The evolving position of the retail investor is as an independent entrepreneur, both exploiting and exploited by the characteristics and opportunities of investment markets as markets become subject to the risks and uncertainties of large group psychology.
Decreasingly, the investor is aware of the decisions and events characterizing value determination both of 1) corporations and 2) markets. The problem is not simply the self-interested nature of the corporation as it externalizes liability; but lies too in the long/short nature of investment in equity shares, coupled with uncertainty in the absence of market-relevant “information”.
My own experience of this disconnect occurred with a 40% drop-off in price, of a stock I’d long followed. True, the original P/E of the stock had been inflated by investor expectation of rosy tomorrows; but the sudden, unexplained loss of its largest customer, dropped the price to levels unseen since before securing that customer— that is, the increased value of the stock relative to its price in earlier years was a function of advances, fostered, in part, by collaboration with the now-lost customer. The stock was a real “value” buy.
But the market’s response was vicious: aggressive short selling plunged the share price another 50%, despite re-assessments of value based on current knowledge. These were driven, in part, by threatened class action suits, a restatement of annual earnings hampered by legal difficulties between corporation and customer, and corporate silence- extending for months- as the stock plummeted. Only six months later, when multiple successful lawsuits were announced, did it appear that non-disclosure had hidden much negotiation to which shareholders were not immediately privy. Still, the stock remained at more than 80% discount to its earlier levels.
My earlier conviction of the firm’s ability to negotiate in difficult foreign markets, cast into doubt with the loss of its customer, was reaffirmed months later, with announcements of new business in those markets. Despite its silence, destructive of shareholder value, management seemed competent and forward looking.
Yet, the disconnect between these serious vicissitudes in customer-firm relations and the interests of shareholders underlined the perilous position of retail investors. While corporations’ first imperative is survival, the precipitous slide of share-price resembled corporate self-destruction; and indeed, equaled a suicidal self-destructiveness for investors during the period of silence when retaining the stock in ignorance of corporate affairs was a matter of faith rather than fiduciary responsibility.
Informational clarity required a very long timeline: and for the individual holding the stock throughout this entire period, required absorbing asset losses of 88% before the possibility of future repair. For the individual with an initial $50,000 position, only $6000 remained six months later: a sickening drop, doubling the depth of the 2008-9 financial crash. During this period, the only available information was of dubious quality: of supporters and detractors of these shares, found on dedicated Internet message boards. Increasingly, the writing resembled the defense of religious zealots against spiritual detractors as disillusioned “longs” battled smugly triumphant “shorts”.
What did I learn? That long-term investment may be considered only with a highly diverse portfolio- with its outer limits approaching a market-based ETF. Only in this way, does the retail shareholder minimize the potentially destructive possibilities to personal assets of informational non-responsiveness by organizations competently (or incompetently) conducting their daily business beyond clear and responsive communication with shareholders.
Yet here, the investor becomes subject to a different dynamic: of large shifts caused by market volatility. The operative question becomes: what is the timeline during which money is to be “tied up”? And, even assuming a long timeline, does it make sense to place money at risk assuming some multiple year regression either to a market mean or better? Would it not be a better idea to withdraw funds from markets during market highs, with investment only upon statistical dips? However speculative, this tactic is based on the long-term nature of markets, rather than on the fantasies of long-term asset
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