To borrow words from Sean Hannon at Seeking Alpha (see link at bottom): a basic tenet of value investing is that every asset is attractive at a certain price. As Mr. Hannon observes, using that rationale values would seem lately to abound. So where are the value investors?
Mr. Hannon points to modern portfolio theory, which teaches that emphasizing individual asset value without considering relative value and overall portfolio risk may be like touting the best chair on the deck of the Titanic.
Humor aside, we’re not here to bleat on about theories. We just want you to look cool in the IR (or executive) chair. And looking cool has gotten painfully harder lately, and lost some of its charm to boot. When you’re swallowing the lump in your throat as you watch the red on your screen signifying the general direction of your share price, how do you figure out what to say about it when you next open your mouth to reply to the CEO or some irate major holder?
Or to phrase it another way, when there’s no fundamental explanation for price performance, what CAN you say about other things, like speculative trading and the actions of risk managers a la Mr. Hannon’s article at the link below?
Let’s talk about what you can’t say first. You can’t say “we think (major institutional holder #2) is selling.” It’s not something you can know definitively, anyway, and it’s the sort of thing that could be materially damaging to both your wallet and your career.
However, we are continually amazed at the reticence of investor-relations professionals to talk generally, pragmatically, and unabashedly about factors affecting their equity market. You are, after all, the Ben Bernanke of your currency – your equity. It’s part of your job to know what sorts of forces are acting upon your share supply and demand. There’s no need to be shy about it.
And one of the simplest things you can do is to view your equity environment like the Federal Reserve sees the supply of money in the markets. They consider its uses, and based on how it’s being used, what policies to set and what to tell the markets.
Participants in the equity markets use your shares for three basic purposes: for rational investing; for risk-management in portfolios; and for short-term speculation. There is patently nothing wrong whatsoever with explaining that your shares are, for instance, currently used significantly for speculative purposes and are therefore lagging levels that rational investors assign.
All that stands between you and these rather powerful answers is a bit of knowledge and information. So get to know your market structure. Just a gentle reminder for these turbulent times.
Margaret E. Wyrwas - Knight Capital Group, Inc. (Nasdaq: NITE)
Senior Managing Director, Corporate Communications & Investor Relations
Equity Analysis™ subscriber since March 2007
"In global markets driven by automation, changing market structure regulation and dynamic investment objectives, today's investor relations professionals require new data points in order to remain relevant and add value in their company's quest to reduce its cost of capital."
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