Has the dead cat finished bouncing?

DiggerUK

It always amuses me being told that gold does not pay a dividend, then hearing the self same people wax lyrical about Berkshire Hathaway that also pays no dividend.  

If you want to make money on your investment in both those items you have to sell, aka "cashing out"..._

bowlhead99

DiggerUK said:

It always amuses me being told that gold does not pay a dividend, then hearing the self same people wax lyrical about Berkshire Hathaway that also pays no dividend.  

Well, fundamentally Berkshire Hathaway is invested in productive assets that make profits over time, while gold is a lump of metal that just sits there, so ownership shares of BH have been able to generate massively greater returns than an ounce of gold over the long term so it's not particularly surprising that BH has its fans; the profits are retained inside the business (increasing the value of the owners' shares in the business over time) rather than being distributed to owners each year.

If you want to make money on your investment in both those items you have to sell, aka "cashing out"..._

But that doesn't require Berkshire Hathaway or Warren Buffet to have in their respective bank accounts "the cash to pay anybody wanting to cash out, quite handy if you want to remain credible", as you asserted.

Your ounce of gold doesn't have cash in its bank account either, as it's an inert piece of metal and does not have a bank account. You can still exit your investment by selling it to a third party and stop owning it, as you can with a share of Berkshire Hathaway or any other multi-billion company traded on a stock exchange.

Thrugelmir

DiggerUK said:

It always amuses me being told that gold does not pay a dividend, then hearing the self same people wax lyrical about Berkshire Hathaway that also pays no dividend.  

Buffett's reasoning is well documented in his shareholder letters. . 

DiggerUK

If Berkshire Hathaway stock is so hot, why does Buffet spend £5billion a year buying BH stock? The main reason companies 'buyback' is to maintain market price.....why does Buffet need to get involved in such manipulative practices if BH stock is so hot to hold and in such a 'DeBeers' form of control?

Yes, gold is just a lump of elemental metal, the price of which changes. The metal just sits there....and?
BH stock just sits there changing price, how is that any real difference to gold?

Nobody really understands how BH operates, yet they are beyond explanation and beyond criticism. So much for talking heads only recommending that investment be made in instruments  you understand.  

For me BH fits the "too good to be true" mould and is incomprehensible. Two smell tests  any wannabe investor is always advised to steer clear of..._

Thrugelmir

DiggerUK said:

If Berkshire Hathaway stock is so hot, why does Buffet spend £5billion a year buying BH stock? The main reason companies 'buyback' is to maintain market price.....why does Buffet need to get involved in such manipulative practices if BH stock is so hot to hold and in such a 'DeBeers' form of control?

Dividends and Share Buybacks are covered in his shareholders letter of 1984. Not a new phenomenon. 
Funnily enough in a book I purchased just a couple of weeks ago to pass the time. 

Dear Shareholder: The best executive letters from Warren Buffett, Prem Watsa and other great CEOs  - Lawrence A Cunningham

bowlhead99

DiggerUK said:

For me BH fits the "too good to be true" mould and is incomprehensible. Two smell tests  any wannabe investor is always advised to steer clear of..._

It's a good idea to avoid getting involved in something you don't understand, though 25 years of published SEC-filed quarterly and annual financial statements and 40+ years of chairman's annual letters to shareholders are available on the website if you wanted to get an insight into what was being done and how, over the last decade, to see whether the returns were plausible to have been obtained or whether they're likely to have been just smoke and mirrors.

If you don't comprehend business, finance, equity markets or the insurance industry then you would probably some of the reports overwhelming or incomprehensible, and some of the issues can be complex when you get into specifics, which is why many people will be more comfortable in holding portfolios of investment funds which will hold shares in the Berkshire Hathaway business among many others.

Yes, gold is just a lump of elemental metal, the price of which changes. The metal just sits there....and? 
BH stock just sits there changing price, how is that any real difference to gold?

To me there seems to be a difference between buying an ownership share of a set of productive businesses, versus a piece of shiny metal, versus a pile of chips at a casino while participating in a game of poker.

