Rabbitisrich
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Posts posted by Rabbitisrich
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Could it be that what is good for a company / shareholders is not necessarily good for the economy?
I think they're aligned over the long-run and if you look at the whole (ie. shareholders are part of the economy).
I hope that you are right but I have a nagging doubt. To draw an analogy with consumers, if enough people decide to postpone spending on "optional" goods, we risk entering a vicious deflationary spiral. If too many companies decide to deploy their cash on stock buybacks instead of investing in expansion, does that not stifle economic growth?
Yes, it does - though there is another way to look at this, which that if there was less debt and more demand in the world companies might *want* to build factories, rather than be in a position where they have more capital than need for capital.
But, it all comes back to incentives. I have no problem with buybacks when a) there is no better use for capital and b) the stock is below IV. I just have very serious doubts that that is actually how managements are incentivised. Why build a factory that will generate value over 30 years when you could juice your stock option value with a buyback today?
Instead of thinking in terms of buybacks and dividends, think in terms of payout ratios. And then look at differential tax impacts. For example, a stock might be overvalued relative to the market, but the company might have reinvestment opportunities far below the expected market return. In that case, you might want management to increase the payout. The question of how is, for most people, a tax issue. If the stock is overvalued, then the dividend and buyback receivers are deliberately holding overvalued shares. The only difference is that the dividend receiver closes his tax loan for the year, and receives a deferred tax benefit on the lowered basis of his holdings. In other words, he switches from borrowing from the IRS to lending to the IRS. That can be good or bad, but you can see that it isn't obviously connected to the question of stock valuation.
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The author might have missed his own argument by focusing too much on the word "buybacks", and not enough on the economic reasoning. Towards the end, he almost pulls it together by implying(?) that favorable tax treatment encourages higher payout ratios than a tax system that somehow treats buybacks and dividends equally. He doesn't explicitly say it, but he must also believe that these excessive payout ratios are not economically punitive, because something prevents reinvestment to fill those areas left undercapitalized by the payouts.
If funds are leaving a given legal shell in the cause of shareholder value maximization, then there must be something more interesting outside of those shells. That could mean exciting events outside of public companies, or really uninteresting happenings inside the shells. Instead of tracking the money, and inferring incentives, the author clumsily slaps a bunch of economic concepts together, and assumes that buybacks are the result of self-enrichment, which is apparently a new thing.
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I think the Institute did a tremendous job by creating the curriculum body of knowledge materials for candidates. I recall in the 90s you had to source your own textbooks, there were no finite list of learning outcomes (just read the textbooks and hope youve covered everything for exam), no free mock exams, no test preps, review classes. I would argue its easier to pass exams today. The high failure rate says more about the quality of candidates than the difficulty of the exams.
I'd argue that the failure is a bit of both material and candidates - more people taking it who are less prepared due to the popularity of the program and having companies pay it for you and because the complexity of material has increased.
I know a CFA grader with a PhD in Finance and the CFA designation who has commented that the course work and materially is substantially more difficult then it was when he took it.
Harder material + a much larger audience of candidates = increasing failure rate
Certainly glad the CFA has improved so much with their materials though. Even the last four years I've seen pretty large improvements.
+1 I recently had a look at the 2015 books compared to 2010 and there is a noticeable improvement. Personally I think the CFA material is [mostly] fantastic and very interesting -- the Schweser books skip a lot of interesting stuff.
True, but Schweser is very good at teaching you to perform for the test. I had to retake Level 3 because I studied from the source books like I did for 1 and 2. As a result, I answered the writing portions in long essay type narratives, trying to consider possible complications, and framing the answer like CFP talking to a client. Not only did I bomb the writing portion, but I spent so much time that I barely finished the morning section in time. Schweser instructors help you with pacing, and with knowing what the graders want to see.
GIPS and Level 3 ethics? No knowledge there, just distractions and satanism! What monster still remembers their GIPS rules?
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if you own a stock and rather get dividends, it means your holding a overvalued stock. You should look at that first.
I like dividends because I don't need to pay a commission to sell any shares. Some of my holdings are very illiquid and a dividend puts real cash in my pocket rather than sitting on the ask for months.
Some of my holdings are in IRA's so dividends are tax-free for me in there as well, not that I let the tax-tail wag the dog..
If you are maintaining your ownership %, then dividends and buybacks will be similar even for a taxable account. Most of the benefit of a buyback is in the extended IRS loan, so the advantages of a buyback accrues with more time and higher returns. If you are selling off the extra ownership within that first tax period, then your loan term is the same as a dividend.
