August 19, 2004

Yet another of those truly interesting comments this morning that runs in direct counter to the traditional "vote with your pocketbook": a professor of business administration, during a radio interview, stated outright that it really does not matter in terms of the company's continued viability whether or not investors pull their money out, since the sales would happen on the secondary market anyway. So-called "ethical" mutual funds, he strongly suggested, might salve the conscience of the investor, but could have no real effect on the company's place in the market as a whole.

I don't know what to make of this statement.

It is my understanding that the on-paper value of a public company is directly related to the number of shares it has released and the amount investors are willing to pay for those shares. I can see where it would be primary market sales that determine the monetary reserves of the company, while secondary market sales determine the on-paper value of the company, within - oh, call it "normal" market times, be they bull or bear. (So long as faith in a piece of paper remains such that buyer and seller, demand and supply, can safely be assumed, the market must be considered "normal" within most of our lifetimes' experience.) I can see where one individual or another, selling a statistically almost insignificant percentage of shares on the secondary market, might not have a particularly strong influence on the company's direction as a whole (let alone its continued existence): not least because there does exist a secondary market, in which people are still generally willing to buy at reasonably stable prices what others wish to sell. Within a "normal" market environment, a typical low-level investor, as a single individual, has no power.

Yet to broaden this statement to the point of assuming that there must always be those willing to buy on a secondary market seems to me, well, arrogant.

We could not even claim experiential consistency in doing so. There have been times in the past, even the relatively recent past, when a population suddenly lost its faith in a company, or a government, or a currency: such that the stock's or bond's greatest value became the heat to be derived by its burning. I still own between-the-world-wars stamps (from an aborted early attempt at collection) on which the monetary amount represented had simply been struck out and overprinted, so fast did the currency collapse in perceived value. Thus what we do know, from experience, is that if individuals en masse lose faith in (or otherwise choose to abandon) a particular company, or government, or currency: in its current structure, that entity is doomed.

It would seem that it is not beyond the realm of reason that, for the stocks of a given company or type of company, there might suddenly be found no more buyers - at any price, the company's on-paper value suddenly evaporating simply because its public stock offerings can no longer find any buyer, and consequently the company's real value similarly evaporating against the debt-asset ratio the banks will no longer allow it to support. (I have heard that in such circumstances, it is not uncommon for one or more stock markets to suspend trading in the stock.)

Which leads me to wonder: why suggest so strongly otherwise ...?

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