Theirfocusis notsomuchonwhatthecompanyis worth
todaybutratherwhatitsvaluewouldbeifitweremanaged
well. Investors like Carl Icahn, Michael Price, and Kirk
Kerkorianhavepridedthemselvesontheircapacitynotonly
to pinpointbadlymanagedfirms butalso tocreateenough
pressure to get management to change its ways.
Howcanvaluationskillshelpinthispursuit?Tobeginwith,
theseinvestorshaveto ensurethatthereisadditionalvalue
that can be generated by changing management. In other
words,theyhavetoseparatehowmuchofafirm’spoorstock
priceperformancehastodowithbadmanagementandhow
muchofitisafunctionofexternalfactors;theformerare
fixablebutthelatterarenot.Theythenhavetoconsiderthe
effectsofchangingmanagementonvalue;thiswillrequirean
understandingofhowvaluewillchangeasafirmchangesits
investment, financing, and dividend policies. As a
consequence,theyhavetonotonlyknowthebusinessesthat
thefirmoperatesin but alsohavean understanding ofthe
interplay between corporate finance decisions and value.
Activistinvestorsgenerallyconcentrateonafewbusinesses
they understand well and attempt to acquire undervalued
firms. Often, they wield influence on the management of
these firms and can change financial and investment policy.
Chartists
Chartistsbelievethatpricesaredrivenasmuchbyinvestor
psychology as by any underlying financial variables. The
information available from trading measures—price
movements, trading volume, and short sales—gives an
indication of investor psychology and future price
movements. Theassumptions here arethat pricesmovein