Shareholders have a problem – themselves.
My friend asked me when his mutual funds would rebound, and I asked him why he cares. He said, “Because if they are not going to rebound, I am going to sell.”
I asked him what he would do if he found a fly in his soup. “I’d want to talk to the waiter.” And if the waiter said it wasn’t his problem? “Then I would want to speak to the chef.” And if the chef said he couldn’t do anything about it? “I’d demand to speak to the manager.” And if the manager did nothing? “I’d want to speak to the owner.”
My friend would want to talk to the owner about the fly, but I would want to talk to the owner about what it means to be an owner.
Over the decades, as a trader and market maker, I’ve been the shareholder of record for billions of shares of common stock, and I have started a few corporations under my own name. While legally, the two forms of ownership are the same, there is a world of difference.
As owner, I know that the customer is a king who can fire me for any reason or no reason, yet my creditors and vendors must still be paid and the taxman must get his due. My employees must keep the customers happy, and my managers must keep the employees happy. I must not only keep an eye on the till, I must save for the rainy day. And when it pours, I will need to dip into those savings to keep the operation running while the customers stay at home. If I want everyone to be loyal to me during good times, I must be loyal to them all the time. I had better believe in my product, or I shall find all this hard to do and sleep soundly, too.
As owner, I must put the interests of all those with claims senior to mine ahead of my own, and only afterward will I receive what is left over. I must bear risk when it needs to be borne, and I can’t bail just because I don’t like watching my net worth decline. I must be responsible and not self-centered. (And, if I have deep pockets, I can afford to be.) After all this, a sane market might reward me for being responsible, fearless, and not greedy, but only if I actually am. Still, there are no guarantees, for time and chance happeneth to us all.
I asked my friend why he owns stocks, and he said, “Because, in the long run, stocks perform best so that is where I keep my retirement savings.” I’ve been to business school too, and I’ve heard this claim before, but for the life of me, I can’t think of a reason it must be true. Besides, stocks represent ownership, and an investment in ownership is different from saving. Savings are what the owner liquidates to keep the company going during hard times. If the owner liquidates his firm to protect his savings, the business is in trouble.
I asked my friend if he is an owner of General Motors and, upon reflection, he realized that he is through his various funds. I asked if he drives a GM car, and he said he thought their products were terrible.
Imagine my friend complains about the fly to the restaurant manager, who researches the situation, and announces that, in fact, my friend is one of the owners; apparently my friend’s broker had purchased stock in the restaurant. When asked what he will do, my friend says, “I will sell my ownership immediately.” If my friend, who only cares about return on his investment, sells to someone with a passion for good food, and a respect for the customer, then that restaurant may one day be a place where you and I would like to eat. Until then, we best stay away. Likewise, we best avoid GM cars until its owners care more about their products (and us) than their portfolio.
You might want to test the thesis that a diversified portfolio of common shares does, in fact, perform well in the long run, in which case you should buy, hold, and see what happens. But, be aware that market prices are determined by the fear and greed of your fellow shareholders, and little else.
But, if you want to be rewarded for being an owner in more than name only, you must be in a position to act like one: be fearless and put the interests of the customers above your own.
Don’t assume I’m talking about others. If you have money in the stock market, I’m talking about you, my friend.