Risk and Return

Occasionally I look at my list of reads and realize I haven’t been someplace in quite a while, so early this morning I headed over to Jeff Matthews place to rectify that issue. Full of great stuff, but I want to highlight two pieces.

First, Jeff tackles the subject of stock buybacks and the piece echoes some of the issues I brought up in my post, The False Promise of Buybacks. Except, his version is more entertaining. So go read The Shareholder Letter You Should, But Won’t, Be Reading Next Spring which is part of his post “The Great Private Equity Cash Robbery of 2007.” I will note two interesting points he made prior to the shareholder letter:

So, was yesterday morning’s 400-point opening decline the selling climax?

[...]

Well, as far as NotMakingThisUp is concerned, the most obvious thing missing in all of yesterday’s headlines was this: no share buybacks were announced by any major company before, during or after the brief morning sell-off.

Not one.

During the panic of October 1987, grey-beards will recall, the tape was clogged not only with headlines of trading-halts amidst the worldwide rush to sell, but also with a steady stream of share buyback announcements by U.S. companies.

Coke, P&G and many others that week and in weeks subsequent to the Crash of ’87 used the substantial cash on their balance sheets to take advantage of the market dislocations that caused even the good stocks to be sold with the bad, and cannily bought their own stock back at deep discounts to its inherent worth.

Why then, were there no share buy-backs announced yesterday?

Could it be that the Great Private Equity Cash Robbery of 2007, in which previously healthy companies either “cleared” their balance sheets of cash—to use the euphemism employed by Steve Odlund, the Chief Cash Clearer at Office Depot—by buying back their own stock at bull-market peaks or faced the prospect of having it cleared for them by the Private Equity Cash Robbers?

I guess Jeff agrees with my friend Tim on this one.

My next recommendation is that you read the entire series he has put up on Warren Buffett’s purchase of Dairy Queen.

I am of course a great fan of Mr. Buffett, but like Jeff I am under no illusions about what the great hedge fund manager is doing. He is making money. He is interested in protecting his company’s shareholders interests, not those of the shareholders from whom he is acquiring his companies. Value investing means underpaying.

The series is a great introduction into looking at a transaction from multiple perspectives. It is a human story, and a financial story, with fascinating characters. Jeff’s biting wit makes it all the more enjoyable.

Part I, Part II, Part III.

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Technorati Tags Dairy Queen, private equity, stock buybacks, Warren Buffett

Tags: Dairy Queen, private equity, stock buybacks, Warren Buffett

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