Comment by fauigerzigerk
16 years ago
Shareholders care only about relative performance. Absolute performance is irrelevant. So as long as all big companies in a particular sector waste X on consultants, that's fine for the shareholder. It doesn't even affect the dividend as you might think, because if everyone does it the cost can be passed on to clients.
Shareholders start to care once a lean competitor enters the scene. Someone who does away with all the fluff and is more profitable. These things happen. But my reaction as a shareholder is to become a shareholder of the better company and dump the stock of the inefficient one. I'm not trying to make the inefficient company more efficient. Some activist shareholders do that, but most don't.
There is one very important truth that too few people are considering: Shareholders are not entrepreneurs. Most shareholders have no interest in improving a particular company. Their interest is in choosing undervalued companies and selling them when they are not undervalued any longer, preferably at a higher price.
The distinction between investors and speculators is a lie. There is no difference between the two. The important difference is the one between owners and entrepreneurs.
Shareholders used to try to improve a company - it was quite popular in the 70's and 80's. Ever watch the movie "Wall Street?
What happened since then is that legislators and courts have become hostile to corporate raids, and have mostly made it toothless. We would have plenty of shareholder activism if it wasn't for that.
Yes. I also never understand the reason behind poison pills (part from shielding management). Why should shareholders limit their own rights to sell the company to somebody who wants to run it?
`Corporate raid' is a term as backwards as `piracy' for copyright infringement. Those `raiders' buy a company with their own money (or money they borrowed) from shareholders willing to accept their price. They should be allowed to do whatever they want with their newly acquired company.
The only problem is they rarely buy the whole company, often they just get a controlling share. At which point they can do a pump and dump which is great if you sell at the right time but it tends to hurt long term investors.
2 replies →
So as long as all big companies in a particular sector waste X on consultants, that's fine for the shareholder.
That's incorrect. As a shareholder, I can sell my stock and reinvest the proceeds into a company in a whole different industry. Thus, companies must compete for shareholders.
I don't think that's true because customers cannot arbitrarily change industries and so even a very inefficient industry can be just as profitable as any other. As a shareholder you buy profitability, not efficiency.
Of course the likelihood of a more efficient competitor entering a market becomes higher the more inefficient the incumbents are. There are more than enough examples for that.