Lower volatility long term growth vs maximum short term gain

18 Dec 2021

The sharp drops in stock prices of listed new-age tech companies across the world is quite scary. If history is a guide, only a small % of them will maybe bounce back. Companies when projecting growth should maybe prioritize lower volatility long term vs max short term gain.

The networth of the core teams in most new-age businesses is tied to ESOPs & hence valuations. Most, including the founders, suffer from anchoring bias. It doesn’t matter how large the notional profits on stock holding, if price hits a peak & goes down, it feels like a loss.

Teams being distracted by large changes in their networth, especially sharp drops, can’t be good for team morale & focus, & by extension the business. The more a company tries to talk price up in short term, the higher the odds of large drops & volatility in the long term.

While it might seem like this isn’t an issue in private companies, it is. If things change, drawdowns are usually large & sudden. So the risks & impact on the business can potentially be much larger than companies whose stock prices gradually decline on the exchanges.

When companies are mostly valued based on what they project, counterintuitively, it may be a good idea to talk down than talking up the price. Lower volatility in stock price is also maybe something companies should strive for, which is good for long term investors as well.

As Amitabh Bachchan says in Sarkar, Nazdiki fayda dekhne se pehle, door ka nuksaan sochna chahiye.

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