Private vs. Public Companies

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Whether a company is publicy traded or not affects every aspect of its operations.

The most important stakeholder to a privately held company are the customers. Unhappy customers adversely impact revenues. If revenues don’t equal expenses it’s game over. It’s pretty well that simple.

For the private company then, the most important thing is to keep the customers happy which translates into steady revenues, which can be turned into positive earnings either through revenue growth, cost cutting or a combination of the two. Earnings equal profits for the owners, who’s preeminant wish is that the profits continue or even grow. To that end, smart owners constantly revisit the following kinds of initiatives:

  • What will make their customers happy?
  • What keeps their customers happy?
  • What will keep their customers loyal: What stops them from leaving? What wins them over from competitors?

Once a company goes public, the equation changes completely. The most important stakeholder is now the shareholders, and, as we’ll see throughout numerous posts here: most shareholders are losers. That is to say: the shareholders are typified by short-term thinking and herd like behaviour. They are heavily influenced by cheerleading and panics. Many of them hold a given stock for less than a year and in many cases a few hours or minutes.

Those who aren’t completely dominated by these characteristics are enveloped in oblivion: simply hurling their money into mutual funds, which they don’t monitor, let alone analyze, and hope for the best. Those mutual funds are run by fund managers who typically cannot beat the market returns, and spend their efforts trying not to lose more money than the next guy, rather than delivering stellar performance (see “The Myth of Beating The Market” ).

In other words, for private companies, keeping their most important stakeholders happy (the customers) is about keeping their interests in mind (which are usually based on longer term calculus) and providing more value in return for the customers money.

Private companies focus all their efforts on keeping their existing customers and winning more new customers than they lose. If they can do this while keeping a lid on costs, it results in earnings and revenue growth over time.

For public companies, keeping their most important stakeholders happy (the shareholders) is basically about continually winning popularity contests amongst 10-year olds. People buy and sell stocks based primarily on emotions. Those emotions are stoked by the two primal forces: fear and greed. They are played upon by a daily barrage of infotainment: where every single day in the markets have to be made out to seem like it’s the single most important day in the history of the financial markets.

CNBC and Clusterstock do not stay in business by telling you “there is nothing important happening with any of the companies you own today – go back to sleep and check back in 6 months”. They stay in business by putting hysterical pundits in front of a camera who whip their viewers into buying frenzies or massage bad news into tenuous bullish rationales.

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One response to “Private vs. Public Companies”

  1. JOP says:

    Wonder if you would shed light on the following in order to compare:
    1. What is the value of nation-state assets and holdings?
    2. What is the value of corporate and transnational corporate assets and holdings?
    Thank you

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