ERICOPOLY

So you want to measure what your kids achieve and how you value them based on how much money they earn? Really? You prefer to have the next Sadar Biglari as a son as opposed to the next mother Theresa as a daughter? Or just to pay a son more than a daughter because women earn statistically speaking less than men? Wow. Spin doctor, can you at least provide some lubricant -- you're chafing me. I want them to fit in with their peer group. I don't want to shower them with riches, for example, if their peers may feel envious. You believe that Sardar would stop being hungry if you paid him more? Me, I think he would just want more. You can't stop Sardar from being Sardar just by throwing more money at him.

Just wait until someone starts a thread to discuss religion and morality. Then you can derail it with a discussion on drugs and prostitution. Or derail it discussing white slavery in Africa... oh well, sorry. http://en.wikipedia.org/wiki/Barbary_slave_trade The European slaves were acquired by local pirates in slave raids on ships and by raids on coastal towns from Italy to Spain, Portugal, France, England and as far afield as Iceland. Men, women and children were captured to such a devastating extent that vast numbers of seacoast towns were abandonded. According to Ohio State University history Professor Robert Davis, who has studied the often neglected white slave trade, at its peak, the depopulation of the European coasts probably exceeded the damage done to the African interior by European slavers. http://en.wikipedia.org/wiki/Slavery_on_the_Barbary_Coast Life for the white slaves in Africa was no better than the worst conditions of the black slaves in America. White slaves worked in quarries, mines and as rowers for the Barbary Pirates' corsairs. Commercial ships from the United States of America were subject to pirate attacks. In 1783, the United States made peace with, and gained recognition from, the British monarchy. In 1784, the first American ship was seized by pirates from Morocco. By late 1793, a dozen American ships had been captured, goods stripped and everyone enslaved. After some serious debate, the US created the United States Navy in March 1794.[6] This new military presence helped to stiffen American resolve to resist the continuation of tribute payments, leading to the two Barbary Wars along the North African coast: the First Barbary War from 1801 to 1805[7] and the Second Barbary War in 1815. Payments in ransom and tribute to the Barbary states had amounted to 20% of United States government annual revenues in 1800.[8] It was not until 1815 that naval victories ended tribute payments by the United States. Some European nations continued annual payments until the 1830s.[9]

Interesting. So would you classify Pabrai as a blind sheep? -CM Wouldn't a blind sheep have more trouble keeping up with the herd? Perhaps he has developed other senses to compensate and thus, in investing, a blind sheep may actually be advantaged.

I'm totally the opposite. I feel like by starting out with the set of names a guy like Buffett has been interested in, I'll have a less polluted lake to swim in. It doesn't seem like a good idea to me to ignore his behavior and instead only go with the names that I think are best. I'm aware of his experience and wisdom and... more importantly, mine! I'm not saying a random process. I'm just saying if you put all of Buffett's investments (including the bond deals and what not) on a piece of paper and selected one at random the chances are pretty good that it would underperform a name selected similarly from the cheapest 20% of the market that is investible to you and me. Perhaps you are right about that -- if randomly selected.

I'm totally the opposite. I feel like by starting out with the set of names a guy like Buffett has been interested in, I'll have a less polluted lake to swim in. It doesn't seem like a good idea to me to ignore his behavior and instead look over every stock in the market and only go with the names that I think are best (instead of peeking at the list of stocks that a few shrewd investors own). I'm aware of his experience and wisdom and... more importantly, mine!

That's exactly right. Because alcohol is legal for those over 21, there is therefore no black market for alcohol. Therefore, it's harder for teens to get alcohol vs acid or coke.

It might disappear if it were legal. The guy lives in a bubble of "do goodness", and needs an outlet. When things are legal, they are no longer a naughty outlet. The dog however is not consenting and it's just animal cruelty at that point -- animal cruelty cannot be legalized. Teen binge drinking is probably worse when it's illegal. At least, I remember my Australian cousins being more responsible around alcohol than I was at age 18. People it seems get a thrill out of breaking rules.

