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Re: [Behavioral-Finance] Why do CEO's place so much importance on the price of their company stock?

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  • plato363@aol.com
    The value increases because that company should make more money now that it has cure for cancer. Stocks tend to discount the future. If the company will make
    Message 1 of 22 , Feb 23, 2006
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      The value increases because that company should make more money now
      that it has cure for cancer.

      Stocks tend to discount the future. If the company will make more money
      in the future, the stock will be more valuable today. Think of it this
      way; what would it cost you if paid for $0.01 one year from now versus
      $100,000 one year from now.


      -----Original Message-----
      From: C. Robert Nelms <bob@...>
      To: Behavioral-Finance@yahoogroups.com
      Sent: Thu, 23 Feb 2006 15:39:43 -0500
      Subject: RE: [Behavioral-Finance] Why do CEO's place so much importance
      on the price of their company stock?

      To all:



      Here?s another way of asking the question. Let?s say I have $100,000
      sitting in a bank at 3.00% interest. I hate the thought of getting so
      little return, so I try investing in the stock market. I do some
      internet research, and invest it in pharmaceutical company that?s about
      to announce a cure for cancer. This company has not, or will not issue
      any new stock, but there are a substantial number of existing stocks
      available for trading.



      I purchase them at a low price, before the announcement.



      The day after the announcement, the stock price is now worth 100 times
      my purchase price.



      Why did the value suddenly increase?



      C. Robert (Bob) Nelms

      bob@... (NOTE NEW ADDRESS)

      Failsafe Network, Inc.

      540-377-2010

      www.failsafe-network.com




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    • plato363@aol.com
      Question 1- one example is that you as the manager can always sell more shares. If you go to market after the stock is sold to neighbor, the manager will ask
      Message 2 of 22 , Feb 23, 2006
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        Question 1- one example is that you as the manager can always sell more
        shares. If you go to market after the stock is sold to neighbor, the
        manager will ask for $150 per share instead of the original $100.

        Question2, another hypothetical, if one shareholder sells at $10-
        there are probably more than few that are irate because the stock is
        down 90%. These shareholders can vote you out of your job. But, this is
        hypothetical and there are more variables to this.

        MC

        -----Original Message-----
        From: C. Robert Nelms <bob@...>
        To: Behavioral-Finance@yahoogroups.com
        Sent: Thu, 23 Feb 2006 15:39:43 -0500
        Subject: RE: [Behavioral-Finance] Why do CEO's place so much
        importance on the price of their company stock?

        To all:



        Thank you for responding. Allow me to rephrase my question via the
        following scenario:



        Let?s suppose I own a company and wish to move into a new building. My
        company does not have the cash, and I do not want to go into debt. I
        could issue some bonds, but I decide to issue stock instead. I issue
        1000 shares at $100/share. With the money, I build my building.



        Because of my new building, my profits soar. I issue dividends to the
        stockholders. Everyone is happy.



        One of the shareholders, however, needs to sell his stock. He needs
        some extra cash. As the original issuer, I don?t want to purchase it,
        so he sells it to his neighbor for $150.00 (because of the excellent
        dividends I am paying).



        Question #1: Why do I, the owner of the company, care that the stock
        sold for $150.00? I don?t see a penny of it, so why should I care?



        Continuing?. Suppose my building burns down. Although I have
        insurance, it sets me back almost a year. I cannot issue any dividends
        anymore, and I have to lay off 50% of my people. Another of the
        original shareholders decides to sell his stock, but now he only gets
        $10.00 for his share. He?s upset.



        Question #2: Why do I, the owner of the company, care that the stock
        sold for $10.00? I already got his initial investment. Certainly, from
        a humanitarian standpoint I would care, but not from a financial
        standpoint.



        C. Robert (Bob) Nelms

        bob@... (NOTE NEW ADDRESS)

        Failsafe Network, Inc.

        540-377-2010

        www.failsafe-network.com










        you may unsubscribe by sending an email to

        Behavioral-Finance-unsubscribe@yahoogroups.com




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        finance
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        schools

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      • hokie1
        Given that you have hypothetically purchased the stock at a significant discount, I d reckon that the consensus bet by the market was that the company would
        Message 3 of 22 , Feb 23, 2006
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          Given that you have hypothetically purchased the stock
          at a significant discount, I'd reckon that the
          consensus "bet" by the market was that the company
          would not be successful in developing that drug.

          Bob, we can debate ad nauseam whether or not the
          market is "efficient"; however, I do believe that
          markets are, most of the time, efficient.

          Inefficiencies in the market do happen and often times
          occur when an "information cascade" takes place. That
          means that all the "agents" (or investors) adopt a
          conclusion without checking out the evidence or, in
          other words, a homogenous conclusion.

          While the book, Wisdom of Crowds, will not provide you
          any stock advice, I believe that it will give you some
          insight on crowd pyschology. If you want to learn more
          focus on that books discussion of the Plank Roads in
          the US.

          --- "C. Robert Nelms" <bob@...>
          wrote:

          > To all:
          >
          >
          >
          > Here's another way of asking the question. Let's
          > say I have $100,000
          > sitting in a bank at 3.00% interest. I hate the
          > thought of getting so
          > little return, so I try investing in the stock
          > market. I do some internet
          > research, and invest it in pharmaceutical company
          > that's about to announce a
          > cure for cancer. This company has not, or will not
          > issue any new stock, but
          > there are a substantial number of existing stocks
          > available for trading.
          >
          >
          >
          > I purchase them at a low price, before the
          > announcement.
          >
          >
          >
          > The day after the announcement, the stock price is
          > now worth 100 times my
          > purchase price.
          >
          >
          >
          > Why did the value suddenly increase?
          >
          >
          >
          > C. Robert (Bob) Nelms
          >
          > <mailto:bob@...>
          > bob@... (NOTE NEW
          > ADDRESS)
          >
          > Failsafe Network, Inc.
          >
          > 540-377-2010
          >
          > www.failsafe-network.com
          >
          >
          >
          > _____
          >
          >


          __________________________________________________
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        • C. Robert Nelms
          Why? Because of the dividends the stockholder might receive? Is
          Message 4 of 22 , Feb 23, 2006
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            <<If the company will make more money in the future, the stock will be more valuable today.>>

             

            Why?  Because of the dividends the stockholder might receive?  Is it solely because of the potential dividends?

