JBird

I don't follow here.

I do agree that your idea works. But to my knowledge, companies aren't doing inverted offerings. So my example was meant to illustrate what happens without such a thing.

They can get out if there is a buyer -- and the company is that buyer. Therefore, there must be a way for them to get out of the shares that the company is repurchasing. There must be some way that a company can issue a reverse rights offering -- in other words, a right to sell at a certain price. Say you have 100,000 shares and the company issues you the rights to sell 1,000 shares at a given price. There you go, it's a tax-efficient way of returning capital to shareholders. Every shareholder can participate. Management should prefer this method of buying back shares because the shareholders can no longer blame management for the capital allocation decision -- it will be plainly obvious that it was their choice not to sell to the company, the allocation decision is squarely on the shoulders of the shareholder. To be sure, a shareholder cashing out via company repurchase is being bought out by the remaining shareholders. You can follow this process to its logical end, where just 1 share remains. But the final shareholder can't cash himself out at an inflated price. To update my previous example: 100 shares and $1,000 in net assets. IV of $10 per-share. 99 shares are repurchased for $10.10. After the repurchase, 1 share remains and its value is $0.1. The company can't repurchase this share, right? That's why I'm saying that as a group the shareholders can't get out. If the company can repurchase this final share, it certainly can't do it at a price above 10 cents. Contrast that repurchase price to the "bargain" repurchase price of $5 per-share. When 99 shares are repurchased, per-share value rises from $10 to $505. All that said, I'm willing to be wrong here.

;D

This is a really interesting point. I agree it's rational for the shareholder to get out when his shares are over-priced. However, the shareholders as a group cannot get out. Therefore, I think it makes sense to look at the attractiveness of buybacks from the perspective of the perpetual shareholder-- after all, that's the entity management is working for. Let's take the example of an investment holding company doing a buyback. The company has 100 shares. It has $1,000 cash, and no other assets. It has no liabilities. Leaving tax implications aside, the valuation for this company is pretty straight-forward; it's worth $10 a share. If the company repurchases 10 shares at $20 per-share, what is the effect? Net assets are now $800, and there are 90 shares outstanding. Per-share value went down to $8.88 Frankly, I want to be the shareholder cashing out at $20 per-share. But if I'm the CEO and my job is to increase per-share value for the perpetual shareholder, this buyback is a disaster.

Can someone please say this at the AGM? Buffett would laugh out loud if he heard this.

Great video, thanks for posting.

+1

"The little voice saying, “Hey, isn’t this sorta out of bounds?” was no match for being the center of someone’s universe" Reminds me of: http://www.farnamstreetblog.com/2013/07/ten-techniques-for-building-quick-rapport-with-anyone/

Fantastic. Thanks

+1

What are the forces keeping corporate profits from growing larger as a % of GDP? What could stop it from getting to 15%? 20%? For reference, 2nd graph in this article shows some historical data: http://www.washingtonpost.com/blogs/wonkblog/wp/2013/09/13/this-is-how-everyones-been-doing-since-the-financial-crisis/

http://www.ft.com/intl/cms/s/0/ab7e1c90-f879-11e2-92f0-00144feabdc0.html?siteedition=intl#axzz2gQKXcdkb "While investing in a closed stock market might be a zero-sum game, the reality of the business world is not. The overall market return is not a given, it is the complex result of millions of people’s interactions. Their decisions can and, I contend, do add value in aggregate. The Gotrocks family, sitting back in their rocking chairs, might find their assumption that corporate America will grow equally successfully without active involvement and oversight lacking solid foundation. New businesses can and do raise capital to bring us new ideas and products we never realised we needed." - David Smith Buffett doesn't argue that: a) market return is a given. b) CEO decisions do not add value in aggregate c) New businesses that raise capital with IPO's don't bring about great new products. When he mentions "active involvement", is he referring to corporate CEOs or portfolio managers actively trying to beat the market? And I don't know why he mentions oversight; Buffett never argues against oversight of public companies. Is it just me or has this man drastically misinterpreted Buffett's thesis?

http://www.bloomberg.com/news/2013-09-30/ikea-to-start-selling-photovoltaic-panels-in-all-u-k-sto.html IKEA is now selling solar panels for $2.73 per watt, before installation.

To be sure, Prem is betting on the possibility of deflation-- not its inevitability. If we face net inflation in the future a hedge against deflation is lost money, yes.

http://online.wsj.com/article/SB10001424052702304795804579097500555715202.html?mod=WSJ_hps_LEFTTopStories Would love to hear some thoughts on this.

This board is so stacked with talent it's ridiculous to pick just one person. I do find that just about every time I read a post from Ericopoly or Oddballstocks I learn something useful.

The purpose of a repurchase program is to increase per-share intrinsic value, right? If so, measuring the utility of a buyback must be done by comparing what per-share intrinsic value was before a buyback to what it is after. If a CEO elects to retain all earnings and commit all capital to a share repurchase program, what is the effect? As the number of shares outstanding falls, earnings-per-share rises. If the multiple stays the same, the stock price must rise. It's the holy grail of stockholder returns; except it's not. What's smart at one price is dumb at another, and if the company elects to repurchase shares at 2 times per-share intrinsic value, every share repurchase incrementally destroys per-share intrinsic value. In this scenario, even though per-share price is rising, per-share value is falling.

Are you proposing that share-repurchase return-math (that is, the repurchases' effect on per-share intrinsic value) be based upon the market price of the stock following the repurchase? Why is that?

How did you arrive at 13%?

+1

I don't mean to be rude; merely typing in "S&P 500 earnings history" gives you all your answers.

Google.com

He was definitely joking. And it got a lot of laughs.

I'm not a tax expert, I'm just a man with Google. The IRS is using the term "substantially identical" when deciding whether the rule applies. If I had to guess, I'd answer yes and yes.