[timthelion]

This article misses the reason why short term investors are potentially harmfull. The author writes: "One basic and important implication of this theory is that, if you hold a share of stock for a minute, you will want the company to increase its long-term earnings power during that minute. If, during your minute of ownership, the company announces "we have sold all our factories and ruined our productive capacity, but we booked a big profit for this minute," you will be sad. "

This is so simple it is wrong. The truth is, that the short term investor cares how PUBLIC KNOWLEDGE changes during that minute. For example, if Kobe steel holds off on making a fraud scandal public during that minute, that's a good thing, even if keeping the fraud skandal secret will hurt in the long term. The short term investor wants the IPhone X to be announced NOW, even if holding off on the announcment could give apple a leg up against the competitors. The short term investor wants toshiba to announce they've got a good deal selling off their memory business NOW, even if that makes it harder for toshiba to improve the price they get even further with a bidding war.

[Yizahi]

Exactly this. I'm observing how a midsized company shares fluctuate completely unrelated to the progress of our development efforts and actual relations and sales to customers. Product A was frozen and discarded after 2 year intense dev cycle (a failure), product B is not faring well in the competition, but we announced product C that may or may not succeed in 1+ years on a major tech show - shares go up. Next year product D is succeeding immensely, record contracts are signed with biggest customers in the world, product is ahead of competition - shares are down, because nobody knows.

tl;dr - PR is everything, often shadowing actual hw or sw "stuff" people make, and HFT capitalizes on this.

[nradov]

PR is nothing. The institutional investors who actually move stock prices barely even look at it. Humans try to make sense of random events by looking for causality, but ascribing stock movements to single factors is often like ascribing weather changes to animal sacrifices.

[TuringNYC]

You have a good point but remember that there are other factors that affect stock price completely external to the company -- the biggest one is interest rates.

Also, external happennings in other companies such as competitors, purchasers, suppliers have an impact on your company. So those should technically feed a model some factors (and in fact they do at hedge funds.)

[amelius]

Yes. The original premise of the article is:

> The value of a share of a company is equal to the market's expectation of the present value of its future free cash flows.

Emphasis on "expectation". It may change wildly in the short term; reasons include hype, speculation, and news that has only short term relevance.

[jmh530]

I think you're right that we don't really understand yet the implications of this idea. For instance, it's not just expectation that should be emphasized, it's the discount rate at which the present value is performed. Conditional on the expected value of the earnings over the future, one can calculate the implied discount rate given a company's price (equity risk premium). When this value is higher, the market is effectively more present-oriented, they care less about future cash flows. And vice-versa. Would the equity risk premium fall under this type of market? Would that mean lower equity prices? I don't know.

[erikb]

What I don't understand yet, is why the company would care about the short term investor. Sure the short term fluctuations are high. But on the long term they should average out based on average long term value of the company. Shouldn't the CEO just ignore the stock price swings?

[nradov]

Yes. Short-term investors get unfairly blamed for problems that are caused by incompetent CEOs.