             

            C. Robert (Bob) Nelms

            bob@... (NOTE NEW ADDRESS)

            Failsafe Network, Inc.

            540-377-2010

            www.failsafe-network.com

             


          • C. Robert Nelms
            Dear Hokie, I m afraid I am not being clear in my questions or my concerns. I am not questioning whether the market is efficient. I am trying to understand
            Message 5 of 22 , Feb 23, 2006
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              Dear Hokie,

               

              I’m afraid I am not being clear in my questions or my concerns.  I am not questioning whether the market is efficient.  I am trying to understand if the market has anything to do with anything but gambling. 

               

              If I were interested in PERSONALLY investing in a company, to help them with my money, well I can understand that.  But buying stock that’s already been sold, merely to trade it with another buyer seems to have nothing to do with anything related to that company. 

               

              Some of the comments I’ve read are as follows:

               

              1. Executives might be afraid of being ousted if enough stockholders are disgruntled.
              2. Executives might not be able to sell stock in the future (at a high price) if the stock price is currently low (this makes no sense to me – all they’d have to do is lower the price per share and sell more shares).
              3. Executives are somehow obligated to do everything they can to satisfy the stockholders.

               

              In other words, executives do things to artificially influence the price of stocks that they have ALREADY SOLD!

               

              The more I think of this, the crazier it gets.

               

              Where am I going wrong?

               

              C. Robert (Bob) Nelms

              bob@... (NOTE NEW ADDRESS)

              Failsafe Network, Inc.

              540-377-2010

              www.failsafe-network.com

               

              -----Original Message-----
              From: Behavioral-Finance@yahoogroups.com [mailto:Behavioral-Finance@yahoogroups.com] On Behalf Of hokie1
              Sent: Thursday, February 23, 2006 4:41 PM
              To: Behavioral-Finance@yahoogroups.com
              Subject: RE: [Behavioral-Finance] Why do CEO's place so much importance on the price of their company stock?

               

              Given that you have hypothetically purchased the stock
              at a significant discount, I'd reckon that the
              consensus "bet" by the market was that the company
              would not be successful in developing that drug.

              Bob, we can debate ad nauseam whether or not the
              market is "efficient"; however, I do believe that
              markets are, most of the time, efficient.

              Inefficiencies in the market do happen and often times
              occur when an "information cascade" takes place. That
              means that all the "agents" (or investors) adopt a
              conclusion without checking out the evidence or, in
              other words, a homogenous conclusion.

              While the book, Wisdom of Crowds, will not provide you
              any stock advice, I believe that it will give you some
              insight on crowd pyschology. If you want to learn more
              focus on that books discussion of the Plank Roads in
              the US.

              --- "C. Robert Nelms" <bob@...>
              wrote:

              > To all:
              >

              >
              > Here's another way of asking the question.  Let's
              > say I have $100,000
              > sitting in a bank at 3.00% interest.  I hate the
              > thought of getting so
              > little return, so I try investing in the stock
              > market.  I do some internet
              > research, and invest it in pharmaceutical company
              > that's about to announce a
              > cure for cancer.  This company has not, or will not
              > issue any new stock, but
              > there are a substantial number of existing stocks
              > available for trading.
              >

              >
              > I purchase them at a low price, before the
              > announcement.
              >

              >
              > The day after the announcement, the stock price is
              > now worth 100 times my
              > purchase price.
              >

              >
              > Why did the value suddenly increase?
              >

              >
              > C. Robert (Bob) Nelms
              >
              >  <mailto:bob@...>
              > bob@... (NOTE NEW
              > ADDRESS)
              >
              > Failsafe Network, Inc.
              >
              > 540-377-2010
              >
              > www.failsafe-network.com
              >

              >
              >   _____ 
              >
              >


              __________________________________________________
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              Tired of spam?  Yahoo! Mail has the best spam protection around
              http://mail.yahoo.com

            • pgreenfinch
              Well if you are not clear with your question, I don t think you will get clear answers. Several hints : * There is gambling in any economic decision * The
              Message 6 of 22 , Feb 24, 2006
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                Well if you are not clear with your question, I don't think you will
                get clear answers. Several hints :
                * There is gambling in any economic decision
                * The stock market brings liquidity by allowing investors to sell
                their stocks. And If rhat possibility didn't exisr they might not
                invest in the first place
                * The CEO is appointed by stockholders. And when they sell,
                stockholders expect to do it at a good price. That is a reason why
                they give incentives (stock options) to the CEO.
                * Of course, moral hazards, perverse effects, perverse incentives,
                the principal-agent problem, the asymmetry of information are thing
                that happen, they are among the BF topics
                * Prices are linked to information (market efficiency) but also to
                perception (behavioral biases)
                * Few investors, employees, customers, suppliers, are contracting
                with a firm just to "help" it, but also because they expect a fair
                exchange : I bring something to the company but I expect that it
                brings something to me.
                * When I buy a "second hand" stock, this has an impact on the
                company, as a high stock price makes easier for it to raise new
                capital, to make takeover or to resist takeover from other
                companies. Also, it contributes to its overall notoriety and trust.
                * If you have some aversion to buy stocks in this secondary market,
                whatever the reason, this group will not interfere in your thinking.
                we take it as a behavioral trait, and we thank you for your
                communication. But the group is not the place for a controversy
                about whether people should buy or not in the stockmarket. If only
                because we respect any ethic.
                * This group is moderated and has a charter, no discussion can get
                too much off topic.
                Thanks for your cooperation
                Peter