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It all boils down to the following dilemma...
Why is it that Mr. Market just doesn't know that HWIC's investors will crush the market in the future?
The conversation has been difficult to follow, but you previously seemed to argue that you would only value a company based on its current asset values. I and others responded that you can never be neutral with respect to management quality, and that a current market valuation holds under certain management behaviors, while under or overvaluing others. That's why I mentioned liquidation, which is a scenario in which it makes sense to "ignore" management. Except that you aren't ignoring anything; you are just assuming a behavior in which your sum of the parts analysis is valid. The same analysis would be hugely optimistic if the CEO were the dumbest, yet most ambitious, man in the world.
But now your argument seems more specific; that you don't think FFH warrants a premium. That's very different from the more extreme claim that you are literally paying for the assets of company despite being an outside passive minority investor.
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but I agree with what I think Eric is getting at, which is that if an asset (e.g. Zenith) is on Fairfax's balance sheet at 1.3x already (tangible+goodwill) then you shouldn't pay 1.3x *that* number for Fairfax unless you think PW *underpaid* for Zenith. In other words, you're in danger of paying 1.3*1.3=1.69x for Zenith.
That's exactly right.
Double counting.
Understood.
FWIW, I'd pay a significant premium to TBV for the assets PW has assembled.
I don't really follow this argument, and it seems like you [Petec] aren't committed to it either in that last comment. Why is it a matter of direct interest what is the liquidation value, or the snapshot value of assets, unless you are planning to immediately liquidate or sell the company? If the business is a going concern, then the snapshot value is the material for managerial discretion. I might decide to pay no more than book value, but that is due to my expectations about the use of assets. There is no room for a passive regard of management.
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I think you have to justify why the goodwill will compound at 15%.
*Or* you actually have to do a DCF and value it as P/PV, but not P/BV.
But a P/DCF is simultaneously a P/BV. You just divide DCF/BV.
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I am valuing the insurance operations as insurance operations, and I am valuing the portfolio of market-marked assets at market value.
Other people are saying we should pay an above-market price for FFH's portfolio of bonds and equities. But that price is way above the market. I'm merely saying that you should be paying market price for those holdings.
Premium for the business operations (float, float growth, and underwriting profit), meanwhile no premium above market price for the marked-to-market holdings.
What if, instead of FFH, you were talking about the Medallion Fund? Would you refuse to pay more than the SOTP snapshot from a given day? It's likely that you would pay up until you felt you were getting your risk adjusted expected return, even if that meant paying for a premium over the day's portfolio value. In that case, management is not easily replaceable, and the strategies are not easily duplicable. Management quality has a value, and the accounting treatment looks like you apply it to the NAV, even though you are economically valuing future behavior.
That said, the above logic is totally consistent with refusing to pay a premium for FFH. It's just that rather than insisting that management behavior is always a neutral value, you value it at zero. Maybe you feel that Hamblin-Watsa is "replaceable", in the sense that you can replicate them in your own portfolio, as a free-rider or through alternative investments. But why would you assume that all potential management candidates are equivalent and neutral with respect to the potential pathways of NAV?
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Moody's releases older versions of their Corporate Default and Recovery Rates 1920-2010. The up to date version is available for purchase, but you can download the older copies from their website.
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Valuing a company according to the market value of its assets is an implicit modelling of management decision making. You are modelling that they will have the same impact as if you simply owned the stocks directly and went passive. Think about a holding company consisting of only SPY shares. Now imagine that the newly hired CEO is:
A. The Dumbest person you know
B. The Smartest person you know
C. A young orangutan
If your valuation of the company is the same across all options, then you are implicitly modelling different relationships between assets and CEO decisions. The balance sheet is just a snapshot. Furthermore, how is modeling spelled?
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so i guess some of you would invest in a hypothetical WEB hedge fund and immediately take a hair cut? meaning if you put $10mil into WEB HF you don't mind that WEB immediately mark what you put in at $8mil!?!?
hmm i don't ever see that happen, not even with the best of managers.
But it does happen thought fees, lockups, collateral calls, and any other conditions that transfer value from investors to management. It is difficult to match variable fees like performance charges to a flat upfront fee, but that is a modeling challenge rather than a theoretical issue, I think.
