Blame Wall Street

Everyone seems to want to blame Wall Street for company management making bad decisions. There is this unspoken assumption out there that once a company goes public, suddenly “Wall Street” forces the company to only think about the next 90 days, losing sight of the big picture. I see this assumption in a lot of tech press coverage, but it is not just journalists who think that. There seems to be a common perception across all of society that somehow public market investors are in a big hurry to make a buck. I do not even have to provide you with links to these kinds of stories, I am guessing that all the non-finance readers out there know exactly what I am talking about.

The thing is…it is not true. It is certainly true that public market investors, the professionals who get paid to manage money, care a lot about short-term metrics. Their own careers are rooted in the annual performance of the funds they manage, and in many cases 90-day and 30-day returns matter just as much. They need to be right on the stocks they buy (or sell) and the timing of their decisions matters a lot. But that is a measurement of their own performance, and is only indirectly related to what they want from company management teams.

Investors in general, do not want to see management teams destroy their own businesses. They do not expect companies to blow out growth with sky-high margins every quarter. For the most part, these are reasonable people who want reasonable things. No fund manager is out there telling management teams to sacrifice next year’s sales in order to hit this quarter’s numbers. That is just not how it works.

(Please note that I am using ‘general’ language, not absolute. There are plenty of exceptions in this. Wall Street has its shares of bad actors, just like every other industry out there.)

Of course, investors do have expectations and things they want from management teams. And that is the key word – expectations. Management teams have numerous opportunities to convey their message and vision to shareholders. In doing so, they set expectations among those investors. In turn, investors want to see management teams do what they have said they would do, and meet those expectations. Yes, there is that cadence of 90-day ‘guidance’ that investors expect companies to meet, but its the management team who gives that guidance.

Serious investors are willing to listen to managements’ stories and plans for the future. If management teams deliver on those, then over time, investors will reward the stock. The key is for management teams to be realistic with themselves about what their companies can achieve. Under-promise, over-deliver. That is the secret to having a healthy relationship with the stock market. If you manage a company that can only grow 5% a year, there is no point in telling the Street that it can grow 20%. When investors first hear that lower number, your stock may drop. But three years from now, when you have delivered 6% growth every year, investors will be much more favorably inclined. Or maybe your company can grow, but not smoothly, up 20% this year, down 5% next year and then up 20% the year after? Ok. Find a way to (legally) communicate that to investors. The Street will not like it at first, but with time things will improve.

And that is they way to think about this – over time. The stock market is impossible to gauge in the short term, chaos personified. Over the long-term, however, it is much more rational. Management teams need to think about their relationship to their stock just as they would about any other part of their business. Yes, there will be pressures to give into the quick fix, but there is no point blaming the Street for giving into those.

I am not going to try to convince anyone that the Stock Market is wholly rational, efficient or fair. But blaming the Street for a company’s bad decisions is not right either. Management teams can make bad decisions all on their own.

I plan on publishing more on this in the future. Starting next week I am going to take a long look at the IPO process, from the point of view of management teams staring down the barrel of that process.

One response to “Blame Wall Street

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