                --- In Behavioral-Finance@yahoogroups.com, "C. Robert Nelms"
                <bob@...> wrote:
                >
                > Dear Hokie,
                >
                >
                >
                > I'm afraid I am not being clear in my questions or my concerns. I
                am not
                > questioning whether the market is efficient. I am trying to
                understand if
                > the market has anything to do with anything but gambling.
                >
                >
                >
                > If I were interested in PERSONALLY investing in a company, to help
                them with
                > my money, well I can understand that. But buying stock that's
                already been
                > sold, merely to trade it with another buyer seems to have nothing
                to do with
                > anything related to that company.
                >
                >
                >
                > Some of the comments I've read are as follows:
                >
                >
                >
                > 1. Executives might be afraid of being ousted if enough
                stockholders
                > are disgruntled.
                > 2. Executives might not be able to sell stock in the future (at
                a high
                > price) if the stock price is currently low (this makes no sense to
                me - all
                > they'd have to do is lower the price per share and sell more
                shares).
                > 3. Executives are somehow obligated to do everything they can to
                > satisfy the stockholders.
                >
                >
                >
                > In other words, executives do things to artificially influence the
                price of
                > stocks that they have ALREADY SOLD!
                >
                >
                >
                > The more I think of this, the crazier it gets.
                >
                >
                >
                > Where am I going wrong?
              • plato363@aol.com
                Pretty much. You also have to remember that when one owns stock, you own a portion of the company (no matter how small it is). May I make a suggestion also.
                Message 7 of 22 , Feb 24, 2006
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                  Pretty much. You also have to remember that when one owns stock, you
                  own a portion of the company (no matter how small it is).

                  May I make a suggestion also. You seem to have a lot of questions that
                  leads me to the conclusion that you are a beginner to investing. This
                  group may not be the best thing for you at the moment as many of the
                  topics covered are a few steps ahead of what a beginner should be
                  getting his or her head in to. But by all means stay and read as the
                  discussion are very good. If you want to learn more, I would suggest
                  picking up a few books such as "Learn to Earn" and "Beating the Street"
                  by Peter Lynch or the "The Warren Buffet Way". That is where I started.

                  -----Original Message-----
                  From: C. Robert Nelms <bob@...>
                  To: Behavioral-Finance@yahoogroups.com
                  Sent: Thu, 23 Feb 2006 16:47:16 -0500
                  Subject: RE: [Behavioral-Finance] Why do CEO's place so much importance
                  on the price of their company stock?

                  <<If the company will make more money in the future, the stock will
                  be more valuable today.>>



                  Why? Because of the dividends the stockholder might receive? Is it
                  solely because of the potential dividends?



                  C. Robert (Bob) Nelms

                  bob@... (NOTE NEW ADDRESS)

                  Failsafe Network, Inc.

                  540-377-2010

                  www.failsafe-network.com




                  --------





                  you may unsubscribe by sending an email to

                  Behavioral-Finance-unsubscribe@yahoogroups.com




                  SPONSORED LINKS
                  Business finance course Business to business finance Small
                  business finance
                  Business finance consultant Business finance magazine Business
                  finance schools

                  --------
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                  * Visit your group "Behavioral-Finance" on the web.

                  * To unsubscribe from this group, send an email to:
                  Behavioral-Finance-unsubscribe@yahoogroups.com

                  * Your use of Yahoo! Groups is subject to the Yahoo! Terms of Service.

                  --------
                • C. Robert Nelms
                  Peter, I m trying my best to understand the causes of the CEO s behavior relating to their attention to their stock prices. The reason for my questioning is
                  Message 8 of 22 , Feb 24, 2006
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                    Peter,

                     

                    I’m trying my best to understand the causes of the CEO’s behavior relating to their attention to their stock prices. 

                     

                    The reason for my questioning is due to what I do for a living – I investigate awful things that go wrong and usually find this issue at the root of these things.

                     

                    Rather than merely “blaming” the CEO (or executive) I am trying to understand their behavior.

                     

                    1.  You said:  The stock market brings liquidity by allowing investors to sell their stocks. And If rhat possibility didn't exisr they might not invest in the first place.

                     

                    My question:  But why would the CEO care whether an investor purchases a “second hand” stock (unless it related to #2 below)?

                     

                    2.  You said:  The CEO is appointed by stockholders. And when they sell, stockholders expect to do it at a good price. That is a reason why they give incentives (stock options) to the CEO.

                     

                    My comment:  This seems like a root issue.  The CEO is being given an incentive to do something that would benefit himself (and stockholders) potentially at the cost of his employees.  The CEO, therefore, seems to have more of an obligation to his stockholders than to his employees.  Is this correct?


                    3.  You said:  Of course, moral hazards, perverse effects, perverse incentives, the principal-agent problem, the asymmetry of information are thing that happen, they are among the BF topics

                     

                    My comment:  Most of these issues are foreign to me – I do not understand them.  As I read the posts on this forum, perhaps I will understand better.


                    4.  You said:  Prices are linked to information (market efficiency) but also to perception (behavioral biases).

                     

                    My question:  Aside from what you mentioned in #2, are there any other reasons why the CEO should care about this price?


                    5.  You said:  Few investors, employees, customers, suppliers, are contracting with a firm just to "help" it, but also because they expect a fair exchange : I bring something to the company but I expect that it brings something to me.

                     

                    My question:  Peter, what does an investor bring to the company when they purchase a second hand stock???

                     

                    6.  You said:  When I buy a "second hand" stock, this has an impact on the company, as a high stock price makes easier for it to raise new capital, to make takeover or to resist takeover from other companies. Also, it contributes to its overall notoriety and trust.

                     

                    My question:  Why does a high stock price make it easier to raise new capital?  The corporation could simply sell more shares at a lower price to give them the same capital, no?

                     

                    My comment:  I understand the takeover issue.  Thanks!


                    7.  You said:  If you have some aversion to buy stocks in this secondary market, whatever the reason, this group will not interfere in your thinking. we take it as a behavioral trait, and we thank you for your communication. But the group is not the place for a controversy about whether people should buy or not in the stockmarket. If only because we respect any ethic.

                     

                    My comment:  Please accept my explanation for probing this issue.  I am not trying to convince anyone of anything.  I am trying to understand the financial behavior of the CEO.

                     

                    Thanks so much for your patience in explaining such basic things!

                     

                    C. Robert (Bob) Nelms

                    bob@... (NOTE NEW ADDRESS)

                    Failsafe Network, Inc.