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The business and the management aren't so clearly separable. After all, management can divert money from one business line into another. Payouts are another option. In that sense, there isn't really an operation that you can distinguish from management decisions, without assuming a baseline management plugin. If it's trivially easy to replace a management team, then you just have to determine whether your team is superior to available alternatives. So in the case of a low turnover, secondary market investor, like Bruce Berkowitz, degree of portfolio replicability approaches that condition of being trivially easy to "replace" management. In which case, management becomes more valuable when outperformance can only be achieved through less available instruments and methods.
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As this thread is about 'musings' or contemplation, are the last few weeks in the macro world a tipping point to use an over used phrase? Started with Bunds at negative rates last year, then the ECB went negative, followed by BOJ going negative a few days ago, and today Swiss National Bank has gone negative. Topsy/Turvy indeed.
Currency wars in the race to the bottom anyone?
For developed nations with large gross trade volumes, and international scale industries, the gains and losses of currency depreciation are muted: http://libertystreeteconomics.newyorkfed.org/2014/07/why-hasnt-the-yen-depreciation-spurred-japanese-exports.html
"The new finding in our study is that the incomplete pass-through is the most pronounced for exporters with large import shares—each additional 10 percentage points of imports in total variable costs reduces exchange rate pass-through by over 6 percentage points. We also show that large exporters are import-intensive, have high foreign market shares, set high markups, and actively move them in response to changes in their marginal costs. Thus, the prices of the largest firms, which account for a disproportionate share of trade, are insulated from exchange rate movements both through the hedging effect of imported inputs and through active offsetting markup adjustment in response to cost shocks."
You might also enjoy this David Glasner post: http://uneasymoney.com/2014/08/11/misunderstanding-totally-competitive-currency-devaluations/
'The benefit that a country derives from the depreciation of its currency is in the rise of its price level relative to its wage level, and does not depend on its competitive advantage. [There is a slight ambiguity here, because Hawtrey admitted above that there is a demand shift. But there is also an increase in demand, and it is the increase in demand, associated with a rise of its price level relative to its wage level, which does not depend on a competitive advantage associated with a demand shift. -- DG] If other countries depreciate their currencies, its competitive advantage is destroyed, but the advantage of the price level remains both to it and to them. They in turn may carry the depreciation further, and gain a competitive advantage. But this race in depreciation reaches a natural limit when the fall in wages and in the prices of manufactured goods in terms of gold has gone so far in all the countries concerned as to regain the normal relation with the prices of primary products.'
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Kind of what I said. We posted at the same time. There is a large number of moving parts involved in the math here.
I disagree about the point at which dividends are more valuable than buybacks. The apples to apples comparison would be to fix your desired % ownership and arrive at the same cash balance via dividends or selling the excess % ownership (in the case of buybacks). Aside from technical issues, the first-order difference is in the tax treatment.
In order for dividends to beat buybacks in an apples to apples comparison, dividends would have to show a persistently higher valuation for the company.
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The debate may be clearer if you focus on an outcome, and then work backwards to see the difference between dividends and buybacks. That also helps to keep the conversation apples to apples, and it should show that the question is NOT about buying back cheap stock versus issuing a dividend. That is an apples to oranges question because it assumes that you don't apply your dividend to purchasing the cheap stock. The appropriate question is whether it makes sense to return capital.
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The bottom line is this: if there is no deity, there is nothing that is moral or immoral.
That is your bottom line, not mine.
As you pointed out in a previous thread, if only the gods know what is wrong and what is right, well, then you are just as clueless as I am. So you might as well use drugs and cheat on your wife - maybe the gods appreciate that after all! No way to know, right? Even if supernatural beings exist, we, humans, are all clueless regarding morality according to you. We'll only find out when we die. Not much different from the animal kingdom you love to refer to. However, you still won't visit a hooker because you have personal opinions about what is right and what is not. So do I. We still strive to act morally - regardless of what supernatural beings think. Something that you keep dismissing.
Anyway, these discussions would be much more fun if a radical muslim showed up arguing, using your line of reasoning, that it's ok to marry 12yr old girls and to stone a woman to death if she's unfaithful. You couldn't claim the moral highground anymore and would be forced to find a better line of reasoning.
First, you never told me the "point."
Secondly, I never indicated we couldn't strive to act morally. Even when I was agnostic, I acted more moral (by most standards) than most religious people. What I realized though, that if a deity doesn't exist, those standards are bs.
I'm simply saying that even if we strive to the "right" thing...that "right" thing isn't really "right."
But the search for the point is the point of the earlier arguments. Even if interventionist deities exist, you are limited to you. You are the one framing the "points"/"meanings"/"purposes" in relation to your interpretation of the deities' commandments. All the deities can do is influence your incentives. Deity exists, ergo reference point for "the point of [...]." Deity doesn't exist, but you believe it does, same. Your introspection is biased from the get go by hinging your framework on "THE" purpose of things.
