The problem, of course, is that many investors (if they can be called that) equate changes in the day-to-day price fluctuations in the stock market with changes in their wealth. This simply isn’t the case. Assuming you’ve paid a sensible price, your long-term success is tied to the operating results of the business. In his masterful treatise, The Intelligent Investor, Ben Graham told his students that “…the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguished caused him by other persons’ mistakes of judgment.”
Executives know it is human nature to keep one’s eyes on the ticker – not on the financial statements. That psychological pressure is why many otherwise good managers resort to aggressive accounting and undertaking unnecessary risk in pursuit of higher growth rates. Companies such as Worldcom and Enron implode. On the other hand, companies with strong controlling shareholders that are able to best focus on the long-term, such as The Washington Post with the Graham family, Berkshire Hathaway with Warren Buffett and Charlie Munger, and Wal-Mart with the Walton family, are probably going to be around for a very, very long time.
The Bottom Line
In the end, I imagine Nardelli will weather the storm. As long as he continues to do the things he’s done in the past – expand operations, improve the supply chain, diversify revenues into areas that build on the company’s core competency, and return capital to shareholders in the form of increased dividends and share repurchases – the shareholders will be extraordinarily well served. At the stock’s current valuation, you really couldn’t ask for more. If he manages to repeat the performance of the past five years, I’d be thrilled to see Mr. Nardelli receive a pay package twice as large as the one he’s already received. And that isn’t an academic opinion; I have a substantial personal investment in the company.
