The drama of the last few weeks, with the stock dropping consistently, and then Mark's smooth-talking nonsense, Sparky's near capitulation, and many private communications in which fund managers and investors alike began questioning WIND valuation - all topped by the news about the short attack - has led me to some basic conclusions.
The stress over the last few weeks affected the company and investors alike, so I am led to conclude that a great deal can and needs to be done to prevent these kinds of conflagrations in the future. Investors may not realize that a stock price that sinks for no discernible reason may interfere with company plans to make acquisitions of other companies or talented personnel. It causes management to devote precious time to handling agitated investors, particularly desperate fund managers. For ordinary investors, extreme volatility is distressing and sometimes catastrophic. As we now know, for open-ended mutual funds it can be a total disaster.
I now realize that volatility is not just something patient investors learn to live with, volatility reflects aberrant behavior of the financial market that can and should be kept to a healthy minimum. The fact that volatility must exist is not an excuse for allowing it to run rampant.
I do not agree with everything Warren Buffett says about the financial market, but I agree with him that it is important to create a situation in which the market price of a stock can approximate its intrinsic value. To be otherwise, too high or too low, provides conditions ripe for speculation, which, as we have seen, works to the disadvantage of less informed stockholders as well as the company itself. For high-growth stocks like WIND I would argue that the optimum market price should be what a prudent investor should be willing to pay, expecting to reap not only a decent market return but a substantial additional reward for the willingness to take on extra volatility that is inherent in high-growth stocks.
What can we, as investors, do to help the stock price better track its proper economic value? What can the company do to help make that happen? What can all of us do to ward off future extreme stock speculation? Lots.
From the investors perspective, it starts with education. The recent foray with Mark Brophy taught me that the long investors who post on this thread probably are not representative of most investors, in particular many lurkers on this thread. Most investors do not know how to value a stock, and therefore panic and sell at the wrong time. That can be changed.
Warren Buffett defines intrinsic value of stock as the present value of the future flow of cash that CAN be taken out of the company over its remaining life. Unfortunately, neither Warren nor his sidekick Charlie know how to calculate intrinsic value defined this way with any precision. Most people don't even know how to start. We can do better than that.
In a future post I will provide a much simpler definition of intrinsic value, and walk everyone through simple yet sufficient approximations.
There are a couple of things at least that the company can do to help. Foremost, they can aid investors' calculations of the value of the company by reporting slightly more detailed information. This is exactly what Warren Buffett attempts to provide his stockholders - the detail, not the calculated value. All financial reporting should be with an eye to inform owners maximally about their company, balanced only by (1) management's need for flexibility and (2) that all reported information be statistically and operationally robust. The first restriction is to prevent management from painting itself into a corner in regard to investor expectations. The second is to keep from causing erroneous conclusions based on operationally misleading or statistically insufficient detail.
Candidates for additional information that might be reported will be examined in future posts. To avoid errors of commission, our suggestions will be minor to begin with, and gradually increase as the company grows rapidly.
Another thing the company can do is to counterattack when speculation becomes excessive. A variety of appropriate strategies come to mind here, including stock buybacks and dealing directly in derivatives. There is much to be said about the details of how these strategies might work.
I confess that I need encouragement to take all this on. Please email me privately your feelings on the importance of my pursuing these matters. If you have suggestions or questions about any of these proposed issues, tell me.
Meanwhile, I will be leaving for the H&Q Tech Show this weekend, so by no means will all this get done immediately.
Allen |