In all cases, you have something, and its value will change from time to time. But as a way to preserve or grow your wealth over the long term they are probably not functionally equivalent.

DiggerUK

Thruglemir, your responses give no answers. Referral to "Buffets letter to shareholders" of times past explains nothing, to me it avoids throwing any light on BH modus operandi. Going back to what WB said in 1984 is of no real value 36 years after the event, one should expect such people to have moved on from then.
I dread to think what I  was saying that long ago, I expect I would disown some of my comments from then.

It gives no explanation of exactly what goes on in BH, or how it works. I have seen footage over the years of the BH shareholders meetings, to me they have only ever been power point presentations of the cult of WB. 

Most of my comments on BH and WB are based on lack of faith in a guru, perhaps I'd best leave it there..._

bowlhead99

DiggerUK said:

If Berkshire Hathaway stock is so hot, why does Buffet spend £5billion a year buying BH stock? The main reason companies 'buyback' is to maintain market price.....why does Buffet need to get involved in such manipulative practices

DiggerUK said:

Thruglemir, your responses give no answers. Referral to "Buffets letter to shareholders" of times past explains nothing, to me it avoids throwing any light on BH modus operandi. 

When companies want to access cash for a project or expanded business opportunities and may find it inefficient, expensive or excessively risky to borrow at a fixed rate from a bank or the debt markets, they may look to issue stock for cash. The eventual profits they make will be split between more shares, but the overall profits might be improved resulting in greater overall success than without the equity raise, and improved prospects.

Conversely if a profitable company has more cash sitting idle than it needs, it can buy back some of its stock. The combination of less unproductive cash sitting around idle, with fewer remaining shares among which the profits will be split, will improve returns on capital for everyone. This is basic maths, rather than needing to be characterized as 'manipulative practices'.

If shares are trading in the market for a price that the board perceive to be lower than intrinsic value, it can be even more lucrative and value-enhancing to have a buyback programme. As Buffet mentioned in 1984:

" When companies with outstanding businesses and comfortable financial positions find their shares selling far below intrinsic value in the marketplace, no alternative action can benefit shareholders as surely as repurchases"

The companies in which we have our largest investments have all engaged in significant stock repurhases at times when wide discrepancies existed between price and value. As shareholders, we find this encouraging and rewarding for two important reasons - one that is obvious, and one that is subtle and not always understood.

The obvious point involves basic arithmetic: major repurchases at prices well below per-share intrinsic business value immediately increase, in a highly significant way, that value. When companies purchase their own stock, they often find it easy to get $2 of present value for $1. Corporate acquisition programs almost never do as well and, in a discouragingly large number of cases, fail to get anything close to $1 of value for each $1 expended.

The other benefit of repurchases is less subject to precise measurement but can be fully as important over time. By making repurchases when a company’s market value is well below its business value, management clearly demonstrates that it is given to actions that enhance the wealth of shareholders, rather than to actions that expand management’s domain but that do nothing for (or even harm) shareholders. Seeing this, shareholders and potential shareholders increase their estimates of future returns from the business. This upward revision, in turn, produces market prices more in line with intrinsic business value. These prices are entirely rational. Investors should pay more for a business that is lodged in the hands of a manager with demonstrated pro-shareholder leanings than for one in the hands of a self-interested manager marching to a different drummer.

Your comment that, "Going back to what WB said in 1984 is of no real value 36 years after the event, one should expect such people to have moved on from then." , is misguided given you had specifically asked why they would do buybacks, which Buffett has spoken in at length in the past, including in the investor letter on his website from 1984, and the fundamental mathematics haven't changed in the 36 years.

And your follow up comment, "It gives no explanation of exactly what goes on in BH, or how it works" is a bit weak if you are complaining that it is opaque and incomprehensible but you haven't read the reports or the investor letters that try to explain it. If all you do is watch some soundbites from the chairman that were media friendly and complain that it looks like a cult, you're not in much of a position to understand it, much less criticise.

