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Most CEOs, as well as some of the other contributors to this forum, appear to have a false sense of what creating shareholder value means. CEOs need to understand the principles of shareholder value and why they are so important in judging difficult trade-offs, learn about the relationship between the financial performance of the company and the company’s stock, and communicate clearly and act appropriately when expectations gaps open.
It’s become fashionable to blame the pursuit of shareholder value for the ills besetting corporate America: managers and investors obsessed with next quarter’s results, failure to invest in long-term growth, and even the accounting scandals that have grabbed headlines. When executives destroy the value they are supposed to be creating, they almost always claim that stock market pressure made them do it.
You like the idea of trading infrequently — buying a stock in the hopes of never selling. You’re tired of making stock brokers a little rich, and making market makers (the people who profit from the bid-and-ask price “spreads”) a lot richer, and you’re thinking there might be a lot of long-term money in all this. But, of course, an investment approach that steers you into holding a stock possibly for decades should make you awfully picky about which stocks to buy! Pick the wrong one, or few, and you might get very little return for a very long time.
Yields on Treasury bonds have plunged in recent weeks, thanks to fear of recession, chaos in the Eurozone and assorted other unsavory news. That buying has driven 10-year yields sharply lower – from 3.25 percent to less than two percent just in the past few weeks. Investors, of course, aren’t buying these bonds for their potential return. They’re buying them for the perceived safety.
Yet their statement values will plunge in the months (and years) ahead.
Vanguard founder Jack Bogle says the stock market is a “giant distraction to the business of investing”. Over the long run, he tells Fox Business Network, stock returns depend on how well Corporate America does; but in the short term, stocks have “inexplicable ups and downs” based on people’s opinions — not facts. He says that given the current situation, the market is poised to deliver average investment returns of about 7% or so for the next decade, based on corporate earnings growth and dividend yield. But in the short term, it will deviate sharply above and below that figure based on investors’ mood swings.
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