Steve Jobs ignored Warren Buffett's advice for a stock buyback | Hacker News Reader

Steve Jobs ignored Warren Buffett's advice for a stock buyback

networkworld.com

35 pointsanderzole29 comments

I read both Jobs and Buffett's biographies (Steve Jobs & The Snowball). I understand these guys' mindsets reasonably well.

The article says that, ironically, Buffett himself never bought Apple stock. The reason is simple. Buffett is an extremely cautious investor who only invested in businesses he understood perfectly, down to how the products were made, what made them superior to competitors, what the cost was of each part, who were the suppliers, etc. Buffett has always admitted he is not a technology guy. During the dotcom bubble, for example, he never invested a single penny in any of the Internet companies.

The advice that Buffett gave to Jobs ("if you think your stock is undervalued, then buy it back") is perfectly logical (after all, who better than the Apple CEO would understand perfectly his own business?), but for that same reason (Buffett not being familiar with this business), it was also logical for Buffett to not buy Apple stock.

Even more so, in Buffet's mindset, Jobs can value AAPL better than he, so when Jobs fails to do a stock buyback, it's an indication that Jobs does not think it's significantly undervalued.

Buffett has called Henry Singleton the greatest capital allocator of all time: http://en.wikipedia.org/wiki/Henry_Earl_Singleton

Basically, the Singleton model was to focus on the long term on building his company Teledyne (started out building aerospace systems/microelectronics).

What Singleton did was recognize when his stock was over and undervalued. During periods of overvaluation, he would issue stock and use it as currency to acquire other companies. This was pretty smart because he was able to get new businesses using a currency that was temporarily worth more than cash (the inflated shares). Then, during market downturns, he would repurchase shares. He basically was able to operate efficiently in both periods of over and undervaluation, while creating value for shareholders.

Here's a decent article on Singleton: http://www.observer.com/2003/04/the-brain-behind-teledyne-a-...

Interesting man!

What I wonder about is how banking fees impacted his ability to issue/buy back shares. For example, secondaries handled by an investment bank cost a fraction of the issue. So his shares must have been significantly under and over valued in order for his buying/selling to be profitable.

A friend of mine was intering at Apple this summer and during the last week he went to a talk regarding this topic. The rational is that they've always needed a lot of cash on hand because Apple takes a lot big risks with its products and that lot of the cash is acquired overseas so its expensive to bring it back to the US. Just some food for thought.

you got this info from an intern who got this information from a talk from some guy other than the CEO/CFO?

> you got this info from an intern who got this information from a talk from some guy other than the CEO/CFO?

The way he "sourced" this information might be questionable, but most of it is indeed true. Apple do have large cash reserves overseas[1], and they have inferred (if not directly said) in earnings calls that their large cash hoard gives them the ability to be agile when it comes to manufacturing.

[1] In fact, they are petitioning the US—along with many other large corporations—to allow them tax breaks so they can bring their earnings back into the country without paying significant amounts in tax.

I'm pretty sure it was Tim Cook who gave the talk but because I don't remember exactly, I didn't cite.

Both a buyback and dividends can be exploited by speculators: they can just buy the stock beforehand and sell it at a higher price or after collecting dividends. A wise thing would be to distribute cash to long-term owners based on how many months and years each has owned the stock multiplied by the number of stocks owned. However, I don't think that's possible in the current scheme. You would need different sets of stock for different dividends and you don't necessarily have records of the cumulate ownership of individual owners.

Apple would have to issue a preferred stock for that. The structure you suggest would not go over well with the investing public because of the dilution that would be involved. Also, this scheme is much more convoluted than a straight up preferred or dividend. Too much like a debt product; stock investors don't like doing as much work as bond investors.

Apple recently made an important change in how they operate. Directors must now be voted in by majority. This signals to the market that they are taking their investors seriously.

Which means if the majority of investors want a dividend somewhere down the line, then the chances of it happening are higher.

"Somewhat comically, and arguably very Jobsian, Buffet later heard that Jobs had told people that he (Buffett) had agreed with Jobs' argument that Apple should, in fact, do nothing with its cash.

The reality distortion field in full effect, folks."

For the rest of us, it's called lieing. Is it not?

1.They aren't really cash, they are cash equivalent. And it is interesting for other company, Newspaper only signal out what is really "cash" and leave those "cash equivalent" like bonds as separate thing.

2. Apple likes to have some money in the bank, so they dont need to borrow on anything.

3. Over 60% of its co called cash are overseas. Which means they cant really do anything with it.

4. The other 40%, are used for operational cost, paying big in front for favorable price, R&D, and even acquiring companies.

5. Apple has LOTS of High Profile Stores. Those Stores are long terms liabilities, and they do cost a bit operate. In the case of another huge economy downturn, those cash are what makes them stay afloat.

I was actually wondering what happens if Apple do have 100B to buy into bonds or what ever, that is 2B a year of interest coming from it.

I've heard it said here that apparently Apple doesn't pay dividends on its stock, so that stock wouldn't be costing them money. Im a stockmarket newbie - what tangible benefits would Apple get from a buyback if they're already not paying dividends?