                    540-377-2010

                    www.failsafe-network.com

                     

                    -----Original Message-----
                    From: Behavioral-Finance@yahoogroups.com [mailto:Behavioral-Finance@yahoogroups.com] On Behalf Of pgreenfinch
                    Sent: Friday, February 24, 2006 3:55 AM
                    To: Behavioral-Finance@yahoogroups.com
                    Subject: [Behavioral-Finance] Re: Why do CEO's place so much importance on the price of their company stock?

                     

                    Well if you are not clear with your question, I don't think you will
                    get clear answers. Several hints :
                    * There is gambling in any economic decision
                    * The stock market brings liquidity by allowing investors to sell
                    their stocks. And If rhat possibility didn't exisr they might not
                    invest in the first place
                    * The CEO is appointed by stockholders. And when they sell,
                    stockholders expect to do it at a good price. That is a reason why
                    they give incentives (stock options) to the CEO.
                    * Of course, moral hazards, perverse effects, perverse incentives,
                    the principal-agent problem, the asymmetry of information are thing
                    that happen, they are among the BF topics
                    * Prices are linked to information (market efficiency) but also to
                    perception (behavioral biases)
                    * Few investors, employees, customers, suppliers, are contracting
                    with a firm just to "help" it, but also because they expect a fair
                    exchange : I bring something to the company but I expect that it
                    brings something to me.
                    * When I buy a "second hand" stock, this has an impact on the
                    company, as a high stock price makes easier for it to raise new
                    capital, to make takeover or to resist takeover from other
                    companies. Also, it contributes to its overall notoriety and trust.
                    * If you have some aversion to buy stocks in this secondary market,
                    whatever the reason, this group will not interfere in your thinking.
                    we take it as a behavioral trait, and we thank you for your
                    communication. But the group is not the place for a controversy
                    about whether people should buy or not in the stockmarket. If only
                    because we respect any ethic.
                    * This group is moderated and has a charter, no discussion can get
                    too much off topic.
                    Thanks for your cooperation
                    Peter

                    --- In Behavioral-Finance@yahoogroups.com, "C. Robert Nelms"
                    <bob@...> wrote:
                    >
                    > Dear Hokie,
                    >

                    >
                    > I'm afraid I am not being clear in my questions or my concerns.  I
                    am not
                    > questioning whether the market is efficient.  I am trying to
                    understand if
                    > the market has anything to do with anything but gambling. 
                    >

                    >
                    > If I were interested in PERSONALLY investing in a company, to help
                    them with
                    > my money, well I can understand that.  But buying stock that's
                    already been
                    > sold, merely to trade it with another buyer seems to have nothing
                    to do with
                    > anything related to that company. 
                    >

                    >
                    > Some of the comments I've read are as follows:
                    >

                    >
                    > 1.      Executives might be afraid of being ousted if enough
                    stockholders
                    > are disgruntled.
                    > 2.      Executives might not be able to sell stock in the future (at
                    a high
                    > price) if the stock price is currently low (this makes no sense to
                    me - all
                    > they'd have to do is lower the price per share and sell more
                    shares).
                    > 3.      Executives are somehow obligated to do everything they can to
                    > satisfy the stockholders.
                    >

                    >
                    > In other words, executives do things to artificially influence the
                    price of
                    > stocks that they have ALREADY SOLD!
                    >

                    >
                    > The more I think of this, the crazier it gets.
                    >

                    >
                    > Where am I going wrong?





                  • C. Robert Nelms
                    Plato, I will take your advice and stop asking questions until I do some more reading. Thanks! C. Robert (Bob) Nelms
                    Message 9 of 22 , Feb 24, 2006
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                      Plato,

                       

                      I will take your advice and stop asking questions until I do some more reading.

                       

                      Thanks!

                       

                      C. Robert (Bob) Nelms

                      bob@... (NOTE NEW ADDRESS)

                      Failsafe Network, Inc.

                      540-377-2010

                      www.failsafe-network.com

                       

                      -----Original Message-----
                      From: Behavioral-Finance@yahoogroups.com [mailto:Behavioral-Finance@yahoogroups.com] On Behalf Of plato363@...
                      Sent: Friday, February 24, 2006 7:20 AM
                      To: Behavioral-Finance@yahoogroups.com
                      Subject: Re: [Behavioral-Finance] Why do CEO's place so much importance on the price of their company stock?

                       

                      Pretty much. You also have to remember that when one owns stock, you
                      own a portion of the company (no matter how small it is).

                      May I make a suggestion also. You seem to have a lot of questions that
                      leads me to the conclusion that you are a beginner to investing. This
                      group may not be the best thing for you at the moment as many of the
                      topics covered are a few steps ahead of what a beginner should be
                      getting his or her head in to. But by all means stay and read as the
                      discussion are very good. If you want to learn more, I would suggest
                      picking up a few books such as "Learn to Earn" and "Beating the Street"
                      by Peter Lynch or the "The Warren Buffet Way". That is where I started.

                      -----Original Message-----
                      From: C. Robert Nelms <bob@...>
                      To: Behavioral-Finance@yahoogroups.com
                      Sent: Thu, 23 Feb 2006 16:47:16 -0500
                      Subject: RE: [Behavioral-Finance] Why do CEO's place so much importance
                      on the  price of their company stock?

                          <<If the company will make more money in the future, the stock will
                      be more valuable today.>>



                        Why? Because of the dividends the stockholder might receive? Is it
                      solely because of the potential dividends?



                        C. Robert (Bob) Nelms

                      bob@... (NOTE NEW ADDRESS)

                      Failsafe Network, Inc.

                      540-377-2010

                      www.failsafe-network.com




                        --------





                        you may unsubscribe by sending an email to

                      Behavioral-Finance-unsubscribe@yahoogroups.com




                        SPONSORED LINKS
                           Business finance course   Business to business finance   Small
                      business finance
                          Business finance consultant   Business finance magazine   Business
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                    • hokie1
                      Bob, RE: the market and gambling Investing is similar to gambling since one does not know the outcome of an event in advance. As such, prior to initiating a
                      Message 10 of 22 , Feb 24, 2006
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                        Bob,

                        RE: the market and gambling

                        Investing is similar to gambling since one does not know the outcome
                        of an event in advance. As such, prior to initiating a position in
                        any company, a well informed investor should look at all information
                        whether good or bad and synthesize the information to come to a
                        conclusion.

