Should Promoters care about the stock price?

…or instead just focus on the business and let stock price be decided by the market forces…

For an idealist that’s not even a discussion point. For him, promoter has no business of talking about the share price and he should only focus on the business. If business does well, market will reward the share price with aplenty and if not sooner than later !

Prima facie, it makes total sense – share price is supposed to reflect the fair price of the business and hence performance should be the only factor that should determine it.

However, the argument has the following key presumptions –

  1. Market is or will be efficient;
  2. Promoters have unlimited time at their disposal; and most important
  3. Share price follows performance and not the other way around

I will request you to take a pause, read the above 3 presumptions again and relate these with your own experiences as an entrepreneur, investor or analyst…

Let’s take them one by one –

Market is efficient or not?

This is hotly discussed topic for ages and you have compelling arguments on both the sides.

In my experience, markets do tend to become efficient over longer periods especially for businesses that are matured, predictable and have an established track record

For others, markets in general are inefficient and can remain so for extended periods and unfortunately that’s where majority of businesses lie

Infact, inefficiencies are what make market… The Market… where people with varied viewpoints participate and hence the buying and the selling…

Every buyer has a seller and every seller a buyer !

Promoters/ management therefore many a times are bound to get jittery, believe that they are not getting valued correctly and hence try to convey their viewpoints. The most recent case in point – ITC – wherein management finally did express it’s frustration on the stock price not reflecting the reality.

Now just imagine, if a large, established and widely known entity like ITC can lose it’s patience, smaller Companies and their promoters have all the right to feel neglected !

Do promoters have unlimited time at their disposal?

“Karmanye Vadhikaraste, Ma phaleshou kada chana, Ma Karma Phala Hetur Bhurmatey Sangostva Akarmani” – shloka from Bhagavad Gita

Meaning…

“You have the right to perform your actions, but you are not entitled to the fruits of the actions. Do not let the fruit be the purpose of your actions, and therefore you won’t be attached to not doing your duty.”

Hmm…. that’s where the problem lies. We have just extended this shloka to every part of our life as per our own convenience !

Put yourself into the shoes of an entrepreneur and then try applying this. If I am a Promoter, I would ask –

  • Patience, dedication, hard work, risk taking, passion etc all is fine but till when ?… Inefficiencies in market can prevail for long long periods
  • Share price of my business i.e., market’s collective wisdom is a barometer for my success and what is the issue if I believe I am not being treated fairly and I am asking that now?
  • How can I just keep watching when other entrepreneurs are racing ahead, whose businesses I feel are much inferior to mine?
  • How can entrepreneurs in private market talk about valuations all the time, get significant jumps sometimes within 3 months but I, who surrendered myself to Mr Market, is supposed to act like a saint and not even ask?

Promoters are also part of the society and the respect and recognition that they get is significantly dependent on how market values them.

Instead of simply waiting, I see no harm in them trying to get this recognition faster.

Infact, sooner they get recognition the better. The more time passes by, a general perception develops about the Company that becomes difficult to change.

Only good performance results in higher stock price or reverse is also true?

In real world, performance and stock price are interlinked and both are dependent on each other

True that the stock prices should follow performance. But the reverse is also true – i.e., performance also follows stock price.

How?

  • It impacts the emotional quotient of the promoters/ management and hence their focus – if they see stock prices move higher, that is a direct reflection on their business strategy which improves their morale and wealth/ compensation;
  • It eases out fund raising needed for growth – both through equity as well as debt. Higher stock price means investors are interested in the business and hence raising fresh equity becomes easier. Likewise, with higher stock price, it’s easier to raise debt with or without the pledge of shares.
  • It creates a better image about the business across – helps in attracting better talent, negotiating with the suppliers, increasing customer base, wider media coverage, etc.

In stock markets, we have this obsession to talk idealistic, whereas real world is not black and white.

Promoter operates in a dynamic environment and he tries his best to balance out various interests. For me, keeping an eye on the stock price and ‘constructive participation’ to address any inherent inefficiencies (in the market or the business) is important to his overall endeavors !

Illustration Credit: Vecteezy.com

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Kavinder
Kavinder
10 months ago

Good one

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