How does the share market’s behaviour change with investor theory?

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Welcome to Finance and Fury, The Furious Friday edition

Today We will go through how the share market changes with economic theory, particularly the theory of Milton Friedman in regards to shareholder value and certain volatility

  • The share market behaviour changes as the thoughts of investors change
  • It is based around Game Theory
To start:
  • What is the predominant thought of today
  • The returns of a company drive demand, people want shares that are doing well
  • Quarterly reports have a short term focus
  • This can take priority over long term health
  • What is the fiduciary duty of directors?

Where does this view come from?

  • Who is Milton Friedman
  • 1962 collection of essays “Capitalism and Freedom”

“there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud.”

  • Prices can respond quicker with information being readily available

How does this all work?

  • Projected versus actual financial reporting
  • Value is not price, it is what people think the price should be
  • Technically pursuing short term value should maximise long term value
  • Sometimes short-term gains come at a loss of long-term potential
  • What is another view of economic good?
  • Public companies are always exposed to short term investors or speculators who have a clear goal
  • Slight misallocation started to occur
  • The drive for CEO’s to be held accountable with shares as payment, came with an incentive to manipulate share prices

This is the sort of market we have to work with

  • Companies with good managers is the number one measurement
  • Long term performances

One of the most important parts

  • Don’t panic sell
  • If the company is good, it should recover long term
  • Selling the shares just crystalises the loss
  • Slow and steady wins the race
  • Next best things “in fashion shares”
  • When to get out?
  • Buy and hold well managed companies
  • I looked at the difference between large cap and small cap active managers
  • I outsourced the guessing to people who do this professionally

Thanks for listening, if you want to get in contact you can do so here.

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