Rabbitisrich

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.

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.

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.

No well informed ideas. This is just shallow outside passive minority investor ranting. I feel like Office Depot shareholders must have felt watching Staples.

A rate hike in the face of declining inflation and years of missing their own official targets might indicate a reliance on survey measures of inflation expectations, or fears of future market reactions (bond vigilantes). Both are extrapolated from current market and output data, so you could be right that a surprised Yellen might react with ANOTHER wave of stimulus, if the resulting slow down is too severe. However, it is pretty obvious that 2% is not a target. If the "real" target range is lower than market expectations, then we could see a lasting valuation change as Yellen waits out the turbulence.

I don't think recency bias applies in this case because Moynihan has been getting the benefit of the doubt. We give him a pass on sliding behind H.8 numbers because of regulatory and legal distractions, and the fact that Countrywide turned out to have illusory underwriting skills and a weak back office. But it's 4Q14, the top line numbers are weak excluding DVA and the low global markets revenue (even if you decide to ignore FVA). It's just a picture of a management team that is focused on Basel, CCAR, and LCR, while waiting for the economy to improve.

Grasshopper, it isn't that weird to see long rates dropping without QE. The QE twist intended to reduce long term yields in the short run in order to effect activity that would increase PCE growth to 2% while lowering unemployment. You wouldn't expect to see a "don't fight the Fed" situation in long run long term yields because the market knows that the Fed wants inflation expectations to be anchored, and the term premium hasn't accelerated its three decade decline. The weird thing is that the Fed has been signalling that it intends to bump around 2% PCE from below, while assiduously assuring that they won't let inflation overheat. Then you have certain governors claiming satisfaction with multiple years of missing the 2% target, suggesting that there is no defense of an inflation pathway, but rather a targeted channel between 2% and something less than 2%. And finally, the Fed has been planning for a reduction of its balance sheet despite continuing to miss its target, and downward adjustments of their own inflation expectations. If you anticipate lower inflation due to a global slowdown, Fed tolerance of deviating from trend, and a still declining term premium, then low rates without QE makes sense.

Pretty ugly quarter, as if management really is relying upon higher interest rates. Weak revenue to tangible assets, weak PTPP to revenue, shrinking loan books, stagnant core loan books, "record" global liquidity. It would have been an unimpressive showing with normalized global banking revenues and ignoring valuation adjustments.

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?

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.

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.

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.

But a P/DCF is simultaneously a P/BV. You just divide DCF/BV.

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?

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.