| Trying to predict stock price movements is | | | | liked to buy assets at the bottom of a cycle. At |
| necessary, of course. After all, when stock prices | | | | the time, the sector was depressed, so for this |
| fall, the cost of borrowing and of issuing new | | | | and other reasons we added the investor to the |
| equity can rise, and falling stock prices can both | | | | company's list of movers. A few months later, |
| undercut the confidence of employees and | | | | the investor purchased more than five million of |
| customers and handicap mergers. Unfortunately, | | | | the company's shares.Potential movers include |
| however, most of these predictions are no more | | | | those who have made money investing in other |
| than rough guesses, because the tools CEOs use | | | | industries in similar circumstances. Investors who |
| to make them are not very accurate. Net | | | | bet on the right players in an industry that |
| present value (NPV) may be useful for estimating | | | | consolidated, for example, may now be eyeing |
| the long-term intrinsic value of shares, but it is | | | | investments in other sectors on the verge of |
| famously unreliable for predicting their price over | | | | consolidation. Potential movers may also be |
| the next few quarters. Conversations with sample | | | | investors who purchased shares in a company's |
| groups of investors and analysts, conducted by | | | | upstream or downstream suppliers and have a |
| the company or by investment bankers, are no | | | | history of investing more broadly in the value |
| more reliable for gauging market reactions.But | | | | chain. Some may have a taste for betting on |
| executives can dramatically improve the accuracy | | | | companies that use certain capital models (high |
| of their predictions. By adopting a more | | | | cash flow, say, or high leverage), have new CEOs, |
| systematic, rigorous approach, corporate leaders | | | | or face particular market changes or competitive |
| can learn to understand individual investors as | | | | conditions.To determine how many investors |
| thoroughly as many companies now understand | | | | should go on the list40? 70? 100? A company |
| each of their top commercial customers. It is | | | | should test the accuracy of its predictions over |
| possible to know such customers well because | | | | previous quarters to arrive at the number that |
| there are only so many of them. Equally, only a | | | | works best. Too few will yield poor correlations |
| finite number of investors really matter when it | | | | between activity and stock prices; too many will |
| comes to predicting stock price | | | | add to the cost and complexity of the process. In |
| movements.Every CEO knows that when buyers | | | | addition, the list changes frequently. Our |
| are more anxious to buy than sellers are to sell, | | | | experience suggests that a mover typically stays |
| share prices riseand that they fall when the | | | | on such lists for six quarterslong enough to give |
| reverse happens. But fewer CEOs know that not | | | | the company time to become familiar with it but |
| every buyer or seller matters in this equation. Our | | | | short enough so that there will always be new |
| research on the changing stock prices of more | | | | movers to study.Moving the moversOnce a |
| than 50 large US and European listed companies | | | | company has identified its movers, the next step |
| over two years1 makes it clear that a maximum | | | | is to develop thorough profiles of all of them. |
| of only 100 current and potential investors | | | | Companies begin by conducting an "outside-in" |
| significantly influence the share prices of most | | | | analysis of each one, including its stated |
| large companies. By identifying these critical | | | | investment criteria and objectives and its trading |
| individual investors and understanding what | | | | patterns. Discussions with every investor give a |
| motivates them, executives can predict how they | | | | company a chance to fill in the gaps in its |
| will react to announcementsand more accurately | | | | understanding of its movers and to confirm its |
| estimate the direction of stock prices.Armed with | | | | hypotheses about what they trade and why.The |
| these new and solid insights about how critical | | | | resulting profile should first describe how an |
| investors behave in specific situations, executives | | | | investor makes decisions. What does the investor |
| can make strategic decisions in a different light. | | | | want to invest in, using what valuation |
| Knowing what makes crucial investors buy, sell, or | | | | methodologies? How is it likely to react to events |
| hold the company's stock allows CEOs to calculate | | | | or to data, which after all can be interpreted in |
| what its share price might be after an | | | | many ways? Are its investments subject to any |
| announcement and to factor this calculation into | | | | constraints, such as their size and frequency? |
| their strategic and operating decisions. To head | | | | Second, the profile should describe each investor's |
| off short-term selling, a company could manage | | | | views on issues that the company might facesuch |
| the timing, pace, or sequencing of strategic | | | | as any new strategies (for instance, whether the |
| announcements. It could introduce a new | | | | company should go into China), earnings surprises, |
| management team before announcing an | | | | and changes in management.To get this kind of |
| acquisition. It could also test an important new | | | | information, companies must phrase the questions |
| product in selected markets before the | | | | carefully in view of a US Securities and Exchange |
| nationwide rollout. How will investors react to a | | | | Commission (SEC) regulation that prohibits |
| merger announcement and what will the resulting | | | | companies from disclosing material information to |
| share price mean for a deal? How might a | | | | some but not all investors.5 Typically, indirect |
| spin-off fare in the market? Does the company | | | | questions work best. A company might ask |
| need to prepare the market or to consider a | | | | investors why they purchased or sold their |
| carve-out instead?A CEO even has the choice of | | | | holdings in a particular business, for instance. But |
