RSSJuly 24th, 2008
Why Wall Street Has it All Wrong
I can’t help getting frustrated when I read about the mentality on Wall Street. I do not understand all the talk about valuations, projections, analyst opinions and other BS that is all purely speculation. Did someone forget that projection is another word for guess? Educated guess at best.
Shouldn’t all the brilliant people in this industry be hedging their bets on something a little more concrete than a guess?
Forget creating great products. Forget making a positive contribution to society. Forget providing extraordinary customer service. Analysts and investors force companies to maximize profit at all costs. It is the only number they see. Grow, profit, grow, profit, that’s all that matters. Forget about long-term vision and success, all that matters to these people is next quarter.
There are some amazing companies today, doing great things in their industry. And they all have one thing in common: ideology rules, profits do not. History proves time and time again that great companies are built on solid values, and an ideology that takes precedence over anything else. Profits are simply the end result.
Ricardo Semler puts it masterfully in his book, The Seven-Day Weekend:
“The minute I hear conventional explanations for business practices, like the idea that companies are required to grow, that profit is paramount, I know I’m encountering calcified thinking …
Why do we have to make more money every quarter or face being downgraded by analysts on Wall Street? Because Wall Street needs to guarantee income to pension funds, which in turn finance ever-increasing numbers of retired people? Because it must compensate for too many bad bets on start-ups, dot-coms and mature players that are no longer ready for prime time? Because it has hired too many MBAs who make too much money and drive costs even higher?
None of these is a convincing reason for relentless growth.”
Bottom line, the profit-centerd mentality pushed on public companies by analysts and investors in the past several years has reached an all-time low.
Companies are bigger than ever, thanks to merger after merger and growth for the sake of higher profits. Public perception of these companies is lower than ever, and for good reason. Everyone hates their cell phone provider because the customer service is a joke. Why? Because it’s cheap for providers to outsource customer service to India and infuriate their customers on a daily basis.
Here are a couple real-world examples of Wall Street logic simply not adding up in the last week:
Example #1: Google
Google, a great company with a solid values that guide their business, announced Q2 profits last week. They profited $1.25 billion, up from $925 million last year in the same quarter. Unbelievable, a 35% increase year over year, reporting a profit of $4.63/share. However, since “analysts” had predicted a return of $4.72/share, the stock plunged as much as 12%. Huh?
Example #2: Apple
I’m not ready to call Apple a great company, but there is no doubt they make great products. In Q2 Apple sold an unprecedented number of Macs, 2.5 million to be exact. Not to mention the other phenomenal product offerings that have been leaping off of shelves. Their profits neared a 31% increase over last year. Yet Apple’s stock plunged almost 11% because they only issued $1/share earnings, instead of the “projected” amount of $1.23/share. Are you kidding? Best Q2 in the company’s history and stock goes down double digits?
The attitude on Wall Street (no offense to the street, I love working right next to it) is all wrong, and I would go so far as to say that it (and the media) has had a large impact on the current state of the struggling US ecomony.
I for one will not subject myself or any of my companies to such ridiculous and flawed thinking. Growth is NOT always the answer, and it does NOT always mean a greater level of success. Companies that put values first, profits second, win.
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