Stockholders are sometimes uneasy, but especially so immediately after purchasing a new stock. Conversely, the longer they hold a stock, the more they like it—regardless of its current performance.

As a stockbroker, I found that once investors really understood what a company was all about, they grew comfortable. They felt secure. Over time they divided their stocks into two categories: their “babies” and their “dogs.” They kept their “babies.” They would sell their “dogs” as soon as they could get out whole. Getting them to sell one of their “babies” was well nigh impossible.

Strange as it may seem, even when one of their “babies” wasn’t doing very well, they would cling to it fiercely. “It’ll come back,” they would tell me. “I have faith in it.”

I learned two lessons. First, stockholders will keep stocks for a very long time but only if they understand the company. Second, when stockholders remove certain stocks from their “sell” list, the available supply of that stock shrinks. Because stock prices reflect supply and demand, price/earnings ratios of those stocks that shareholders tuck away inevitably increase, particularly when that company delivers consistent performance.

All stockholders are potential sellers. Only about one in three individuals will ever purchase additional shares in the same company. (They love to see the price of their shares go up, but at the same time they are reluctant to pay more for the same stock.) The low price of the year is always set by a selling stockholder. By definition, it is an uninformed sale. Make your reports more informative and you will dry up the supply of shares at cheap prices. In effect, stockholder ignorance about your company establishes the low side of your price/earnings ratio.

Investors have egos. They don’t like to admit they were wrong in buying your stock. They subconsciously want to have their investment judgment validated. They do not want to change their mind about your company any more than you want them to leave you. But if they only learn about a company through its financial statements and they are deteriorating, they have little to cling to. On the other hand, if they have a sound understanding of your company’s products, its markets, and its aspirations, they will frequently forgive weak near-term performance and hold for a recovery. It is for these reasons that we take great pains to write in plain English. We seek to raise the comfort level of your shareholders. We do this by delivering a report that is crammed with interesting facts and details about your business. Each stockholder gains confidence when he feels he understands your company. In time, your stock may someday even become his “baby.”

Granted we are talking about individual investors, but overlooking their needs can be a serious mistake. If you are an “average” company, more than 35% (sometimes more than 100%) of your shares changes hands each year. You can be reasonably certain that much of this reflects the work of institutional traders as they trade chiefly on near-term results while individual shareholders and investment clubs tend to hold for the longer term.

CURIOSITY ABOUT CEOS
The average investor has a curious fascination about CEOs. Investors often speak glowingly about their pet stocks’ top men. Invariably they talk about his personality and his drive. This kind of information they must necessarily infer from reading the annual report and newspapers because few ever meet their CEOs personally. On the other hand, they rarely inquire about any other corporate officer.

Thus, if a corporation wants its shareholders to know its CEO, it has be accomplished in the Letter to Shareholders. That’s where the ideas and goals of the CEO must be made clear. Leadership, vision and personal drive should be readily apparent. Too often the CEO’s letter is a rehash of financial numbers, which are better left to the CFO’s MD&A.

EXCESSIVE EMPHASIS
It is my personal opinion that many corporations are placing an excessive emphasis on near-term financial performance.Today’s obsessive focus on numbers and ratios invites stock market price speculation and discourages long-term investing. The emphasis is incredibly short-range. It makes the score more important than the game. It downplays the main event — the corporation’s products, its research efforts, its markets, its very reason for being. And, I might add, the principal reasons people buy stock. Invariably, investors want to know what the company makes or does before finding out about its financial performance.

INVESTOR EXPECTATIONS
Surprisingly, investor expectations are quite modest. Their benchmark is what their savings will earn in a bank versus what they might get in the stock market. Although they won’t admit it, they love dividends, absolutely adore stock dividends (they view them as “found money ”), and they drool over stock splits.

THE INSIDE TRUTH
Investors love to talk. But what they say at cocktail parties and what they do in brokerage offices are two different things. They put their serious money in stocks they can understand. They will not “risk the farm” on unknown quantities, no matter how impressive their recent financial performance. Similarly, retail brokers are reluctant to “push” high performing, high p/e stocks because they do not want to risk losing a customer if things go sour. Thus preparers of annual reports of high technology stocks should give serious consideration to explaining what their companies do in more understandable, laymen ’s terms.

An investor’s fear of losing money is three times greater than his expectation for gain. Thus to the extent your report provides a measure of emotional comfort for stockholders and potential investors, you have done much to overcome investors ’ inherent fear of loss.