A hedge fund manager friend pointed me to this post from Mark Cuban’s blog. Its his forward to the book “The Number,” by Alex Berenson, a top financial investigative reporter for The New York Times:
“If the value of a stock is what people will pay for it, then Broadcast.com was fairly valued. We were able to work with Morgan Stanley to create volume around the stock. Volume creates demand. Stocks don’t go up because companies do well or do poorly. Stocks go up and down depending on supply and demand. If a stock is marketed well enough to create more demand from buyers than there are sellers, the stock will go up. What about fundamentals? Fundamentals is a word invented by sellers to find buyers.
Price-earnings ratios, price-sales, the present value of future cash flows, pick one. Fundamentals are merely metrics created to help stockbrokers sell stocks, and to give buyers reassurance when buying stocks. Even how profits are calculated is manipulated to give confidence to buyers.
I get asked every day to invest in private companies. I always ask the same couple questions. How soon till I get my money back, and how much cash can I make from the investment? I never ask what the PE ratio will be, what the Price to Sales ratio will be. Most private investors are the same way. Heck, in Junior Achievement we were taught to return money to our investors. For some reason, as Alex points out in The Number, buyers of stocks have lost sight of the value of companies paying them cash for their investment. In today’s markets, cash isn’t earned by holding a company and collecting dividends. It’s earned by convincing someone to buy your stock from you.
If you really think of it, when a stock doesn’t pay dividends, there really isn’t a whole lot of difference between a share of stock and a baseball card. If you put your Mickey Mantle rookie card on your desk, and a share of your favorite non-dividend paying stock next to it, and let it sit there for 20 years. After 20 years you would still just have two pieces of paper sitting on your desk.
The difference in value would come from how well they were marketed. If there were millions of stockbrokers selling baseball cards, if there were financial television channels dedicated to covering the value of baseball cards with a ticker of baseball card prices streaming at the bottom, if the fund industry spent billions to tell you to buy and hold baseball cards, I am willing to bet we would talk about the fundamentals of baseball cards instead of stocks.
What matters most in buying stocks is recognizing that equities are actually commodities subject to the immediate law of supply and demand. Greater demand for stocks sends them higher; Less demand — or a greater supply (i.e., secondaries and new issues) sends them lower.
Glad we settled that issue . . .
What’s a Stock Worth?
The Big Picture highlights what Mark Cuban has to say about how stocks are valued. (Cuban’s entire statement is here )Mark is absolutely right that supply and demand, and the mood of the crowd (psychology) matter much more than all…
Cuban’s intro reminds me of the bad old days, when Jesse Livermore (or his ghostwriter) could with complete seriousness write, “stocks are manipulated to the highest point possible and then sold to the public on the way down,” and be entirely right. today’s IPO syndicate is the ethical version and is an essential part of capital formation.
the part of Cuban’s post that rings most true to me is not the part you quoted, but rather, “the stock market has gone from a place where investors actually own part of a company and have a say in their management, to a market designed to enrich insiders by allowing them to sell shares they buy cheaply through options.”
the enrichment of top management at the expense of shareholders is something you can measure. it’s completely legal, quite widespread, subsidized by the government through the tax treatment of options exercise and — given the essential fungibility of management skill — entirely unethical in a way that the IPO syndicate emphatically is not.
http://www.nytimes.com/2004/04/18/business/yourmoney/18watch.html
GRETCHEN MORGENSON
Bubble Lives on at Broadcom, Where Options Still Rain Down
JUST when you thought you had seen the most outrageous transfer of shareholder wealth to executives through stock options, along comes a company that tops them all.
The Broadcom Corporation, a maker of integrated circuits for broadband digital data transmission, went public during the bubble in the late 1990’s. The bubble has never burst for Broadcom management, judging from the option plan that the company wants shareholders to approve at its meeting on April 29.Your first clue that stock options play a leading role at Broadcom is that its board has a committee devoted to them. Members of the option committee are Alan E. Ross, the company’s president and chief executive; Henry Samueli, a company co-founder; and Werner F. Wolfen, president of Capri Investments, an investment advisory firm.
Proving just how serious its work is, the option committee met 25 times in fiscal 2003; the full Broadcom board held 18 meetings in that same time.
Broadcom shareholders are being asked to vote on a company proposal to increase by 12 million the number of shares authorized for grants under its 1998 stock incentive plan. In addition, a “yes” vote will expand the types of stock awards that the company can offer executives and employees, as well as grant the compensation committee the right to reprice underwater options at any time. This objectionable repricing practice removes the risk for executives and employees that outside shareholders incur when their stock falls….
Glass Lewis & Company, an institutional advisory firm in San Francisco, is urging shareholders to vote against the option plan because of its monster price tag. The plan’s cost is equal to 12.2 percent of Broadcom’s enterprise value, Glass Lewis said, and would dilute existing shareholders’ interests by 3.7 percent if put in place.
Had the proposed plan been in place last year, it would have cost shareholders an amount equal to about 75 percent of the company’s revenue, the firm said.
Broadcom lost almost $1 billion in 2003. Its retained earnings totaled a negative $6.7 billion at year-end.
Under the terms of the new plan, Broadcom’s compensation committee can select from certain performance goals before stock awards are to be vested. Many companies use a few criteria, like sales or earnings growth. But Broadcom gives its compensation committee no fewer than 14 to consider.
The criteria are a mouthful: “return on total shareholder equity; earnings per share; net income, before or after taxes, or operating income; earnings before interest, taxes, depreciation and amortization or operating income before depreciation and amortization; sales or revenue targets; return on assets, capital or investment; cash flow; market share; cost reduction goals; budget comparisons; implementation or completion of projects or processes strategic or critical to our business operations; measures of customer satisfaction; any combination of, or a specified increase in, any of the foregoing; and the formation of joint ventures, research and development collaborations, marketing or customer service collaborations, or the completion of other corporate transactions intended to enhance our revenue or profitability or expand our customer base.” The list gives management a lot of wiggle room. Why not a performance hurdle based on the sun rising in the east? …
OVER all, Broadcom’s executive compensation receives a failing grade from Glass Lewis because the company paid its top five officers more than its peer companies even as it performed worse than they did. Glass Lewis also gives Broadcom demerits for allowing employees to exchange underwater options – those with exercise prices above the current market price – for new, lower-priced versions in 2001 and again in 2003.
The 2003 repricing allowed the exchange of 20 million options, with an average price of $51, for 18 million options at about $35, giving Broadcom insiders a windfall of $250 million by Glass Lewis’s figuring. Outside shareholders weren’t so lucky….
What’s a Stock Worth?
The Big Picture highlights what Mark Cuban has to say about how stocks are valued. (Cuban’s entire statement is here )Mark is absolutely right that supply and demand, and the mood of the crowd (psychology) matter much more than all…
Mark Cuban’s argument that fundamentals don’t matter is specious. If you bought Mickey Mantle baseball cards at the start of his career when his prospects were uncertain, and he later turned out to be a terrible player, the cards wouldn’t be worth a nickel. In this case, Mickey Mantle’s performance represents the “fundamentals”, just as earnings are the fundamental drivers of stocks. It is NOT just a matter of supply and demand.