CEO is likely the most critical.

As to the coiffing, a number of CEOs lost their hair long ago and many seem to struggle choosing the right tie. Well coiffed or in working man’s attire, the CEO is critical to execution and execution is critical to unlocking the value of a company’s potential to deliver earnings on assets. As in other selection criteria, contrarians agree about 70% of the time as to which CEOs are doing their job well and those who are less effective. The best submarine in the sea needs a captain. The better the skipper, the more effectively the equipment will be employed. When contrarians agree about the skills of the CEO, consensus hits price, as CEO/leadership is the most correlated with price appreciation.


Posted by Brendan Wood | Report as abusive

Why do corporate Boards not receive the same attention as the CEOs in Mr.Wood’s surveys? It is, in my view, these boards are responsible for approving the compensation of top executives, passing strategic planning initiatives as well as major expenditures. Boards are a collective group of “yes” men for the most part, who would dare criticize them? MF

Posted by Malcom Forsyth | Report as abusive

The Brendan Wood Shareholder Confidence data is actually replete with questions pertaining to Boards of Directors. A surprisingly large number of investors do not actually know who the board members of an investee are much less their strengths and weaknesses. But for the silent majority who do evaluate Boards, do so based upon the ability of the Board to drive an aggressive agenda for the company. Governance is an expected attribute of any and all boards, and given the gamut of investor concerns governance is not top priority. Investors who look closely at Board composition and behaviour are looking for a group who can generate strategy, opportunity and revenue for the company. From the investors’ perspective a Board is given highest confidence if it meets the test of a driving force making bold but prudent steps in a journey that is well mapped in the minds of shareholders.

As to the awarding of “no lose” shares and other executive giveaways yes there’s always a board around who didn’t say no! Typically, these companies suffer from different forms of mediocrity, the compensation committee being only one area of a larger non-performance driven culture. Who wants to own a company when the directors are not at risk in the stock and dispassionate about the company’s proactivity in its markets? Rightly so, investors look to directors who accelerate growth and get things done. Great boards are passionately interested in the long term prosperity of the organization they serve. The Brendan Wood Shareholder Panel awarded only 63 TopGun Board designations this year out of 750 large cap candidate organizations.


Posted by Brendan Wood | Report as abusive

BWI has listened to the voice of the shareholder and the message is companies that have the confidence of the shareholder perform well, while companies that don’t inspire any confidence perform poorly. The share price of companies is in the hands of its shareholders and this seems to be logical.

Posted by Erik | Report as abusive

Shareholder Confidence is the voice of shareholders. Brendan Wood International helps improve the brand name of a company by providing Shareholder Confidence back to the management team of the company.

Posted by Elaine | Report as abusive

Shareholder confidence evidently goes up and down. There isn’t a company out there that held steadfast and didn’t see a drop in share price over the last 18 months. I think what Brendan Wood is trying to get at is that there are certain companies, those with the greatest amount of confidence, that go up higher than most during good times and drop less than most during bad times. I would think that confidence in a CEO and/or Board is only part of the equation, but an important component nevertheless. A perfect example of this is CN Railway vs CP Railway. Similar companies, same industry but one is run by the renowned Hunter Harrison and his understudy, Claude Mongeau. While there are other factors are play, surely, the difference in confidence and thus stock price is undeniable.

I would think that confidence in the CEO/Board is only part of the shareholder confidence equation and that confidence in the balance sheet and/or growth potential plays a part as well.

Posted by Jack Kraft | Report as abusive

I find it surprising that not all professional managers pay attention to Boards these days. Is this because they are seen as irrelevant or all professional investors have lost faith in them? What is the point of corporate governance then? When every company, big or small, in the world place such a high emphasis on corporate governance?

Posted by Lisa Miranda | Report as abusive

The share price of a company is in the hands of the investor and confidence is a driving force in that price. Companies can look good on paper, make promises, forecasts, etc., however it is the investor’s confidence in the fact that the company will follow through on those promises or meet those forecasts that drives investors to purchase stock in those companies. A company can make all promises in the world, but if investors are not confident that they can keep those promises then they aren’t going to buy that stock.

Posted by Amanda | Report as abusive

When one has to sell the question becomes “what should an investor resist selling at all cost?”. It would appear that companies which retain their value are those that also receive the highest shareholder confidence. Clearly the investor’s behaviour is aligned with their vote of confidence in management and the company’s ability to grow profitably. Interesting to constrast “shareholder confidence” vs “value investing” -should the phenomenon described in the article actually be characterised as “shareholder value”.

Posted by Tom | Report as abusive

Is it a fair conclusion that companies which have high shareholder confidence measures, have in-effect, cheaper access to capital?

Posted by Investor | Report as abusive

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.

Posted by Black Chihuahua | Report as abusive

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.

Posted by Weishi | Report as abusive

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.

Posted by Josh | Report as abusive

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.

Posted by Ajay | Report as abusive

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.

Posted by Allison | Report as abusive