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Investment Analysis Clubs / The BMW Method
|Subject: The Polygraph Machine||Date: 12/11/2012 12:21 AM|
|Author: kelbon||Number: 40837 of 41903|
I posted this on another board, but as the thread before last was on the subject of Berkshire Hathaway, I think it appropriate to post it here too.
I'm reading Tap Dancing to Work the new book on all things Warren Buffett. Unlike most books on Buffett, he's actively promoting this one and doing the chat show circuit as a double act with the author, Carol Loomis.
Tap Dancing to Work
April 29, 1985
An excerpt from an article by Carol Loomis
The Exxon investment is new, built up only after the company started acquiring its shares in 1983. "A big reason I got in," Buffett says, "is that the company has recognized the value in its stock and been smart enough and pro-shareholder enough to repurchase it." On the other hand, Buffett has sold the stocks of certain companies because they would not make repurchases.
He is convinced, in fact, that the market discounts the prices of companies that should be making repurchases and don't, instead frittering their money away on acquisitions or other investments of far less value. The corollary, he says, is a markup in prices for companies that do repurchase shares, because investors identify the buybacks as a sign that management will be consistently inclined to act in the interests of shareholders. "All managements say they're acting in the shareholders' interests," he observes. "What you'd like to do as an investor is hook them up to a machine and run a polygraph to see whether it's true. Short of a polygraph, the best sign of a shareholder-oriented management —assuming a stock is undervalued—is repurchases. A polygraph proxy, that's what it is."
More recently, a big reason Buffett got into IBM shares is because their management has repurchased, and is committed to repurchasing, a meaningful amount of their shares. Nothing much seems to have changed in Buffett's reasoning about buying stock in shareholder friendly companies. Which naturally brings up the question of is Buffett really inclined to act in the interest of Berkshire's shareholders? Although he has set a floor under the stock by announcing the intent to buyback shares at less than 1.1 times book he's created a situation where it's unlikely that Berkshire's shareholders will see meaningful share repurchases, even though it's no secret that Berkshire's management consider the shares undervalued. Presumably most of Berkshire's shareholders hold shares hoping for a meaningful increase in their market price. It's worth considering that the share price is being anchored because, indeed, the market is punishing Buffett for not acting in the best interest of his shareholders. Perhaps it's time to hook him up to that polygraph machine?
A glutton for punishment—as always—I posted the above on the Berkshire board and got the reaction I expected (though some readers there seemed to agree with me): that Buffett is an exception to the rule, even a rule he himself advocated; that Berkshire is different; and, something along the lines of: "I don't want Buffett buying Berkshire even at a 25% discount to intrinsic value if Company X can be purchased at a 40% discount." There's logic in this one provided the intrinsic value of X is actually purchased at