DiggerUK

Snarky comments  implying I have no understanding of share buybacks is made without appreciating Digger Mansions was a big beneficiary of the lunacy known as Demutualisation of the Building Societies.

Each year ballot papers came through for us to elect unknown names to unknown posts at the AGM.  Another regular question was asking us to vote to allow the board to buyback its own shares. At first it puzzled us why a company should want to buy its own shares, it seemed as daft as a farmer buying their own sheep.

Without the interwebby it took a while for the penny to drop, most research then had to be done slowly from magazines and newspapers. It was a scam to boost share prices then and it still is.
I repeat, if BH stock is so hot and WB is such a sage, then why is it necessary to manipulate the stock price of BH. It increases the price of the shares, without increasing the output, profitability, or viability of the company......now that is smoke and mirrors. 

Dead cats can smash through mirrors and meet no resistance from smoke, but bounce??....dream on..._
 

bowlhead99

Snarky comments  implying I have no understanding of share buybacks is made without appreciating Digger Mansions was a big beneficiary of the lunacy known as Demutualisation of the Building Societies.

Apologies, my assumption that you don't understand share buybacks was just from the way you have described them and the fact that you reject or ignore advice on where to find explanations of why BH would use them, or the attempts to explain them in simple terms.

Another regular question was asking us to vote to allow the board to buyback its own shares. At first it puzzled us why a company should want to buy its own shares, it seemed as daft as a farmer buying their own sheep.

It's quite straightforward - the farm is not buying it's own sheep, it is paying off some of the farm owners who had earlier provided finance to acquire the sheep, whose finance is no longer required; by acquiring and cancelling those owners' shares in the farm, the remaining owners get a greater share of the profits each, forever. 

So, if the farm is generating more profits than it requires to retain as cash in the farm business, it can make perfect sense for the farm to buyback and cancel some shares, because it enhances value for each of its owners.

If you don't understand the process other than through the pop education you get from a magazine or newspaper, you may think it's a conspiracy theory or 'scam' to increase the price of the shares and indeed some shareholders still assume it is.

The maths shows that the shares of the sheepfarm or the insurance conglomerate are more desirable when there are fewer shares in issue and less idle cash sitting redundant in the business, because the same profits are henceforth split between fewer owners.

So it would not be surprising to see the share price go up rather than stay flat (or stay flat rather than fall) - in other words, get a boost from the buyback activity. That doesn't make it a scam. Any share that you own has literally become more valuable because it represents a larger ownership slice of the business, and the business can probably make just as much ongoing profit as it was making before, because the cash wasn't being used for anything much, being surplus to requirements.

I repeat, if BH stock is so hot and WB is such a sage, then why is it necessary to manipulate the stock price of BH. It increases the price of the shares, without increasing the output, profitability, or viability of the company......now that is smoke and mirrors. 

If there are 100 shares in issue, each share is entitled to 1/100th of the future profits of the business and a percent of its assets. If the company buys one of them back with some spare cash, each remaining share will now be entitled to more than a percent of the future profits of the business and its assets. So, even through the output and profitability or viability of the company is unchanged, each shareholder will get more money from it in future. So, not surprising that they would be willing to pay more for that share on the open market.

It's not smoke and mirrors. People are willing to pay more for a 1.01% share of a profitable business than they would pay for a 1% share of a business that makes the same number of pounds of profit per year.

Rationally, shareholders would not want surplus cash sitting idle in the company bank account and would prefer the company's unutilised cash to be returned to them - either as a cash dividend, or by paying off other shareholders to leave them with a larger ownership share of the company. So if some shareholders are looking to sell, it's a good thing for the board to buy back those shares, to tangibly enhance the value of the remainder.

Dead cats can smash through mirrors and meet no resistance from smoke, but bounce??....dream on

Happy to engage with logical discussion, but if you've run out of things to say and don't have much interest in learning anything, at least spare us the extended metaphors - they don't do you much credit.