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Charts Hypochondriasis: A Panacea for Uppers and Downers Addiction

This week in Alrroya, the United Arab Emirates (UAE) business and financial daily, I urge public companies to reclaim their mandate in providing guidance to investors on their value generating potential from the tyranny of end-of-day stock price league tables.

I am not a huge fan of market closing price league tables. I studiously ignore titles like ‘Today’s 10 Bottom Stocks,’ ‘5 Leading Losers,’ ‘10 Market Chargers,’ ‘10 Exchange Laggards’ on the Markets pages and financial websites. These companies are not in any competition with each other in that sense. I am not aware of any chief executive that purposely determines that his company stock should rise the most or fall the least on any given day.

On these celebrated ranking scales, one would find utilities and beverage companies and on another, IT and entertainment companies, all with no relationship to one another. The only tenuous connection being that their prices went in the same direction on that day whatever the reasons. By an insidious transformation, these market close summaries have become value-laden commentaries on corporations. ‘Losers drag down the index,’ ‘Gallant bulls wrestle bears to a standstill,’ ‘Stubborn bears not going down without a fight.’ Gainers are good, and losers are bad. Pick your choice.

Needless to say, I am neither a club supporter of the dizzying price movement overload that distracts viewers of financial news channels. Sometimes, these tickers run at both the top and bottom of the screen. It is a wonder that more people do not suffer from photosensitive seizures after prolonged viewing. This visual multi-tasking is a veritable health hazard for epilepsy patients.

But do not get me wrong. I have nothing personal against prices bobbing either way. In any market, prices cannot be static. I also recognize that many traders and investors earn their livelihoods from these changes in values, upwards and downwards, however wide or infinitesimal. A closed trade demonstrates that there has been a willing buyer and a willing seller who have transacted based on their own independent analysis of the value of the traded security. Contrary to what many commentators have argued, I do not think day traders, short-sellers, black box programs or algo-traders are destructive, distortive, evil or parasitic. In their own unconventional ways, they play important roles in the price discovery process.

Where I have an issue is with the resignation of companies to this prevalent culture that confuses an image slide, that is, a temporary mispricing, with a picture book, that is, a sustained change in the valuation. Companies feel helpless to actively intervene in investors’ information input flow.

The fault does not lie with the websites, newspapers or cable channels that feed this frenzy. Websites want visitors, newspapers want readers and cable channels want viewers. They are just being what they are. All those green- and red-colour arrows, minuses and plus signs, blue- and amber-hue figures serve one purpose: to retain the audience. They could not careless if visitors, readers, and viewers called their brokers afterwards.

The problem lies with companies who have lost the initiative in the contest of value story-telling. Can one blame investors who actively trade stocks of companies but know next to nothing about these companies’ market share, management experience, revenues, sector dynamics, strategy or competitive position? Do companies accord the same prominence to these issues that the media gives to those league tables? Unfortunately, they often do not. Executives have abdicated their responsibility to evangelize their companies. The result is the dominance of these ever-present price league tables, where companies are judged based on the latest closing prices and investors are encouraged to have short memory spans. The shorter, the better. Churn is the new morality.

Recently, I reread the 2008 annual report of Logica, the top-tier European IT and business services company. If there was an award for clarity and precision in investor communications, I would nominate Logica for it. In the introduction, the company explains that the report sets out to provide answers to six basic questions. First, what makes our company distinctive? Second, what is our strategic plan? Third, how are we executing our plan? Fourth, do we have the right operational and financial resources to succeed? Fifth, do we have the right strategy in the current market conditions? Finally, how are we getting closer to customers? If Einstein’s dictum that things should be made as simple as possible, but not simpler, was a virtue, this schematic would be its manifestation for the capital markets.

I am always amazed that companies which commit intensive management energy to their marketing campaigns have a hard time accepting that they need to push their value messages toward investors with the same passion. Regrettably, most companies continue to falsely believe that once a quarter is more than enough interaction with the market. As we have seen, these companies are ranked each day without their consent. Seeking refuge by burying their heads in the sand, thinking that investors know better, can only work against them. Companies should be proactive in articulating and pushing out their own wider set of performance measures or else their fates become mere chips in a grand casinos and slips in corner betting shops. Capital for production, not speculation, should be their gospel. It is high time to shift the paradigm.

The original article may be read here on the Alrroya website.

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