Friday, March 02, 2007

More PR Bull? 

Blogger Sterling Hager took after me for my Wednesday posting on the irrationality of markets. His argument against my view was stated as follows:

Mr. Horton's chief assertion is public company CEO life expectancy shouldn't be tied to stock performance. He says, It has never made sense to me to value a CEO's ability against such variability. That's not only ridiculous, it's dangerous, and it begs the question, 'If not stock performance, than upon what shall we measure their performance?' His perfect smile? Her people skills?

How about the balance sheet and income statement– would that be too harsh? But alas, those crazy little annoying quarterly accounting things have a way of influencing the stock price, too, and there we are, right back where we started.

Individual investors can be irrational. But in the collective, a zillion buyers and sellers over a reasonable period of time have a certain 'Wisdom of Crowds' that can't be ignored. Moreover, for every person selling earlier this week, there were people buying. Are the buyers irrational, too? Stocks didn't tank in 1929 because investors all at once came down with a national pandemic of irrationality. Microsoft, for example, hasn't traded in a low narrow band for years because we don't get it. It's there because people get that Microsoft doesn't get it.
I could go on and on… CEOs know what they're signing up for… stockholders have a rightful expectation to a reasonable and timely return on their investment… long-term blind faith investing is for losers… but my main point is this: What's happening to America?

The trend toward not keeping score so that Johnny doesn't get depressed about playing soccer badly is now making its way to the board room? Don't tell Jane her P/E sucks… it'll hurt her feelings? People! Performance matters. When it comes to money, which is what almost everything eventually comes down to, it's all about the ROI.

I agree with his argument but for stock price. There isn't a wisdom of crowds in the market. There is an irrationality of crowds aided and abetted by automated stock selling programs that take human input out of decision making.

CEOs must be measured, but it seems to me they should be measured by revenue and earnings growth, by book value of stock, by any number of metrics associated with controllable variables rather than by stock price. Too often, stocks are "out of favor" in a market. Whole sectors can be "out of favor." Should CEOs be fired because individuals who make up the market pay no attention to the sector? The error, it seems to me, is to assign a "super-rationality" to the combined decision making of thousands of individuals driven largely by fear and greed.

When I started in the PR business, I was in investor relations where I handled stocks of OTC companies -- good firms making excellent money with underpriced stocks relative to the market. I would go to business school at night and learn about the Efficient Market Hypothesis and return to work the next day to represent firms that were in anything but efficient markets. The wisdom of crowds wasn't working then: It doesn't work now or markets wouldn't gyrate by hundreds of points from day to day as crowds (or their automated programs) buy and sell with all the characteristics of a panic.

I don't feel sorry for CEOs. Too many have been too arrogant for far too long. But it is an issue of equity. CEOs didn't deserve the pay they were getting in the 90s when the market as a whole rose to bubble levels. They don't deserve to be penalized when investors abandon markets as a group either. If that is PR bull, then so be it.


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