Why small-cap companies should communicate with long-term shareholders – but not pander to short-term retail traders
On February 7, 2022, The Wall Street Journal published an article titled Connecting with small shareholders remains a challenge for companies. As the headline suggests, some public companies are turning to a range of external service providers and consultants in an attempt to please retail traders demanding frequent updates, some of whom can be rather boisterous on social media. You could argue that some of these companies even hope to become a meme stock thanks to retail investors and see their stock price skyrocket as Gamestop’s did in 2021. But this approach is wrong, and when companies go down this path in the hopes of stimulating short-term jumps in their stock price, they are making a mistake.
Before going any further, let me say one thing: these are my personal views, which aren’t necessarily shared by others in the small-cap community and probably not even at the public company I used to help run. But in addition to being an executive I am an ardent retail investor and have been since college. One thing I’m emphatically not, however, is a short-term trader. I invest for the long term, guided by the principles of Warren Buffett and Charlie Munger but also Philip Fisher, Howard Marks, Joel Greenblatt, Will Danoff and William Thorndike, to name a few.
An important quote that is often cited but even more commonly ignored is from Buffett’s mentor, Ben Graham, who said, ‘In the short run, the market is a voting machine but in the long run, it is a weighing machine.’ When small companies cater to the whims of many retail traders demanding frequent updates on social media, they are incorrectly focusing on voters. Instead, they should communicate with weighers via shareholder letters and focus on the long term.
For example, Jeff Bezos would frequently cite Graham’s quote, reminding employees and shareholders to ignore the daily stock price, especially when Amazon was still a small, publicly traded company. Why? Having a talented team that delights customers is the only way to serve shareholders over the long term. There are no substitutes, no silver bullets. In fact, the first two sections of Amazon’s inaugural letter to shareholders in 1997 are titled ‘It’s all about the long term’ and ‘Obsess over customers’. For my vote, Bezos’ letter is the gold standard. It should be read aloud before every public company’s board meeting, like the Pledge of Allegiance.
Here are two reasons why companies shouldn’t obsess over retail traders if they aren’t committed to being long-term shareholders.
1. Shareholder letters are more effective and efficient for communicating with true company ‘weighers’
Bezos isn’t alone in ignoring short-term traders in favor of annual shareholder letters. In his book, Dear Shareholder, Lawrence Cunningham details some of the best shareholder letters in history, including those from Berkshire Hathaway, Fairfax Financial, Constellation Software, Markel Corporation, Alleghany Corporation, Morningstar and Graham Holding Company.
While these companies’ share prices may have fluctuated in the short term, they have performed exceptionally well over the long term, as Cunningham details: ‘Above all, these executives hold fast to a long-term time horizon. They are not focused on the current quarter or year: they are in it for the long term and seek the same from their employees and shareholders. Search their letters in this compendium and you’ll find ‘long term’ mentioned far more frequently than ‘quarterly’. They eschew conference calls and earnings guidance, preferring to speak mostly through their shareholder letters.’
While all shareholders typically enjoy seeing their holdings rise in value, the simple reality is that it takes time to build talented teams. It takes time to build great products. It takes time to serve and win over customers at scale. Not weeks or months but years; sometimes it even takes decades. Sophisticated investors, both institutional and retail, understand this and are willing to give companies ample time. As Charlie Munger says, ‘The real money is in the waiting, not the trading.’
In fact, when Chris Mayer analyzed companies that had delivered a 100-times return in his book 100 baggers: Stocks that return 100-to-1 and how to find them, the data revealed that it required an average of 26 years. So while it’s possible to turn a $10,000 investment into $1 mn, it’ll usually take about a quarter of a century.
Management teams that are truly building the business for the long term should update shareholders candidly and consistently with an annual letter (see Cunningham’s book for pointers), in addition to all mandatory financial reporting to the SEC. Less mature companies, which are effectively publicly traded start-ups, may choose to write to their shareholders even more frequently, like semi-annually or even quarterly. But they should ignore the fad around trying to appease short-term traders, which won’t matter in the long run.
2. Pandering to short-term traders is a costly distraction your company can’t afford
It’s probably obvious, but you don’t want your senior executives spending their time trying to appease short-term retail traders. The mostly highly compensated and influential people at the company should be focused on the most important work, which is serving customers. Along with forging a strong culture and savvy capital allocation, this is what creates shareholder value.
In the early days of Amazon, Bezos would talk to customers and willingly share his email address. He’d even get on his hands and knees to pack boxes and fill orders. But one thing he wouldn’t do was cater to short-term traders. Much like Berkshire Hathaway, he’d provide updates with his shareholder letters, often pointing out that Amazon’s long-term objectives remained the same as in his inaugural 1997 letter.
In closing, please let me reiterate that I am a dedicated retail investor. I’m also technically a millennial who possesses a Robinhood account and loves the platform’s user interface, not to mention its disruption of the industry. I think it’s great to see more retail investors, as it can be an incredible way to build wealth over one’s lifetime. But just because social media has provided smaller shareholders with unprecedented access to companies and their management teams, it doesn't mean their every desire should be satiated or their every question answered, especially when it's not in the best interest of the company and therefore its shareholders. Management teams truly focused on the long term must ignore short-term traders and allow their businesses to be weighed over a number of years.
Kai Sato is a millennial retail investor and founder of Kaizen Reserve