COMMENTARY --- Will Reform Cause More Losses for Shareholders Initially?
While I am all for reform and proper accounting, there is a real possibility that some reform might reduce the apparent worth of certain companies. It's naive to say that "All Reform is Good". Initially it may actually harm shareholders, so be careful and be prepared. This isn't being discussed much yet, so I thought it worth mentioning now. Quality reform is virtually always a good thing in the long run, but don't be naive about the effect it can have in the short run.
I remember as a young man in my twenties investing in a few gold and silver Penny Stocks. At that time, I didn't know the meaning of the word "manipulation" or that most "penny" mining stocks of the time existed only on a piece of paper in some lawyer's office in Spokane or Salt Lake City. Needless to say I didn't do real well on those investments. But I did even worse when the SEC decided to clean up the market. Within a few days of the news coming out, all my stocks went virtually bankrupt.
Fast forward to yesterday. I visited the VRTS board on Yahoo.com, just one of hundreds of message board where a daily battle of "hypes" and "bashers" pummel each other with rumors, lies, occassional tidbits of truth, and often snappy but nasty retorts.
I wasn't really surprised to see someone mention that VRTS stock's price was in danger because VRTS had given out lots of stock options to management. I don't know whether that's true or not, but I knew what he/she was getting at. What, you ask?
Well, the new potential regulation that companies would be required to book options as an expense would decrease the bottom line, in some cases fairly substantially, of certain companies. What would this do to valuation? It will certainly have some effect. That's for sure.
While I agree that business accounting should be straightened out and standardized, I am also afraid that not many yet are making the connection. Valuations are about to come down if some of these reforms become reality. In the meantime, expect "Shorts" or so-called "Bashers" on Yahoo, to start using these to advantage regularly, whether it's a valid concern or not of the particular company.
In other words, fear and uncertainty is on the horizon. I wouldn't overreact to it, but I certainly wouldn't ignore it either. |
