Overview
Perhaps you’ve heard it said before that, if you want to change something, don’t leave, stay and fight. While that saying may be true in some contexts, there are other situations where choosing to stay and fight may not be worthwhile and may end up being personally detrimental.
This article was inspired by Nomad Capitalist’s video talking about the same subject. While that video is in the context of tax strategy and politics, the message of “don’t stay and fight if you want to win” is just as relevant to investing as it is to tax strategy.
If an investor feels they are getting the short end of the stick – that is, they’ve committed time and capital to an enterprise but their investment seems to be going nowhere, then it may be better to move on.
A Mutually Beneficial Relationship
Many investors seem to forget that investing is a two-way street, in that two parties ultimately stand to gain something.
An investor hopes to benefit by getting a return on their money, either in the form of capital appreciation, interest payments, or dividends. The company an investor chooses to put their money towards benefits by using that investment capital to expand their business, hoping to bring in more customers and ultimately more revenue.
If one party gives to another without any expectation of receiving a future benefit, that’s not investing, that’s charity.
Business and investment go hand-in-hand. One cannot exist without the other. For businesses and investors to advance their respective goals, both must stand to gain something, otherwise, there is no incentive to drive mutual progress.
An investor wouldn’t invest if they didn’t get some sort of return on their money, and companies won’t willingly give the public an ownership stake unless they raise more capital as a result of doing so.
So, when a business becomes increasingly unattractive on grounds of investment merit, and it is abundantly clear that investors stand to gain nothing but lose everything, then the logical decision would be to move on to greener pastures.
Yet, some investors insist on staying to try and make things better. Why?
With respect to retail investors, they have no obligation, legal or otherwise, to stay invested in an enterprise and to try and change it.
If a retail investor feels their investment is not worthwhile, they have every right to withdraw their money as soon as they possibly can.
I know that if a business I was invested in started to show obvious signs of deterioration, and I happen to have very little individual influence to try and change things, then the first thing I would start thinking about is how early I can dump my shares, and where to put my money next.
Maybe an investor chooses to stay because of sentimental reasons: this may be the first company they bought, or perhaps they’ve held this company for several years now.
Remember, an investor’s worst enemy is their own emotions: choosing to stay and fight because of emotional reasons serves only to satisfy one’s vanity. An investor needs to understand when it’s time to move on.
The Sum of the Whole is Greater than the Parts?
Of course, the argument can be made that “if investors leave in droves, how can any change be expected?”
There are investors who choose to stay and fight and do so successfully. They are known as activist investors. This term is commonly used to describe a group of investors who band together to directly influence corporate policy.
While activist investors have successfully influenced companies in the past, it is important to remember that activist investors have their own agenda, an agenda that may or may not benefit every investor.
Not only that, but the efficacy of activist investing is usually measured by how much of a company they own. You can start to see the problem here.
If a handful of activist investors (let’s say around 10-15 people/institutions) hold more than half of a company’s shares, while the remaining shares are distributed amongst thousands of other investors, then most shareholders are at the mercy of a few.
This small group of investors can push for major corporate reforms because so much of the company’s ownership is concentrated in their hands. Other investors can only hope that the reforms being pushed by the activist investors align with their own interests.
Choosing to stay and fight is a decision an investor must think about very carefully. They must know that it will cost them, literally.
Also, an investor needs to really ask themselves: “how much influence do I really exert over this company?”. If you are a retail investor, then the answer is: “not that much, if at all”.
This idea of choosing to leave when things are looking bleak was summed up nicely by Warren Buffett: “Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”
In my mind’s eye, it makes zero sense for an investor to stay and “hope” things will get better. Things may improve, things may not, If they simply choose to leave and go to greener pastures, they can seize a more secure future without having to worry.
Most individual investors lack the capital to make a large enough investment to influence a company’s corporate policies significantly. It makes zero sense for most investors to try and influence something they clearly cannot possibly hope to.
When things are starting to look bad, an investor is better off leaving as soon as they can instead of licking their wounds later.
Pick Your Battles Wisely
There are instances throughout our lives where it may be worthwhile to stay and fight for something. I know I’ve done so a few times throughout my life, and chances are you have as well.
However, it would be foolish to take on every battle, even when the chances of success are extremely slim, and the cost of fighting is very high.
I learned very early on as an investor that activist investing is, for most investors, a giant waste of time and only serves to stroke an investor’s ego. Very few investors have the capital to influence a company on their own.
Even if an activist investor decides to join forces with other investors, there is no guarantee others will join their cause, especially if agendas and other self-interests may conflict.
Some investors are in a position to push for major corporate reforms, others are not. I know that I belong in the latter group. Because of that, I choose to cut my losses and move on rather than stay and risk losing more money than I already have.
Wrapping Up
When a company starts to fall into what seems like a never-ending decline, and the prospect of losing money from your investment becomes more of a reality with each passing day, then it may be best to just move on.
Yet, some investors insist on staying and attempt to change corporate policies and culture for the better.
While some investors wield the capital and networks needed to push for such drastic reforms, most investors do not. For most investors, moving on is a better solution than choosing to stay and fight.
If an investor chooses to stay and fight, they must understand what exactly they are getting themselves into, and must ask themselves if the time, effort, and money they are about to spend is worth it in the end.
In Sun Tzu’s Art of War, he said that “The greatest victory is that which requires no battle”. Investors should take these words to heart.
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