                        RE: Investing in Publicly Trade Companies

                        In Benjamin Graham's book, "The Intelligent Investor", Graham states
                        that stock represents partial ownerships of many businesses that are
                        for sale every day. In order to determine whether a company (or
                        stock) warrants your investment, one should try to ascertain the
                        future cash flows of said company and determine the Present Value of
                        said cash flows. If the PV of the CFs are less than the company's
                        market capitalization (or Enterprise Value), then one should
                        consider buying a piece of that business.

                        Once a company becomes publicly traded, the company can also buy
                        back its stock or issue additional stock to the public.

                        John Maynard Keynes has suggested that the stock market has become
                        a "beauty contest" but with a twist. Instead of picking
                        the "prettiest" company, Keynes states that investors attempt to
                        select what everyone will conclude is the "prettiest" company.

                        --- In Behavioral-Finance@yahoogroups.com, "C. Robert Nelms"
                        <bob@...> wrote:
                        >
                        > Dear Hokie,
                        >
                        >
                        >
                        > I'm afraid I am not being clear in my questions or my concerns. I
                        am not
                        > questioning whether the market is efficient. I am trying to
                        understand if
                        > the market has anything to do with anything but gambling.
                        >
                        >
                        >
                        > If I were interested in PERSONALLY investing in a company, to help
                        them with
                        > my money, well I can understand that. But buying stock that's
                        already been
                        > sold, merely to trade it with another buyer seems to have nothing
                        to do with
                        > anything related to that company.
                        >
                        >
                        >
                        > Some of the comments I've read are as follows:
                        >
                        >
                        >
                        > 1. Executives might be afraid of being ousted if enough
                        stockholders
                        > are disgruntled.
                        > 2. Executives might not be able to sell stock in the future (at
                        a high
                        > price) if the stock price is currently low (this makes no sense to
                        me - all
                        > they'd have to do is lower the price per share and sell more
                        shares).
                        > 3. Executives are somehow obligated to do everything they can to
                        > satisfy the stockholders.
                        >
                        >
                        >
                        > In other words, executives do things to artificially influence the
                        price of
                        > stocks that they have ALREADY SOLD!
                        >
                        >
                        >
                        > The more I think of this, the crazier it gets.
                        >
                        >
                        >
                        > Where am I going wrong?
                        >
                        >
                        >
                        > C. Robert (Bob) Nelms
                        >
                        > <mailto:bob@...> bob@... (NOTE NEW
                        > ADDRESS)
                        >
                        > Failsafe Network, Inc.
                        >
                        > 540-377-2010
                        >
                        > www.failsafe-network.com
                        >
                        >
                        >
                        > -----Original Message-----
                        > From: Behavioral-Finance@yahoogroups.com
                        > [mailto:Behavioral-Finance@yahoogroups.com] On Behalf Of hokie1
                        > Sent: Thursday, February 23, 2006 4:41 PM
                        > To: Behavioral-Finance@yahoogroups.com
                        > Subject: RE: [Behavioral-Finance] Why do CEO's place so much
                        importance on
                        > the price of their company stock?
                        >
                        >
                        >
                        > Given that you have hypothetically purchased the stock
                        > at a significant discount, I'd reckon that the
                        > consensus "bet" by the market was that the company
                        > would not be successful in developing that drug.
                        >
                        > Bob, we can debate ad nauseam whether or not the
                        > market is "efficient"; however, I do believe that
                        > markets are, most of the time, efficient.
                        >
                        > Inefficiencies in the market do happen and often times
                        > occur when an "information cascade" takes place. That
                        > means that all the "agents" (or investors) adopt a
                        > conclusion without checking out the evidence or, in
                        > other words, a homogenous conclusion.
                        >
                        > While the book, Wisdom of Crowds, will not provide you
                        > any stock advice, I believe that it will give you some
                        > insight on crowd pyschology. If you want to learn more
                        > focus on that books discussion of the Plank Roads in
                        > the US.
                        >
                        > --- "C. Robert Nelms" <bob@...>
                        > wrote:
                        >
                        > > To all:
                        > >
                        > >
                        > >
                        > > Here's another way of asking the question. Let's
                        > > say I have $100,000
                        > > sitting in a bank at 3.00% interest. I hate the
                        > > thought of getting so
                        > > little return, so I try investing in the stock
                        > > market. I do some internet
                        > > research, and invest it in pharmaceutical company
                        > > that's about to announce a
                        > > cure for cancer. This company has not, or will not
                        > > issue any new stock, but
                        > > there are a substantial number of existing stocks
                        > > available for trading.
                        > >
                        > >
                        > >
                        > > I purchase them at a low price, before the
                        > > announcement.
                        > >
                        > >
                        > >
                        > > The day after the announcement, the stock price is
                        > > now worth 100 times my
                        > > purchase price.
                        > >
                        > >
                        > >
                        > > Why did the value suddenly increase?
                        > >
                        > >
                        > >
                        > > C. Robert (Bob) Nelms
                        > >
                        > > <mailto:bob@...>
                        > > bob@... (NOTE NEW
                        > > ADDRESS)
                        > >
                        > > Failsafe Network, Inc.
                        > >
                        > > 540-377-2010
                        > >
                        > > www.failsafe-network.com
                        > >
                        > >
                        > >
                        > > _____
                        > >
                        > >
                        >
                        >
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                      • pgreenfinch
                        I will limit my answer to some of those questions. * the CEO is responsible towards the stockholders. But of course the other stakeholders (employees,
                        Message 11 of 22 , Feb 24, 2006
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                          I will limit my answer to some of those questions.
                          * the CEO is responsible towards the stockholders. But
                          of course the other "stakeholders" (employees,
                          customers...) have also their own means of pressure on
                          the firm.
                          * The prases I used are also familiar to insurers. As
                          a specialist of accident, I suppose you can meet some
                          of them who might inform you. You can also find short
                          definitions in the BF glossary:
                          http://perso.wanadoo.fr/pgreenfinch/behavioral-finance.htm
                          * It is easier to raise capital or launch a takeover when
                          the stock price is high, because you issue less new stocks
                          for the same amount raised. This means the earnings for
                          each share are less "diluted". This makes the present
                          shareholders happy.
                          Hoping this group's debates will interest you.
                          Peter