Anyways, I think that's likely the reality of it. It's not like these fund managers or retail investors are going to patiently let their dividends pile up and then reinvest them once the market drops. After all, you've already argued that they don't even know it's overvalued in the first place. So they'll just reinvest the dividend. Why would they do otherwise if they can't value the stock?

All those bogle-heads just say a person should reinvest his dividends. That's probably what winds up happening. Dollar-cost averaging. In an overvalued market, (the one where you want management to pay dividends), that doesn't help your retail investor much. So he's going to buy those shares with the dividend anyway -- only because of dividend taxes he's really getting screwed... not only buying overvalued shares, but a lot fewer of them.

You don't believe a shareholder can assess when shares are overvalued? No, I think the average retail investor cannot make that assessment. They are in a position where they must trust Management to make their capital investment decisions for them (that's why CEOs make tens of millions of dollars after all.) So I do not think it is fair to blame shareholders for the actions of Management. The capital allocator of the average retail investor is a mutual fund manager. I don't think the average mutual fund manager can do it either. I think being good at spotting overvalued/undervalued stocks is really, really, really hard in truth. Maybe less than 1 percent of investors have that ability over the long-run. The mutual fund managers do however have the ability to sell an offsetting amount of shares each and every quarter if they are capable of reading an earnings release (where they mention the number of shares sold). They also have the expertise to understand what the phrase "tender offer" means and execute on it -- even if they don't understand the valuations, they could get a hint from management that the tender offer is just the new dividend system. Also, keep in mind that the average retail investor who does it on his own is instructed to "dollar cost average", which means that once he gets his dividend he just buys more shares at the market price anyhow. Only he can't afford as many after paying his dividend tax. So he gets hurt -- and in that scenario would be better off if management just bought more share on his behalf.

You don't believe a shareholder can assess when shares are overvalued? No, I think the average retail investor cannot make that assessment. They are in a position where they must trust Management to make their capital investment decisions for them (that's why CEOs make tens of millions of dollars after all.) So I do not think it is fair to blame shareholders for the actions of Management. The capital allocator of the average retail investor is a mutual fund manager. And using your term, isn't that a multi-millionaire management team?

You don't believe a shareholder can assess when shares are overvalued? And why would they not be selling their shares (perhaps to management's buyback program) when they are known to be trading at overvalued levels? Shares worth $10 are trading for $20. They know it's only worth $10, they know they could sell and pocket $20 per share, but for some reason they don't and ride it back to $10. They cost themselves $10. Management bought back $1 of shares at $20 and cost them 50 cents. You are saying that by the time they discover management's value destruction it's too late. That claim of yours makes no sense, because they've been staring at the overvalued $20 ticker for days/weeks/months/years before it collapsed. Quarter after quarter they could sell after learning of the buyback. Not much stock gets bought back in any one quarter if you are talking about a regular and habitual buyback program, so very little is on the line in any one quarter exposed to a plunge in price after purchase. Truly, it's picking nits there to complain about a small amount from one quarter -- easily smoothed over by the regular tax savings over time. And if it's a big amount in one quarter, it can certainly be neatly handled by a tender offer. There will also be times when they buy and you didn't know about it, but you luckily sell at a higher price the next quarter after reading the news of the buyback. It all balances out over time.

Well, that depends. Perhaps if the company has a large amount of capital to return, they merely announce a tender offer. It's pretty straightforward in that case. Or perhaps they regularly pay a dividend every quarter. They announce that instead they'll purchase an equivalent amount of stock each quarter instead. Quarter after quarter they buy, and quarter after quarter you sell. Sometimes you sell higher than they bought, sometimes you sell lower than they bought -- over the long run, this is just a wash. The thing though that I was primarily commenting on (that got the fortune cookie quality response) was the shareholders who say management destroyed their value by purchasing overvalued stock. Well, was it overvalued only in hindsight? If not, then why were they still shareholders at the time? Why didn't they all sell? For a stock to be overvalued, there must be a lot of shareholders who want to hold onto it at that price -- that's a given. So are those the people who cry foul later on? Let's say the stock is worth $10 and trades at $20. Later it will drop back to $10, so they cost themselves $10 per share of losses by not selling. Instead of beating themselves up over it, they will blame management for buying $1 of shares back at $20 instead of paying a dividend. So the scoreboard now reads that they cost themselves $10 but don't blame themselves, and they instead claim that management is a poor capital allocator for having wasted 50 cents. It's insane. This is why I'm saying they having nobody to blame but themselves -- the shareholders are the idiots who made the whopper of misallocation decisions by not selling at $20. Who are they to point fingers at management?

