Over the years we have seen many good companies disappear, expert management teams fall by the wayside and investors turn against individual stocks and sectors. While private investors do tend to deal a little more on emotion than institutional and professional investors, money talks in the world of finance and stock market investment. What do we mean by this?
Hitting targets and delivering returns
When a company is loss-making it can be very difficult to give a “fair valuation” but as soon as a loss-making company turns profitable, the traditional value indicators kick in. Price-earnings ratios, margins and growth in revenues will all play a major role and if companies regularly miss targets then investors will eventually give up. There may be times where these companies are taken over by others who can “make a better job of it” but once a company has a reputation of failing to deliver it can be difficult to shake off.
Potential doesn’t pay the bills
The stock market and in particular the small companies markets have been a graveyard for many “potentially groundbreaking” businesses. These are businesses which came to the market with a great story, great potential but whether down to timing, finance or bad luck, they failed to deliver. These types of companies are very prevalent in the technology and pharmaceutical industry which are extremely cutthroat. We have seen instances in years gone by where companies are bought up or squeezed out of the market by competitors to protect market share.
Ironically, many of these brutal strategies will result in fines or repercussions from the regulators but very often this is too little too late and potential competitors have already fallen by the wayside, crashed and burned.
Looking for the next growth market
Even a successful company will be limited by market share, both naturally and by regulators, and will at some point need to look outside of its traditional operating boundaries. One company which is beginning to struggle on this particular subject is Apple which has hundreds of billions of dollars in a war chest waiting to be invested. So far the company has been extremely successful in rolling out iPhones and similar products but at some point it will need to move into a new area as core markets mature. Looking to the future is the role of directors, briefing analysts about their plans is very important as is keeping investors, both institutional and private, on board.
Money talks at the end of the day
The investment market is a brutal environment where the private life and skills of key personnel will be dissected and studied in great detail with very little in the way of loyalty in the longer term. Sometimes directors and founders of a company need to know when to let go, when to sell out and when to bring in more experienced management. They may have taken the company to a multibillion dollar valuation but once their natural lifespan with the business is over investors will have no qualms in throwing them overboard and installing new management.
Successful directors, founders and entrepreneurs know their strengths and know their weaknesses and are able to withdraw before they are pushed. This ensures that they keep their reputation going forward, make a pretty penny along the way and will no doubt attract other companies looking to make use of their skills and experience. Everybody has a shelf life……and money talks.