                          --- In Behavioral-Finance@yahoogroups.com, "C. Robert Nelms"
                          <bob@...> wrote:
                          >
                          > Peter,
                          >
                          >
                          >
                          > I'm trying my best to understand the causes of the CEO's behavior
                          relating
                          > to their attention to their stock prices.
                          >
                          >
                          >
                          > The reason for my questioning is due to what I do for a living - I
                          > investigate awful things that go wrong and usually find this issue
                          at the
                          > root of these things.
                          >
                          >
                          >
                          > Rather than merely "blaming" the CEO (or executive) I am trying to
                          > understand their behavior.
                          >
                          >
                          >
                          > 1. You said: The stock market brings liquidity by allowing
                          investors to
                          > sell their stocks. And If rhat possibility didn't exisr they might
                          not
                          > invest in the first place.
                          >
                          >
                          >
                          > My question: But why would the CEO care whether an investor
                          purchases a
                          > "second hand" stock (unless it related to #2 below)?
                          >
                          >
                          >
                          > 2. You said: The CEO is appointed by stockholders. And when they
                          sell,
                          > stockholders expect to do it at a good price. That is a reason why
                          they give
                          > incentives (stock options) to the CEO.
                          >
                          >
                          >
                          > My comment: This seems like a root issue. The CEO is being given
                          an
                          > incentive to do something that would benefit himself (and
                          stockholders)
                          > potentially at the cost of his employees. The CEO, therefore,
                          seems to have
                          > more of an obligation to his stockholders than to his employees.
                          Is this
                          > correct?
                          >
                          >
                          > 3. You said: Of course, moral hazards, perverse effects, perverse
                          > incentives, the principal-agent problem, the asymmetry of
                          information are
                          > thing that happen, they are among the BF topics
                          >
                          >
                          >
                          > My comment: Most of these issues are foreign to me - I do not
                          understand
                          > them. As I read the posts on this forum, perhaps I will
                          understand better.
                          >
                          >
                          > 4. You said: Prices are linked to information (market
                          efficiency) but also
                          > to perception (behavioral biases).
                          >
                          >
                          >
                          > My question: Aside from what you mentioned in #2, are there any
                          other
                          > reasons why the CEO should care about this price?
                          >
                          >
                          > 5. You said: Few investors, employees, customers, suppliers, are
                          > contracting with a firm just to "help" it, but also because they
                          expect a
                          > fair exchange : I bring something to the company but I expect that
                          it brings
                          > something to me.
                          >
                          >
                          >
                          > My question: Peter, what does an investor bring to the company
                          when they
                          > purchase a second hand stock???
                          >
                          >
                          >
                          > 6. You said: When I buy a "second hand" stock, this has an
                          impact on the
                          > company, as a high stock price makes easier for it to raise new
                          capital, to
                          > make takeover or to resist takeover from other companies. Also, it
                          > contributes to its overall notoriety and trust.
                          >
                          >
                          >
                          > My question: Why does a high stock price make it easier to raise
                          new
                          > capital? The corporation could simply sell more shares at a lower
                          price to
                          > give them the same capital, no?
                          >
                          >
                          >
                          > My comment: I understand the takeover issue. Thanks!
                          >
                          >
                          > 7. You said: If you have some aversion to buy stocks in this
                          secondary
                          > market, whatever the reason, this group will not interfere in your
                          thinking.
                          > we take it as a behavioral trait, and we thank you for your
                          communication.
                          > But the group is not the place for a controversy about whether
                          people should
                          > buy or not in the stockmarket. If only because we respect any
                          ethic.
                          >
                          >
                          >
                          > My comment: Please accept my explanation for probing this issue.
                          I am not
                          > trying to convince anyone of anything. I am trying to understand
                          the
                          > financial behavior of the CEO.
                          >
                          >
                          >
                          > Thanks so much for your patience in explaining such basic things!
                          >
                          >
                          >
                          > C. Robert (Bob) Nelms
                          >
                          > <mailto:bob@...> bob@... (NOTE NEW
                          > ADDRESS)
                          >
                          > Failsafe Network, Inc.
                          >
                          > 540-377-2010
                          >
                          > www.failsafe-network.com
                          >
                          >
                          >
                        • leif_ericssen
                          Hay Bob, I don t want you to get the wrong idea, it s *not* you asking questions that s a problem as such, it s that behavioural finance is a specialised
                          Message 12 of 22 , Feb 25, 2006
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                            Hay Bob, I don't want you to get the wrong idea, it's *not* you
                            asking questions that's a problem as such, it's that behavioural
                            finance is a specialised discipline and is what the BF group's
                            charter is about, much like a peer-reviewed journal or industry
                            newsletter. Simple as that.

                            I understand that you are pursuing a research interest in executive
                            behaviour and priorities re stock prices and that's quite worthy. If
                            you like, please feel free to send me an email (may be some delays
                            in reply due to travel, schedules, apologies in advance) and I'll do
                            what I can to clarify questions that come up and talk about what
                            sources of information are likely relevant to get up to speed.