That money belongs to the shareholders. You can invest it in the company to attempt to earn more money in the future (capital improvements, research and development). You can pay it to the shareholders in dividends. You can acquire other companies to diversify or to enter new markets.

If you buy back existing shares of stock, you increase the value of each share of stock by improving the earnings and free cash flow per share. (Think of it as paying down long term debt.)

Stockpiling the money--especially that much money--doesn't generate much return for shareholders. Sure, it earns a little bit of interest, but Buffett's reasoning is probably that there are better places for that money. Use it to make the company worth more.

The apple shareholders would get a benefit in that they would end up owning a bigger share of apple.

If you own say 1% of a company and the company buys back 50% of its stock, then you will end up owning 2% of the company with the same shares.

Currently for each apple share you get ownership of a part of apple's business and a part of apple's huge stockpile of money. The business would hopefully grow and create profit for a long time to come (at least you believe that if you own the shares), but the cash would sit around and do nothing. If you think that the business is undervalued, than it is very much in your benefit for apple to swap your share of the cash for an additional share of the business.

How so? If they don't pay dividends, what benefit will you gain from the stock?

Got to this site: http://www.investopedia.com/exam-guide/cfa-level-1/equity-in...

This chart is "industry life cycle" so let me apply it to smart phones.

There are 4 distinct phases:

1) Pioneering Phase: Back in 2004sh, a number of companies were making barely usable smart phones: (Pocket PC, Palm Treo, Black Berry)

2) Growth Phase: This is where we are now, Apple, Google, Etc. are all building products targeting this market and it is growing like crazy.

3) Mature Growth: This will happen in the next 10 years, (my guess is in the next 5), as the world population who can afford phones is limited and there will be so much product with limited new customers. Companies will still innovate, and sell product, but the growth rate will slow.

4) Stabilization and Deceleration: This will probably happen after people in impoverished nations get cell phones and all Smart phones are driven down in price. (Think current PC market) and who knows what will cause the deceleration? I don't.

--Here are the theoretical flows of capital for each phase--

1) Pioneering = VC, Private Equity money flowing in to businesses

2) Growth Phase = IPO, and Private Equity money flowing in to businesses

3) Mature Growth Phase = Companies start buying back shares, and paying dividends.

4) Stabilization Deceleration Phase = Bankruptcy, Buyouts, continue paying flat dividends etc.

What you will notice is that between 2 & 3 share holder money starts getting returned. Growth companies are priced "high relative to current earnings" but "low relative to distant future earnings".

Investing in the growth phase is done so that the stock will appreciate as certainty over product success becomes apparent. Once that happens, the stock price will be much higher as the market expects dividends.

Apple is a great example of this process.

There are a number of reasons to have stock in a company, the dividend returns are often not a big factor, as the dividends are usually far less than the cost of purchasing the shares.

Instead purchasing shares has other benefits, such as certain tax concessions (e.g. franking). To increases in the capital value of the shares purchased which can then be sold for a net profit. Additionally holding shares (especially large numbers) gives you certain voting rights to how a company is run. This is why certain wealthy individuals are known to purchase stock in public media companies. (There are examples were some media influencing has taken place.) You can also lease your shares/work with short sellers for gains. (which is trying to earn money via speculating the movement of the share price.)

A bit more on short selling: (this is grossly simplified)

Short selling is the idea of selling shares that have not been purchased beforehand. Let's say Person A sells person B 50 shares at $1 each, however after the deal is made the share price drops to 50c each. Person A is able to scoop up the 50 shares for half the price, even though person B is contracted to buy them for $1. In effect a decrease in the share price has given Person A a profit. My example sounds a bit fraudulent (selling something that you don't actually have.) In the real world it involves leasing shares and the idea that shares will be available to buy at a later date. Porsche famously bankrupted many short sellers /speculators by quitely buying up all the spare VW shares. (Something they deny publicly.)

I see, thank you. I'm not very knowledgeable about the stock market, but at least I finally understand shorting!

You can sell it for higher than what you bought it for if the stock goes up.

In the U.S., share repurchases are tax-deductible for the company, but dividends are paid with post-tax money.

Theoretically, fewer public shares means that the value should go up (basic supply and demand curve). Apple could then sell their shares at the higher price and effectively earn a return (the reality of how this would happen is more complex--but it all adds up to this basic premise).

The act of re-issuing the shares would have the opposite effect on supply, causing the price to go back down. You can't create profits by retiring and then reissuing shares.

We aren't talking about re-issuing shares--we're talking about buying them back to be re-issued at a later date. The act of buying them back would shrink the supply and (in theory) drive up the price.

You are ignoring the growth in supply that would happen because of the re-issue.

Presumably, the stock would be reissued at a point where forces other than supply & demand would have had an impact on the price as well. Yes, the additional available shares on the market would cause a dip--but that dip would not necessarily negate the other effects that (could have) impacted the stock price since the buy-back.

I'm not ignoring the effect; I'm just not viewing it in vacuum.

No, you can't buy a stock (causing it to go up) and then sell at the higher price; that would be creating profit out of nowhere. And aren't bought-back shares destroyed?

When a company buys back shares, it can either cancel them or hold them as treasury stock. Treasury stock can then be reissued at a later date at the then market price.

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