What? This doesn't make any sense. First, from a practical perspective, you don't know if Management destroys shareholder value until it does - at which point it's too late to sell your shares. Secondly, if the stock price appreciates, do shareholders take the credit for that great decision or does Management? So it's shareholder's fault if the stock goes down but Management's credit if the stock goes up? Secondly, Management is entrusted with the stewardship of a Company's capital. If I rent your house from you and then I burn it to the ground with a can of gasoline, is that my fault or your fault? Let me burn down your house and see if you blame yourself. Something tells me you'd demand I be put in prison and you'd sue the crap out of me. You make the point that value is not destroyed until it is. Please stop talking like a fortune cookie and say it in a way that I can respond to. I don't know where you are going with the bit about prices going up and down, and who takes credit for it. Nor do I understand what the burning house is referring to.

I believe Bank of America has an official complaint center to handle these kinds of customer focused issues: Office of the Associate Attorney General (202) 514-9500 ask for Tony West

Well of course the shares represent a higher ownership stake. There is no "but". That's the whole point -- you can sell some to get the offsetting amount of cash (tax-advantaged "dividend"), and yet maintain the same ownership stake. That's an identical amount of cash as you'd get with a dividend, and an identical remaining ownership stake. The only difference lies in the taxes you owe. Yes of course they do. There is nothing "missing" in my account. This new shareholder (if it's not the company itself) will be thrilled to be treated in a more tax-efficient manner. loop() { company stock buyback offsetting share sale by investor (creating new shareholder potentially) } The new potential shareholder just lives in this loop like the rest of us.

That's absurd. Any buyback will increase the value of that share. No dividend ever will. You appear to be saying that the management only cares about the value of the share itself, and not the enrichment of the shareholders.

I think where you get tripped up is you assume a non-sale of stock by an investor. This too is irrelevant to management's decision. Their decision is merely to return capital to shareholders. One method has an observable tax advantage over the other. The people who sell an offsetting amount want the cash, the ones who don't sell an offsetting amount likely prefer the tax-advantaged reinvestment at current prices.

Yes, there would certainly be a difference unless your costs basis is zero. Example... I buy BAC at $15 -- that's my cost basis. dividend: they pay a $1 dividend. I pay 33% tax on that dividend. I'm left with 67 cents on the dollar. repurchase: Management decides to repurchase $1 of stock for $15. I sell an offsetting amount of shares at $15 price point (same as my cost basis). I'm left with $1 in cash. No taxes whatsoever! I have roughly 50% more cash. With the difference that in case 1 you're left with a stock price of $14. Okay, now (to fix both cases in my example) you could also comment on case 2 where you would also arrive at a total value of $15. You fixed the first case but not the second. Were you to fix both, you'd have $15 left in both scenarios, but after paying taxes in case 1 you'd only have $14.67. So it's $14.67 vs $15? I'll take $15 every time. Meaning... every time. Don't care where the stock is trading, I just want more money every time. You are assuming a sale of stock by an investor, which is irrelevant to management's decision making. From management's perspective, share transactions only matter when they are with the company - when shares are issued, and when shares are bought back and cancelled. Otherwise, there is a shareholder and it's the company's job to maximize value for him. So here's BAC's perspective. Say they' start with 10 billion shares out - you have two options. (1) Buy back 1 billion shares. My duty in this scenario is to my continuing 9 billion shareholders and I'm giving them each an extra stake in the company - a REINVESTMENT of continuing shareholder capital. (2) Dividend equivalent cash. I still have 10 billion continuing shareholders and I've RETURNED their capital that I couldn't use. Either my continuing shareholder has their stake + cash, or an increased stake. Clearly, if BAC is overvalued, my continuing shareholder should prefer the return of cash. The key is, from BAC's perspective its shareholders CANNOT SELL stock except to the company - they can change identity, but they continue to exist. In short, the only way continuing shareholders can get cash out of a company is through dividends. A person who sells an offsetting amount of shares is a "continuing stakeholder". You claim management's duty is to continuing stakeholders. It's the ownership % that matters. A person who sells some offsetting amount of stock is not an "exiting shareholder". He is merely keeping his ownership unchanged and would like management to serve his best long term interests -- distributing capital in the most tax-efficient manner is doing exactly that.

