October 11, 2015

Is A Publicly Traded Asset Ever A “Safe Investment?”

What is a “safe investment?”

As I have attempted to secure investors for our feature film From the Rough, I have gotten extremely frustrated by comments many people have made that our investment is much “riskier” than putting their money in publicly traded stocks and bonds, or even real estate construction.

An article entitled “Tim Cook vs. Steve Ballmer” written on April 23, 2013, by Zach Epstein, the Executive Editor of an online portal called BGR, points out that investors are calling for the ouster of Tim Cook, the Apple CEO, who has presided over a 40% decline in Apple’s stock since he succeeded Steve Jobs, just as they have called for the ouster of Steve Ballmer, the Microsoft CEO who succeeded Bill Gates in 2000, while Microsoft stock has declined by 43%.


Epstein points out that Ballmer has increased Microsoft revenues by 221% since he took over and has increased profits by over 80% during that period. Similarly, Apple’s revenues and profits have increased since Cook took over. While it is always arguable that companies like Microsoft and Apple could be better served by other leaders, the argument that these CEOs are responsible for the poor performance of these Company’s stock is a poor rationale for replacing them. The reason for the poor performance of these companies’ shares may very well be unrelated to their performance as CEOs.

The price of public company stocks or bonds, or of any publicly traded asset is based primarily on how actual and prospective buyers and sellers collectively assess future expectations of how that asset will be valued. The rationales for that collective assessment are unknowable.

When Microsoft and Apple reached their historic high prices from which they have declined, those who bought the shares and drove up the price had a set of expectations on share price appreciation or returns from dividends that they shared with no one. Since no one buys a publicly traded asset expecting to lose money, or even to secure an economic return comparable to a U.S. Treasury debt instrument, the only conclusion we can draw is that they believed that the shares of the companies they acquired would produce a positive economic return far higher than those produced by a Treasury debt instrument. However, we do not know what they expected in terms of future return, and we particularly do not know what kind of company performance they believed would result in that return.

In effect, when any of us buy shares of a publicly traded asset, we are betting that the collective expectations of those who have bought or held on to the asset are not unrealistically high. However, we can never find out enough then or at any other time to know whether our bet was a reasonable one at the time we made it. Those who bought Microsoft and Apple shares at their historic highs have essentially bet wrong up to this time. Because the expectations of buyers and sellers have been disappointed, there have been more trades initiated by sellers taking profits or deciding that they had better use of their money than retaining shares in those companies.

I experienced this many times as Pitney Bowes’ CEO when I visited with investors and prospective investors. When our stock price declined, especially in 1999 and 2000, they were less interested in learning about the inherent performance expectations of our company than about what we knew about the behaviors and intent of other investors. They did not want to buy shares and see them decline because others had lower expectations about the company’s future than they did.

One of the reasons investment firms gather every scrap of intelligence about the intent of other investors is because that intent, if translated into future behavior, affects the stock price. Similarly, large investors like Fidelity Investments deliberately disguise their purchasing and selling decisions to avoid having those decisions prematurely influence the behavior of other investors to raise the cost of buying shares or devalue shares they were trying to sell.

As a CEO, I never sold a share of Pitney Bowes stock, because I did not want my decision to sell stock, even to balance my overall investment portfolio, to influence the behavior of others. I felt that my obligation to shareholders, particularly to employees who held shares, was to signal my confidence in the company’s future, not to send the opposite signal. That decision cost me countless millions of dollars, probably in excess of $10 million over time, because when I was free to sell, the company’s stock price had dropped below $25 a share and has never gotten close to that point. During my tenure, the stock reached a high of over $71 a share, and was frequently in the $40-50 per share range. The collective market behavior was probably irrational in valuing the stock at $71, even during the optimistic times of the late 1990’s when the stock price hit that level on two occasions.

The main reason to buy shares in a publicly traded asset is the liquidity of the investment. If an investor wants safety, publicly traded stocks, bonds, commodities or real estate trusts may be terrible choices, even if the underlying companies are very strong. Stocks used to be a good choice when investors could count on the consistency of dividend payouts, but fewer companies than ever maintain or increase dividends over time, and the payout of dividends does not guarantee the maintenance of the company’s share price. We need only look at my old company, Pitney Bowes, to see that a dividend that keeps increasing does not translate into a higher stock price.

Why is all this important? It points out that the question of investment risk needs to be evaluated in a new light. Our film project has certain risks, just as any intellectual property licensing project has risks, but the one risk it does not have is having a valuation that depends on the unknowable collective expectations of future investors. The value of our film as an asset depends totally on its performance, not on future expectations of its performance.

There are circumstances in which the value of a film depends on future performance expectations, particularly those in which the distributor and owner of the asset is a major studio which can make a rational decision to choose to write off the asset and do nothing further with it, and to devote efforts to competing films. This is not one of those circumstances.

I make no judgment as to how our film stacks up in attractiveness against other options people may have, but I know that the publicly traded asset has risks that are not present in our case, and are not able to be evaluated with any degree of accuracy.

In the healthcare marketplace, I am seeing an inexplicable contrast between companies that are able to attract over $200 million in investor capital because of wildly unrealistic expectations about future share price appreciation, and our company, which has steadily grown in an extremely adverse environment and has a relatively safe revenue stream. I have long since stopped getting upset about trying to change collective irrationality.

However, I believe it is good for me to remind everyone who considers investments to remember that unknowable expectations make assets dependent on future market price movements inherently risky at a level that an asset dependent on the performance of a particular entity cannot match.