| forging ahead in the face of adverse predictions, | | | | the company would actually be trying to |
| using the information to manage the expectations | | | | understand why they sold their holdings after the |
| of the board. An executive may, for instance, | | | | business announced, for example, that it was |
| consider bold strategies even though they could | | | | investing in China. Do the investors dislike the risks |
| push some critical investors to sell the company's | | | | that are associated with China, distrust the |
| stock.The few that matterIt should come as no | | | | management team put in place to manage |
| surprise that big trades can significantly move the | | | | expansion in Asia, or reject specific details of the |
| needle on a company's stock price. When the | | | | disclosed plan?Making predictionsWith the movers |
| Bass family of Texas, for example, sold its stake | | | | identified and profiled, the investor relations staff |
| in Disney, in September 2001, in response to a | | | | and executives can make reasonable judgments |
| margin call, Disney's stock fell by 8 percent.But | | | | about who will sell, buy, and hold. This process isn't |
| typically, short-term changes in a company's | | | | merely a mathematical exercise, though it does |
| stock price aren't the result of a single big trade. | | | | involve many calculations.Besides assessing |
| For the 50 companies whose quarterly stock | | | | whether each investor will approve or disapprove |
| price variations we studied, we consistently found | | | | of a given announcement, executives must |
| that the majority of unique changes in each | | | | estimate how many shares the investor is likely |
| company's stock price resulted from the net | | | | to buy or sell. They can be guided in these |
| purchases and sales of the stock by a limited | | | | estimates by such details as the average trade |
| number of investors who traded in large | | | | the investor makes and whether the investor |
| quantities. (By "unique changes," we mean those | | | | historically "bleeds" (buys and sells incrementally |
| occurring relative to the rest of the market. In | | | | over time) or "blasts" (buys and sells quickly and |
| other words, they do not include price bumps or | | | | in large blocks).Although the process itself is |
| falls that coincided with the overall movements of | | | | straightforward, making these predictions can be |
| the market or the sector.)Although the number of | | | | quite complex. Nonetheless, several companies we |
| crucial investors in a company ranged from as | | | | have worked with have done the necessary |
| few as 30 to (more typically) as many as 100, in | | | | calculations and used the information to guide their |
| each case this set of actors had a dramatic | | | | strategic decisions. One company, recognizing that |
| impact on share prices. In the companies we | | | | it would take a hit, decided that it could do little |
| studied, we could attribute from 60 to 80 percent | | | | about this except to prepare and manage its |
| of all unique changes, quarter by quarter, to the | | | | board. (In this case, estimates of what would |
| net trading imbalances of these investors.Industrial | | | | happen to the stock price were extraordinarily |
| marketing for investorsFew companies today get | | | | accurate.) Another company decided to postpone |
| to know their top investors well enough to predict | | | | a restructuring when it realized how far its stock |
| with any accuracy what will make those investors | | | | price was likely to fall. In a third case, two |
| buy or sell more of their shares. The CFO of a | | | | companies were about to announce that they |
| large financial company, which was about to | | | | were merging. But the estimated dip in the |
| announce the divestiture of a major division, | | | | acquirer's stock price after the announcement |
| believed that he was "right on top of [our] | | | | could have affected the deal (an equity and cash |
| investor base." Indeed, in a general way, the | | | | buy), so executives at the two companies used |
| company's executives knew the big investors | | | | the profiles to identify investors who should be |
| wellwhat they thought of management, the | | | | reached immediately and individually. Profiling also |
| creditworthiness of the company, and so on. But | | | | helped the companies tailor their communications |
| executives didn't know what investors thought | | | | to those investors.Even if no immediate decisions |
| about specific potential strategies, such as a | | | | are pending, a company should try to predict |
| divestiture. Was the offer price that executives | | | | probable moves by investors on a quarterly basis |
| were considering above or below the value | | | | if not more often. Accuracy improves with |
| investors attributed to the unit when those | | | | practice.Building the capabilitiesCompanies that |
| investors calculated the company's total value? Or | | | | choose to adopt an industrial-marketing approach |
| did investors think that the company benefited | | | | to investor relations will need to make at least |
| from cross-divisional synergies that would end | | | | two key changes. The first is to stop viewing the |
| with the divestiture?To develop the ability to | | | | market as a monolithic entity that is judging a |
| make predictions about shareholders, companies | | | | company's performance in an adversarial way. |
| should identify their stock price movers and | | | | When the company's stock price changes, |
| calculate how many additional shares would be | | | | executives shouldn't ask why the market moved; |
| offered or sought in reaction to specific | | | | they should pinpoint who bought, who sold, and |
| announcements. Through background analysis and | | | | why. In fact, managers should view investors |
| interviews, the companies must then analyze in | | | | much as managers in private companies view |
| depth the trading behavior of these movers, | | | | their corporate ownersand understand them just |
| developing trading profiles for each of them. | | | | as well.Have you ever found yourself in a tussle |
| Finally, companies should use the information in | | | | between heart and brain? It happens when your |