                            Regards,
                            Jan


                            --- In Behavioral-Finance@yahoogroups.com, "C. Robert Nelms"
                            <bob@...> wrote:
                            >
                            > Plato,
                            >
                            >
                            >
                            > I will take your advice and stop asking questions until I do some
                            more
                            > reading.
                            >
                            >
                            >
                            > Thanks!
                            >
                            >
                            >
                            > C. Robert (Bob) Nelms
                            >
                            > <mailto:bob@...> bob@... (NOTE NEW
                            > ADDRESS)
                            >
                            > Failsafe Network, Inc.
                            >
                            > 540-377-2010
                            >
                            > www.failsafe-network.com
                            >
                            >
                            >
                            > -----Original Message-----
                            > From: Behavioral-Finance@yahoogroups.com
                            > [mailto:Behavioral-Finance@yahoogroups.com] On Behalf Of
                            plato363@...
                            > Sent: Friday, February 24, 2006 7:20 AM
                            > To: Behavioral-Finance@yahoogroups.com
                            > Subject: Re: [Behavioral-Finance] Why do CEO's place so much
                            importance on
                            > the price of their company stock?
                            >
                            >
                            >
                            > Pretty much. You also have to remember that when one owns stock,
                            you
                            > own a portion of the company (no matter how small it is).
                            >
                            > May I make a suggestion also. You seem to have a lot of questions
                            that
                            > leads me to the conclusion that you are a beginner to investing.
                            This
                            > group may not be the best thing for you at the moment as many of
                            the
                            > topics covered are a few steps ahead of what a beginner should be
                            > getting his or her head in to. But by all means stay and read as
                            the
                            > discussion are very good. If you want to learn more, I would
                            suggest
                            > picking up a few books such as "Learn to Earn" and "Beating the
                            Street"
                            > by Peter Lynch or the "The Warren Buffet Way". That is where I
                            started.
                            >
                            > -----Original Message-----
                            > From: C. Robert Nelms <bob@...>
                            > To: Behavioral-Finance@yahoogroups.com
                            > Sent: Thu, 23 Feb 2006 16:47:16 -0500
                            > Subject: RE: [Behavioral-Finance] Why do CEO's place so much
                            importance
                            > on the price of their company stock?
                            >
                            > <<If the company will make more money in the future, the stock
                            will
                            > be more valuable today.>>
                            >
                            >
                            >
                            > Why? Because of the dividends the stockholder might receive? Is
                            it
                            > solely because of the potential dividends?
                            >
                            >
                            >
                            > C. Robert (Bob) Nelms
                            >
                          • leif_ericssen
                            One thing I m curious about is how can a disciplined empiricist who is analysing from consequences in studying executive behaviour/stock prices can best
                            Message 13 of 22 , Feb 25, 2006
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                              One thing I'm curious about is how can a disciplined empiricist who
                              is analysing from consequences in studying executive behaviour/stock
                              prices can best account for moral hazard and mis-placed incentive.

                              It seems rather different from tracing back from outcomes to causes
                              in an (assumed) environment where mistakes are legitimate and can be
                              considered a cost of experience, you know?

                              Jan


                              --- In Behavioral-Finance@yahoogroups.com, "pgreenfinch"
                              <pgreenfinch@...> wrote:
                              >
                              > I will limit my answer to some of those questions.
                              > * the CEO is responsible towards the stockholders. But
                              > of course the other "stakeholders" (employees,
                              > customers...) have also their own means of pressure on
                              > the firm.
                              > * The prases I used are also familiar to insurers. As
                              > a specialist of accident, I suppose you can meet some
                              > of them who might inform you. You can also find short
                              > definitions in the BF glossary:
                              > http://perso.wanadoo.fr/pgreenfinch/behavioral-finance.htm
                              > * It is easier to raise capital or launch a takeover when
                              > the stock price is high, because you issue less new stocks
                              > for the same amount raised. This means the earnings for
                              > each share are less "diluted". This makes the present
                              > shareholders happy.
                              > Hoping this group's debates will interest you.
                              > Peter
                              >
                              >
                              >
                              > --- In Behavioral-Finance@yahoogroups.com, "C. Robert Nelms"
                              > <bob@> wrote:
                              > >
                              > > Peter,
                              > >
                              > >
                              > >
                              > > I'm trying my best to understand the causes of the CEO's
                              behavior
                              > relating
                              > > to their attention to their stock prices.
                              > >
                              > >
                              > >
                              > > The reason for my questioning is due to what I do for a living -
                              I
                              > > investigate awful things that go wrong and usually find this
                              issue
                              > at the
                              > > root of these things.
                              > >
                              > >
                              > >
                              > > Rather than merely "blaming" the CEO (or executive) I am trying
                              to
                              > > understand their behavior.
                              > >
                              > >
                              > >
                              > > 1. You said: The stock market brings liquidity by allowing
                              > investors to
                              > > sell their stocks. And If rhat possibility didn't exisr they
                              might
                              > not
                              > > invest in the first place.
                              > >
                              > >
                              > >
                              > > My question: But why would the CEO care whether an investor
                              > purchases a
                              > > "second hand" stock (unless it related to #2 below)?
                              > >
                              > >
                              > >
                              > > 2. You said: The CEO is appointed by stockholders. And when
                              they
                              > sell,
                              > > stockholders expect to do it at a good price. That is a reason
                              why
                              > they give
                              > > incentives (stock options) to the CEO.
                              > >
                              > >
                              > >
                              > > My comment: This seems like a root issue. The CEO is being
                              given
                              > an
                              > > incentive to do something that would benefit himself (and
                              > stockholders)
                              > > potentially at the cost of his employees. The CEO, therefore,
                              > seems to have
                              > > more of an obligation to his stockholders than to his
                              employees.
                              > Is this
                              > > correct?
                              > >
                              > >
                              > > 3. You said: Of course, moral hazards, perverse effects,
                              perverse
                              > > incentives, the principal-agent problem, the asymmetry of
                              > information are
                              > > thing that happen, they are among the BF topics
                              > >
                              > >
                              > >
                              > > My comment: Most of these issues are foreign to me - I do not
                              > understand
                              > > them. As I read the posts on this forum, perhaps I will
                              > understand better.
                              > >
                              > >
                              > > 4. You said: Prices are linked to information (market
                              > efficiency) but also
                              > > to perception (behavioral biases).
                              > >
                              > >
                              > >
                              > > My question: Aside from what you mentioned in #2, are there any
                              > other
                              > > reasons why the CEO should care about this price?
                              > >
                              > >
                              > > 5. You said: Few investors, employees, customers, suppliers,
                              are
                              > > contracting with a firm just to "help" it, but also because they
                              > expect a
                              > > fair exchange : I bring something to the company but I expect
                              that
                              > it brings
                              > > something to me.
                              > >
                              > >
                              > >
                              > > My question: Peter, what does an investor bring to the company
                              > when they
                              > > purchase a second hand stock???
                              > >
                              > >
                              > >
                              > > 6. You said: When I buy a "second hand" stock, this has an
                              > impact on the
                              > > company, as a high stock price makes easier for it to raise new
                              > capital, to
                              > > make takeover or to resist takeover from other companies. Also,
                              it
                              > > contributes to its overall notoriety and trust.
                              > >
                              > >
                              > >
                              > > My question: Why does a high stock price make it easier to
                              raise
                              > new
                              > > capital? The corporation could simply sell more shares at a
                              lower
                              > price to
                              > > give them the same capital, no?
                              > >
                              > >
                              > >
                              > > My comment: I understand the takeover issue. Thanks!
                              > >
                              > >
                              > > 7. You said: If you have some aversion to buy stocks in this
                              > secondary
                              > > market, whatever the reason, this group will not interfere in
                              your
                              > thinking.
                              > > we take it as a behavioral trait, and we thank you for your
                              > communication.
                              > > But the group is not the place for a controversy about whether
                              > people should
                              > > buy or not in the stockmarket. If only because we respect any
                              > ethic.
                              > >
                              > >
                              > >
                              > > My comment: Please accept my explanation for probing this
                              issue.
                              > I am not
                              > > trying to convince anyone of anything. I am trying to
                              understand
                              > the
                              > > financial behavior of the CEO.
                              > >
                              > >
                              > >
                              > > Thanks so much for your patience in explaining such basic things!
                              > >
                              > >
                              > >
                              > > C. Robert (Bob) Nelms
                              > >
                              > > <mailto:bob@> bob@ (NOTE NEW
                              > > ADDRESS)
                              > >
                              > > Failsafe Network, Inc.
                              > >
                              > > 540-377-2010
                              > >
                              > > www.failsafe-network.com
                              > >
                              > >
                              > >
                              >
                            • C. Robert Nelms
                              Jan, Thanks for this note. You all have been lots of help already! At this point, I have ordered some books (suggested by this forum). I might be back with
                              Message 14 of 22 , Feb 27, 2006
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                                Jan,