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Indeed, marriage is fairly new invention in the life of us primates. We are violating our evolutionary instincts of procreation by being married (unless the marriage is open, obviously).
That is a rather idiosyncratic interpretation of evolution. How is it possible to be "violating our evolutionary instincts" through our behavior? It's like watching an orangutan demonstrate tool making capabilites in captivity that it hadn't shown in the wild, and coming to the conclusion, "Oh, that's just not natural."
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All such quotes to the effect of "ignore macro". You have to know what you have to know, and all business expectations are implicit assumptions about macro environments.
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I start with revenue to tangible assets and non-interest expenses to tangible assets.
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Well, look at guys like Floyd Mayweather, tweeting about how much he made, including per second, in last week's fight. Then having two women lie on his bed and count $100K cash. These people are just idiots to begin with or try and maintain that bad-boy persona because it sells tickets.
Floyd Mayweather is an interesting example to use because he exemplifies different expressions of arrogance. You are referring to the "Money" Mayweather cartoon that we see between fights. But in the ring, he is a more disciplined fighter than past talents like Sugar Ray Leonard and Roy Jones Jr. Every move he makes between the ropes in intended improve his odds of winning. And, of course, he is always in shape. So you see the practitioner's humility in knowing that he is only exceptional in so far as he behaves smartly, and not due to some inherent characteristic of being special just because.
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I've kept an eye on Klarman for years. I remember him starting to get bearish around 2010. I also found some of his old letters a while back, and from what I remember he started getting bearish around 1995 or 1996. I figured that he's was "wrong" for about 4 years and then was proved massively right. We're getting close to that period now. We'll see if history repeats itself! This then matches really, really well with Buffett's idea of 17 year or so market cycles.
The market rewards/punishes behavior, not reasoning, so it is probably an overstatement to say that the market proved someone to be correct for a given "big picture" statement. Klarman described the market as being "greatly overextended" in November 1995. But the S&P 500 would go on to return 7.7% over the next 8 years.
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Yes, Richard Koo's Balance Sheet Recession (published in 2003) has been a big influence on my thoughts/opinion on this matter for the last 10 years.
His focus on household balance sheets makes sense from a business perspective, but he hugely overstated his case against monetary policy. His debt based argument not only presumed monetary inefficacy in real terms, which is defensible, but it also presumes impotency in nominal terms.
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Otsog, the quotes supplied in the Michael Lewis piece are even more confusing. They look at one side of a transaction, the trader who enters an order that doesn't get filled, and somehow end up at "front-running". What happened to the order? Is the HFT now taking your place as the investor? Or, more likely, is the HFT flipping the stock to an investor who is willing to pay more? In the latter case, that is just price discovery! What the people in the article are complaining about is the allocation of the fee for matching buyers and sellers. The bid ask spread is not a right. It is just the information provided given the existing order flow.
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This is the part that makes no sense:
Steve Kroft: What do you mean front run?
Michael Lewis: Means they're able to identify your desire to, to buy shares in Microsoft and buy 'em in front of you and sell 'em back to you at a higher price. It all happens in infinitesimally small periods of time. There's speed advantage that the faster traders have is milliseconds, some of it is fractions of milliseconds. But it''s enough for them to identify what you're gonna do and do it before you do it at your expense.
Notice that the above argument has little to do with investing. Lewis is describing how the "investor" can no longer clip the marginal value of mismatches between what people would pay and what they actually pay. So, in the pre-HFT days, did the generous market makers of lore pass along such bid-ask spreads to the buyer or to the seller?
Stock buyback are killing the American economy
in General Discussion
Posted
krazeenyc,
The article contains a few fundamental errors and inexplicable omissions. Maybe he has thought more deeply about why he focuses on buybacks, but he didn't share those thoughts.
petec,
Valuation doesn't have anything to do with the difference between buybacks and dividends. Management deserves credit or blame for adjusting the payout ratio. But once they pay out, they paid out. The money is out of their hands. Equity owners are the ones who subsequently adjust their ownership stakes. So why implicate management for shareholder decisions? Implicate management for management decisions, which is most directly represented, in this case, by their payout decisions.
Keep in mind that a company is not literally investing in their shares during a buyback. If the valuation shows optimism, management can just issue shares. If shares run low, management can just split shares. A buyback is a release of cash, and not a company's investment in its own shares.