| the profiles to predict which movers would be | | | | heart wants to go in one direction and your brain |
| likely to react to specific corporate | | | | to another. This happens, not only once but |
| announcements by selling or buying in the short | | | | several times, whether is a case of expressing |
| term and then calculate what this would mean for | | | | your love, whether is a case of selecting or |
| share prices.4Getting to know investors isn't a | | | | rejecting a candidate, whether it is to accept or |
| one-shot process. Companies must continually | | | | reject a proposal, you name it and there are |
| reexamine who is moving their sharesinvestors | | | | several occasions, where you heart want to do |
| come and go. An ongoing dialogue with the | | | | something and your brain another thing.If you |
| movers deepens the knowledge of these | | | | listen to your heart, you know what brings you |
| companies and, over time, sharpens their ability to | | | | joy, peace, beauty, and love. So why wouldn't we |
| predict the actions of their critical investors. | | | | want to do this? Most of us have been taught to |
| However, most companies will need to beef up | | | | distrust our heart. Our heart will lead us astray we |
| their investor relations capabilities to get the job | | | | have been told, and cause us pain. It is our mind, |
| done. The good news: getting started isn't a | | | | teachers have told us that must be developed |
| mammoth task. Two to three months should be | | | | and followed. Much of what we have been taught |
| enough to develop an initial set of profiles of the | | | | can be attributed to the patriarchal philosophy that |
| most important investors.Identify the critical | | | | has dominated our world thinking for the past |
| investorsA company should begin its assessment | | | | 2000 years. The masculine orientation, historically, |
| by asking who has the potential to move its | | | | has honored intellect over emotions, observation |
| stock price. Some of the movers could be among | | | | and measurement, through use of our five |
| the company's largest current shareholders. Some | | | | senses, over intuition and knowing.To listen to |
| may be smaller holders who want to increase | | | | your heart, you need to be a good listener.When |
| their ownership. And some are potential large | | | | you find yourself engaged in an activity that |
| players who do not yet own any of the | | | | allows your head to take a break, and the |
| company's stock but could purchase or short it in | | | | experience brings you a sense of joy and passion |
| large quantities. What do these movers have in | | | | like you haven't experienced in years, that's your |
| common? They are active stock-portfolio | | | | heart speaking to you. For example, you travel |
| managers who regularly buy and sell large | | | | someplace that causes you to slow down, |
| quantities of shares in the company or in similar | | | | breathe and immerse yourself in the beauty of a |
| companiestypically, managers of mutual, pension, | | | | region and suddenly you feel alive. Or you |
| or hedge funds or even individual large investors.In | | | | participate in a hobby or new activity and find |
| other words, investors who count have both | | | | that you love the experience, losing all track of |
| weight and a propensity to throw it around. | | | | time. The experience itself is uplifting and you feel |
| Although the actual calculations needed to put | | | | happiness and more energy. That's your heart |
| together the list of movers are | | | | calling you.When your heart calls you to bring |
| complicatedrequiring more discussion than we can | | | | more passion and joy into your life, you have a |
| present in this articlea likely mover is someone | | | | couple of choices:1. Ignore it and keep on living like |
| who does or could reasonably account for at least | | | | you're living2. Move to a monastery3. Get some |
| 1 percent of a stock's trading volume for one | | | | awareness and clarity about what it is you really |
| quarter.Movers are not necessarily a company's | | | | want in your lifeand then take action and get |
| largest investors. Shareholders (such as family | | | | support to live the life of your dreams.Who is |
| holdings or trusts) that have owned big blocks of | | | | right, the heart or the brain???Your heart speaks |
| the company's stock for a long time don't move | | | | in metaphors, analogies and images of |
| it quarter to quarter. Neither do index funds unless | | | | possibilitythe possibility of you stepping into your |
| the company is added to or dropped from an | | | | full potential and becoming who you are meant to |
| important index (or unless the fund's assets | | | | be. Your head tries to find reasons and rationale |
| change dramatically). Among the largest 20 | | | | to make that picture a reality, and as it tries to |
| investors of one big pharmaceuticals company we | | | | figure out how to "solve this challenge", inevitably |
| studied, only 10 were movers, and this proved to | | | | fears, limitations and doubts surface within its |
| be typical of the companies we studied. What is | | | | borders. Your head is not against your heart -- it's |
| more, nearly half of the large movers of the | | | | simply trying to protect you from getting hurt |
| stock of the pharmaceuticals company over eight | | | | and it's doing its job by going through a logical, |
| quarters from 1999 to 2001 weren't listed among | | | | rational thought process.When you allow your |
| its 20 largest investors during any single | | | | head to see the essence of the vision of what |
| quarter.Moreover, companies should add potential | | | | your heart is sharing with you, and you begin to |
| investors to the list of movers. For a large | | | | believe that it's possible to make it happen, your |
| chemical business in our study, we analyzed the | | | | head begins to partner with your heart and looks |
| way the positions of investors in other chemical | | | | for ways to make the dream a reality. The |
| businesses changed over time. One investor, a | | | | simple act of believing and trusting is the bridge |
| $22 billion investment fund, had been an active | | | | between your head and heart. |
| trader in other, similar chemical companies and | | | | |