                                 

                                Thanks for this note.  You all have been lots of help already!  At this point, I have ordered some books (suggested by this forum).  I might be back with more questions later.

                                 

                                Thanks again for all your help.

                                 

                                C. Robert (Bob) Nelms

                                bob@... (NOTE NEW ADDRESS)

                                Failsafe Network, Inc.

                                540-377-2010

                                www.failsafe-network.com

                                 

                                -----Original Message-----
                                From: Behavioral-Finance@yahoogroups.com [mailto:Behavioral-Finance@yahoogroups.com] On Behalf Of leif_ericssen
                                Sent: Saturday, February 25, 2006 5:01 PM
                                To: Behavioral-Finance@yahoogroups.com
                                Subject: [Behavioral-Finance] Re: Why do CEO's place so much importance on the price of their company stock?

                                 

                                Hay Bob, I don't want you to get the wrong idea, it's *not* you
                                asking questions that's a problem as such, it's that behavioural
                                finance is a specialised discipline and is what the BF group's
                                charter is about, much like a peer-reviewed journal or industry
                                newsletter. Simple as that.

                                I understand that you are pursuing a research interest in executive
                                behaviour and priorities re stock prices and that's quite worthy. If
                                you like, please feel free to send me an email (may be some delays
                                in reply due to travel, schedules, apologies in advance) and I'll do
                                what I can to clarify questions that come up and talk about what
                                sources of information are likely relevant to get up to speed.

                                Regards,
                                Jan


                                --- In Behavioral-Finance@yahoogroups.com, "C. Robert Nelms"
                                <bob@...> wrote:
                                >
                                > Plato,
                                >

                                >
                                > I will take your advice and stop asking questions until I do some
                                more
                                > reading.
                                >

                                >
                                > Thanks!
                                >

                                >
                                > C. Robert (Bob) Nelms
                                >
                                >  <mailto:bob@...> bob@... (NOTE NEW
                                > ADDRESS)
                                >
                                > Failsafe Network, Inc.
                                >
                                > 540-377-2010
                                >
                                > www.failsafe-network.com
                                >

                                >
                                > -----Original Message-----
                                > From: Behavioral-Finance@yahoogroups.com
                                > [mailto:Behavioral-Finance@yahoogroups.com] On Behalf Of
                                plato363@...
                                > Sent: Friday, February 24, 2006 7:20 AM
                                > To: Behavioral-Finance@yahoogroups.com
                                > Subject: Re: [Behavioral-Finance] Why do CEO's place so much
                                importance on
                                > the price of their company stock?
                                >

                                >
                                > Pretty much. You also have to remember that when one owns stock,
                                you
                                > own a portion of the company (no matter how small it is).
                                >
                                > May I make a suggestion also. You seem to have a lot of questions
                                that
                                > leads me to the conclusion that you are a beginner to investing.
                                This
                                > group may not be the best thing for you at the moment as many of
                                the
                                > topics covered are a few steps ahead of what a beginner should be
                                > getting his or her head in to. But by all means stay and read as
                                the
                                > discussion are very good. If you want to learn more, I would
                                suggest
                                > picking up a few books such as "Learn to Earn" and "Beating the
                                Street"
                                > by Peter Lynch or the "The Warren Buffet Way". That is where I
                                started.
                                >
                                > -----Original Message-----
                                > From: C. Robert Nelms <bob@...>
                                > To: Behavioral-Finance@yahoogroups.com
                                > Sent: Thu, 23 Feb 2006 16:47:16 -0500
                                > Subject: RE: [Behavioral-Finance] Why do CEO's place so much
                                importance
                                > on the  price of their company stock?
                                >
                                >     <<If the company will make more money in the future, the stock
                                will
                                > be more valuable today.>>
                                >
                                >
                                >
                                >   Why? Because of the dividends the stockholder might receive? Is
                                it
                                > solely because of the potential dividends?
                                >
                                >
                                >
                                >   C. Robert (Bob) Nelms
                                >




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