Understanding management priorities on price

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I’ve been wrestling with the issue of divergent interests between management and shareholders of a public company. How can the stock price of a great business be very undervalued and management be unconcerned? (Successive fundraisings that dilute long term holders are a sign of that, for example).

I didn’t have the smarts to work it out but fortunately I know a man who does. Benjamin Graham, the father of value investing, worked this out 50 years ago in his book “The Intelligent Investor”.

I’ll quote him at length below, where he cuts the Gordian knot:

Benjamin Graham

“Why is it that insiders may have no interest of their own in following policies designed to provide an adequate dividend return and an adequate average market price? It is strange how little this point is understood. Insiders do not depend on dividends and market quotations to establish the practical value of their holdings. The value to them is measured by what they can do with the business when and if they want to do it. If they need a higher dividend to establish this value, they can raise the dividend. If the value is to be established by selling the business to some other company, or by recapitalising it, or by withdrawing unneeded cash assets, or by dissolving it as a holding concern, they can do any of these things at a time appropriate to themselves.

“Insiders never suffer loss from an unduly low market price which it is in their power to correct. If by any chance they should want to sell, they can and will always correct the situation first. In the meantime they may benefit from the opportunity to acquire more shares at a bargain level, or to pay gift (and prospective estate) taxes on a small valuation, or to save heavy surtaxes on larger dividend payments, which for them (sic) would mean only transferring money from one place where they control it into another.”

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