The NYT article, in fact, doesn’t represent our view of the problem, since it mainly reflects the writer’s political opinion that a company shouldn’t be laying off so many employees if it has so much cash in the bank to do sizable share buybacks. That misses the point by a long shot.

There are two big points here. One is whether over-cautious companies are passing real opportunities to invest and hire at at time of supposedly cheap opportunities to do so. To put it another way: if companies were well managed (or got lucky, it doesn’t matter) enough to put away some cash and now see their less-efficient or troubled competitors suffer as well, isn’t this the time to invest and pull even more ahead when the cycle reverts?

The other point is: Inverting the reasoning above, let’s assume that the situation is so complicated that caution is indeed warranted. Shouldn’t keeping the cash as reserves be the real choice in this case?

Share buybacks are great when the shares are undervalued and there’s both clear visibility and a lack of better options – but we’re with Buffett in that they are just one of the many options for the shrewd capital allocator. It implies a level of visibility of long-term prospects and, well, sapience from management that’s seldom seen: management has to know that its company’s stock is cheap. As our 23-year experience picking stocks has shown, that kind of “certainty” (let’s call it asymmetrically favorable probability distributions) is hard to come by.

The real problem in this case is whether misaligned incentives/ conflicts of interest and the institutional imperative aren’t driving managers to do share buybacks – instead of motivation by sound financial and strategic reasons.

Conflicts of interest: That’s a risk when EPS is a big KPI (key performance indicator) in executives’ compensation plans. While it looks great on paper to drive alignment, there can be many situations in which this metric (if overweighted) can drive irrational or reckless behavior compared to long-term objectives. Cases of management driving repurchases to hit the EPS “sweet spot” for their compensation schemes are not unheard of, and that cash could have been used for investments or as a reserve against risky times.

Institutional Imperative: That’s a risk because share buybacks have an uncontested aura of shareholder-friendliness. To put it another way, CEOs don’t lose jobs for recommending share buybacks and less-inquisitive investors have also come to believe that a buyback program is always a good sign. Ask WorldCom shareholders whether Bernie Ebbers’ buybacks were a good idea – or, more recently, ask Netflix owners… In fact, there are even rough studies claiming that, in aggregate, share buybacks destroy value. Of course “in aggregate” means very little, and it reminds us of the studies that “show” that M&A destroys value. And just as M&A now has a bad fame because it’s been overused and can be poorly thought and carried out depending on the incentives and personalities of the management teams involved, we wouldn’t like share buybacks to be thought of a “bad move” per se. Both can be misused, just as any other tool in managers’ toolkits can.

Of course, so is this commencement speech by Steve Jobs (the 5th video in the post): on a very different note and yet just as good.

“Torture numbers, and they’ll confess to anything.” – Gregg Easterbrook

“He uses statistics as a drunken man uses lamp-posts … for support rather than illumination.” — Andrew Lang

“There’s no sense in being precise when you don’t even know what you’re talking about.” – John Von Neumann

“For every complex problem there is an answer that is clear, simple, and wrong.” – H. L. Mencken

“Not everything that can be counted counts, and not everything that counts can be counted.” – Albert Einstein (attributed)

April 2011 profile on Bridgewater and Ray Dalio – New York magazine. Yes, there’s New York and there’s New Yorker…

March 2011 story on Absolute Return – $1,990 annual subscription required to see the archives. Free trial only lets you see the current issue for 14 days.

We posted an interview with Mr. Klarman back in September, also worth the read.

About John Brockman, here’s an interesting interview on March 2011 Wired UK magazine.

Two: This Financial Times story uses Cisco as an example of tech companies paying dividends and not getting “recognized” for it. In this case, we like the part that says “Behind all of this lies an uncomfortable truth for successful tech companies. Ultimately, the transition from being a growth stock to what the market would consider a value play is a painful one, usually taking years to complete. The decision to pay a dividend is often made early on in this transition. That explains why many tech entrepreneurs instinctively balk at the idea: it is like confessing to their own mortality.”

Tidbits:

“It’s not just that there is so little clear signal amid so much noise. It’s that many economists have a unique idea of what signal to listen to and what priority it deserves.”

The next two quotes are by Dan Ariely, of “Predictably Irrational” fame, also mentioned en passant in a 2009 post on Buysiders.com:

“ ‘Pride is not in the model. Revenge is not in the model. Fear is not in the model. Even simple things like the disenchantment of people who are fired from their jobs — the model doesn’t account for how devastating that experience can be.’ ”

“ ‘But there’s a good reason that human irrationality isn’t part of the standard economic models, and this gets to the dilemma of economics. If you have a simple problem, you can offer a simple solution. But the economy is a hugely complex problem. So we either simplify the problem and offer a solution, or embrace the complexity and do nothing’.”

We don’t have any intention to be the “ultimate source for all things Buffett”, as a lot of people already do a great job at this and we thank them for uncovering these pearls. But this video is special. The parts on “moats” add up to some of his most detailed comments yet on the subject.

We don’t think it’s any exaggeration to say that Buffett has transcended the investment realm and that this is interesting for people in all walks of life. We’re certainly making backup copies.