How Much Impact Does a CEO Have on a Company's Stock?
Tagged in:
Tap to Read Full Story

There have been a lot of corporate news events recently that have had a negative effect on company stock prices. (Remember the United and Pepsi scandals earlier this year, or how other retail stocks dropped after Macy’s announced lower profits?) But not so for General Electric.

GE shares actually went up after CEO Jeff Immelt announced on June 12 that he’d be stepping down. After opening at $27.71, the stock climbed more than 5 percent during the day. It ended the week at about $29.

Why are investors so happy to see Immelt leave?

Wall Street’s bye-felicia treatment of Immelt is thanks to GE’s plunging stock prices during his tenure. Since he took the company’s reins from legendary manager Jack Welch in September 2001, the stock has slid 27 percent while the Dow Jones industrial average (a commonly used benchmark representing overall market performance) jumped 121.1 percent.

Can one person really make such a big difference? “Who manages the company is as important as the product itself,” says Certified Financial Planner Vid Ponnapalli, founder of Unique Financial Advisors. “Management has a direct impact on the quality and cost of the product, thus impacting the overall profitability.”

That’s why it’s crucial, if you’re investing in individual stocks or actively managed funds, to do your homework and stay on top of what management’s doing. Although, as Certified Financial Planner Taylor Schulte, founder of Define Financial, points out: It is one variable out of a thousand to consider, which makes [stock picking] really, really challenging.”

Plus, he notes, you can’t just own and follow one stock. To diversify your portfolio, you want a mix of several different types of stocks. And to keep up to date with everything that’s going on within each company is nearly impossible.

If you don't have the time, know-how or willingness to analyze dozens or hundreds of individual stocks in such great detail—we’d be impressed if you did—you're better off investing in index funds and exchange-traded funds for your long-term portfolio. “[This gives you] easy and low-cost access to thousands and thousands of different companies and spreads out a lot of the risk,” Schulte says.

Index investing is also likely to produce better results. Thanks to generous quarterly dividends, GE investors didn’t fare as badly as the negative returns of Immelt’s tenure sound: If you’d invested $1,000 in the company when he took over, you’d have about $1,250 now, according to the Washington Post. But the same amount invested in a Standard & Poor’s 500-stock index fund over the same period would be worth an estimated $3,200 or more today.

Get the Grow Newsletter Every Week
The best money advice you never got, delivered to your inbox weekly.
The best money advice you never got, delivered to your inbox weekly.
 
Related