The managers of listed companies are often so convinced of the goodness of their management and strategies that they always see value in their company. Therefore, it is often difficult to understand why an investor does not buy or why they sell the company at any given time.
An investor's job isn't to decide if a company is good or bad, if they like their managers or not. Your job is to decide if by buying that stock, you are going to make money.
Understand the factors that influence decisions of investors helps companies to have a better relationship with the market.
A very important factor is the investment time horizon. Normally, an investor evaluates the company twelve months from now. Although the company's higher value in the long term is not in dispute, it is not always likely that, within a horizon of only twelve months, the company will be able to meet market expectations and therefore the stock will rise. The average holding period of a security in a portfolio has been decreasing for decades. New lows were reached in 2020. A recent Reuters study on the New York Stock Exchange put it at 5 and a half months, compared to fourteen months in 1999 or 5 years in the distant seventies. Lower brokerage costs and market volatility in 2020 have accelerated investor short-termism.
The growth of the passive management, with lower commission costs, has also put additional pressure on active managers, who are more likely to concentrate and rotate shares to crystallize potential profits, trying to justify their higher commissions. As a result, according to Inalytics, the number of shares in a typical portfolio has fallen by half, from 120 to 61 shares, in recent years.
Las liquidity needs of a fund, given the possibility that shareholders have to withdraw their investments, often on a daily basis in the retail market, is another factor that affects investment decisions. The liquidity of a security in the face of the possible need to reduce positions in a short period of time is key for a manager.
Managers' profitability is continuously compared against their Benchmarks. A manager should not only invest in a series of stocks and expect a positive return. The quality of a manager is continuously evaluated in relative terms compared to the behavior of their benchmarks. The worst case scenario for a manager is not that the price of one of their shares falls, but that the price of other shares in which they could have invested rises simultaneously, thus amplifying worse relative behavior. The opportunity cost of investing in a stock is that it behaves at least as well as or better than its comparables.
A manager always has in mind who will be the Marginal buyer or incremental of the shares it holds. If the company requires an enormous amount of time to be understood, or for accounting reasons it is trading at high multiples or does not have a well-defined dividend policy, it is very difficult for a general investor to be that additional buyer that the stock needs to continue rising.
No less important is the subjectivity of investors as individuals. Their reputation and income, probably related in part to the evolution of their portfolios, are at stake. Bad behavior for several quarters against their benchmarks of the selected stocks will cause pressure and questions from their clients, their bosses and will eventually lead to the sale of that stock. The possibility of buying this stock again in the short term, however cheap it may seem, will be minimal.
Therefore, companies must always work for Build trust among its investors. On the stock market, there is always a price to buy and another to sell. There is nothing better than an investor who sells satisfied with the capital gains made. He'll be back.
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Ricardo Jiménez Hernández
Sigma Rocket partner