Yes, there would certainly be a difference unless your costs basis is zero. Example... I buy BAC at $15 -- that's my cost basis. dividend: they pay a $1 dividend. I pay 33% tax on that dividend. I'm left with 67 cents on the dollar. repurchase: Management decides to repurchase $1 of stock for $15. I sell an offsetting amount of shares at $15 price point (same as my cost basis). I'm left with $1 in cash. No taxes whatsoever! I have roughly 50% more cash. With the difference that in case 1 you're left with a stock price of $14 and in this way get $1 of tax free price appreciation (potentially). I understand your point now with the edit. You're saying that potentially one day the capital gains taxes will be less. That's true mostly... however deferred-taxation leads to better compounding results over time. Also, here in the US you get a free step-up in cost basis when you die (or your wife if you live in community property state), so there won't be any capital gains taxes due at all in that case. There will also be times when you sell the BAC shares below your cost basis... say management buys them back at $10 and you sell at $10. So you'd have a $5 per share capital loss to deduct against the dividends that you are getting elsewhere in the portfolio. So that really makes the math sweet -- instead of paying 33% on the dividend, you'll have a lower tax bill on the other dividends that you are collecting. So the difference in cash could be well over 50%.

Yes, there would certainly be a difference unless your costs basis is zero. Example... I buy BAC at $15 -- that's my cost basis. dividend: they pay a $1 dividend. I pay 33% tax on that dividend. I'm left with 67 cents on the dollar. repurchase: Management decides to repurchase $1 of stock for $15. I sell an offsetting amount of shares at $15 price point (same as my cost basis). I'm left with $1 in cash. No taxes whatsoever! I have roughly 50% more cash. With the difference that in case 1 you're left with a stock price of $14. Okay, now (to fix both cases in my example) you could also comment on case 2 where you would also arrive at a total value of $15. You fixed the first case but not the second. Were you to fix both, you'd have $15 left in both scenarios, but after paying taxes in case 1 you'd only have $14.67. So it's $14.67 vs $15? I'll take $15 every time. Meaning... every time. Don't care where the stock is trading, I just want more money every time.

There would certainly be a difference unless your costs basis is zero. Example... I buy BAC at $15 -- that's my cost basis. dividend: they pay a $1 dividend. I pay 33% tax on that dividend. I'm left with 67 cents on the dollar. repurchase: Management decides to repurchase $1 of stock for $15 per share. I sell an offsetting amount of shares at $15 price point (same as my cost basis). I'm left with $1 in cash. No taxes whatsoever! I have roughly 50% more cash if management buys back stock instead of paying a dividend.

you are misinterpreting the question. We're talking about managements decision making, not your decision making as a share holder. Yes obviously you shouldn't own overpriced shares, but OP's point was that paying out is always the wrong decision - and it just isn't. Its corp finance 101 not investing 101 I believe your comment is directed at the gentleman who opined on Bank of America's buybacks destroying shareholder value. Of course, in that case it was the shareholder's decision to hold that did the self-inflicted damage. He might have changed the topic of the conversation, and then I replied. However, it's how things go on these boards.

The share price (of the buyback) has absolutely nothing at all to do with it. The person who destroys value by holding overpriced shares is... YOU!!!!!! Don't blame the management, take responsibility for your own boneheaded decisions. They buy some shares that you decide not to sell... you blame them. Hmm... why is it again that you are still holding the shares anyhow?

No, and no. 1) Buyback increases your ownership % stake 2) You then sell an offsetting amount. Voila! 3) No capital is destroyed. You have the cash and the same % ownership stake as before. You avoid being taxed on your cost basis. Compare that to a dividend where you are taxed on the entire distribution.