I wrote an article earlier this month entitled “Buying Stocks on Sale” where I highlighted comments Warren Buffett made during a speech at the University of Florida in 1998; here was what he said (bold added for emphasis):
I have no idea where the market is going to go. I prefer it going down…
Practically anybody in this room is probably more likely to be a net buyer of stocks over the next ten years than they are a net seller, so every one of you should prefer lower prices. If you are a net eater of hamburger over the next ten years, you want hamburger to go down unless you are a cattle producer. If you are going to be a buyer of Coca-Cola (KO) and you don't own Coke stock, you hope the price of Coke goes down. You are looking for it to be on sale this weekend at your Supermarket. You want it to be down on the weekends not up on the weekends when you tend the Supermarket. The NYSE is one big supermarket of companies.
And [if] you are going to be buying stocks, what [would] you want to have happen? You want to have those stocks go down, way down; you will make better buys then…
On Monday, Warren appeared on CNBC with Becky Quick and had this to say about share repurchases (video below):
“I'm just saying that if [IBM] is going to buy back stock, they're going to buy back a lot of stock, they've announced they're going to do that. If they buy it cheaper and I'm a continuing shareholder, I'm better off. I mean, if three people own a McDonald's stand and you can buy out one of the three for a fifth of the total value of it, the other two are better off at the end. And any time you — any time you buy your partner out at a discount, you benefit… I'll love it if IBM buys a ton of stock, and the cheaper they buy it, the better I'll do over time.”
Later on in the interview, Becky asks why Berkshire has never paid a dividend, to which Buffett responds:
“Well, a dividend essentially would have hurt Berkshire at any time since I've been there. I mean, every dollar that's been reinvested in Berkshire has turned out to have a greater than a $1 value. So what's the sense of paying out somebody a dollar that's worth $1.10 or more in the business?”
There are two quick points that I wanted to make from these comments:
The first is the importance of breaking the chains of the counterintuitive reaction many investors have to falling equity prices; I will continue to harp on the fact that long-term net buyers of stocks should cheer when they can buy businesses cheaper than they could yesterday. Investors who recognize this reality and act accordingly are taking a huge step in the right direction towards investment success.
Secondly, the ideas that buybacks are bad or dividends are good (or any blanket statement asserting something similar) are generalizations that should be reexamined; intelligent capital allocation isn't set in stone — it's dependent upon many factors, such as price/value disparity and current tax laws, that must be looked at before drawing any conclusions.
As always, investors should make sure that management is working in the interest of long-term shareholders, and question when their actions (or compensation) are not aligned with that goal. This can manifest itself in the form of a buyback at exuberant prices (and with the purpose of signaling management’s “confidence in the business,” or any other illogical purpose), or capital paid out as a dividend that would be better served as reinvested capital.
For long-term investors, these are two key concepts; implement these ideas into your decision-making process if you’re looking to intelligently invest for the future.
CNBC video - http://www.cnbc.com/id/46544809
I have no idea where the market is going to go. I prefer it going down…
Practically anybody in this room is probably more likely to be a net buyer of stocks over the next ten years than they are a net seller, so every one of you should prefer lower prices. If you are a net eater of hamburger over the next ten years, you want hamburger to go down unless you are a cattle producer. If you are going to be a buyer of Coca-Cola (KO) and you don't own Coke stock, you hope the price of Coke goes down. You are looking for it to be on sale this weekend at your Supermarket. You want it to be down on the weekends not up on the weekends when you tend the Supermarket. The NYSE is one big supermarket of companies.
And [if] you are going to be buying stocks, what [would] you want to have happen? You want to have those stocks go down, way down; you will make better buys then…
On Monday, Warren appeared on CNBC with Becky Quick and had this to say about share repurchases (video below):
“I'm just saying that if [IBM] is going to buy back stock, they're going to buy back a lot of stock, they've announced they're going to do that. If they buy it cheaper and I'm a continuing shareholder, I'm better off. I mean, if three people own a McDonald's stand and you can buy out one of the three for a fifth of the total value of it, the other two are better off at the end. And any time you — any time you buy your partner out at a discount, you benefit… I'll love it if IBM buys a ton of stock, and the cheaper they buy it, the better I'll do over time.”
Later on in the interview, Becky asks why Berkshire has never paid a dividend, to which Buffett responds:
“Well, a dividend essentially would have hurt Berkshire at any time since I've been there. I mean, every dollar that's been reinvested in Berkshire has turned out to have a greater than a $1 value. So what's the sense of paying out somebody a dollar that's worth $1.10 or more in the business?”
There are two quick points that I wanted to make from these comments:
The first is the importance of breaking the chains of the counterintuitive reaction many investors have to falling equity prices; I will continue to harp on the fact that long-term net buyers of stocks should cheer when they can buy businesses cheaper than they could yesterday. Investors who recognize this reality and act accordingly are taking a huge step in the right direction towards investment success.
Secondly, the ideas that buybacks are bad or dividends are good (or any blanket statement asserting something similar) are generalizations that should be reexamined; intelligent capital allocation isn't set in stone — it's dependent upon many factors, such as price/value disparity and current tax laws, that must be looked at before drawing any conclusions.
As always, investors should make sure that management is working in the interest of long-term shareholders, and question when their actions (or compensation) are not aligned with that goal. This can manifest itself in the form of a buyback at exuberant prices (and with the purpose of signaling management’s “confidence in the business,” or any other illogical purpose), or capital paid out as a dividend that would be better served as reinvested capital.
For long-term investors, these are two key concepts; implement these ideas into your decision-making process if you’re looking to intelligently invest for the future.
CNBC video - http://www.cnbc.com/id/46544809
