Weekend Reading
A couple of articles I found interesting this weekend.
Capital Allocation
In my recent post on Apple, I noted that the scale of share buybacks by the company (Apple shares outstanding have fallen from 24mn to 16mn in less than a decade) means that shareholders who did not sell, now own a ~ 30% larger percentage of the Company.
This is true as far as it goes but Capital Allocation is not as simple as that and my assertion above needs a qualification. Share buybacks do not necessarily benefit long-term shareholders. My thoughts on this (below) were inspired by an article I found this weekend by Jeremy Chia.
The key thing is the price at which the shares are bought back. In making decisions about share buy backs, the company must behave like a long-term, rational, value investors. They should only buy back shares when they are trading at a price below their conservatively assessed fair value (let us call it intrinsic value) and more importantly, they should be very disciplined and resist the temptation to buy back shares when they are trading significantly above intrinsic value. Warren Buffett is thought to follow a rule that only allows buybacks of the shares of Berkshire Hathaway, when the intrinsic value is below 120% of the intrinsic value.
In the 2023 report to investors, Buffett noted, "buybacks are a wonderful way to return capital to shareholders, especially when shares are selling below their intrinsic value." He also noted that "we have repurchased billions of dollars of our stock over the years, and we will continue to do so as long as we believe our shares are undervalued."
Berkshire shares are closely followed and largely held by a very loyal group of unusually committed investors and therefore most unlikely to trade below the intrinsic value. Therefore, the “limit” is set at 120% and not (say) 90%.
One of the greatest capital allocators ever, was Henry Singleton, who was the founder of Teledyne Technologies (TDY) and the CEO from 1960 and 1986. Charlie Munger who is Warren Buffett’s partner is a big fan of Singleton. In a 2002 interview, Munger said that Singleton was "one of the great business geniuses of the 20th century." He also said that Singleton was "a master of capital allocation" and that he "had a brilliant mind for business."
Here are some additional details about Teledyne's performance under Singleton's leadership:
In 1960, Teledyne's stock price was $2 per share.
In 1988, Teledyne's stock price was $250 per share.
This represents a total return of over 100,000%.
Teledyne's stock price outperformed the S&P 500 by over 100 times during this period.
There are two key things about Singleton which explain this phenomenal level of success.
First, Singleton was a brilliant engineer and businessman. He had a keen eye for identifying undervalued businesses and he was able to use Teledyne's cash flow to acquire them.
Second, Singleton was a master of capital allocation.
When markets conditions were favourable, he aggressively expanded his equity base and used cash flows from equity sales and operations to buy companies. After the mid-1970s, markets stopped valuing acquisitive conglomerates highly, Singleton changed strategy 180 degrees and aggressively shrank his equity base for over a decade. More valuable detail on Singleton and Teledyne can be found in a book by William Thorndike called “The Outsiders”. Thorndike profiles eight CEOs who he considers to be "outsiders" because of their unconventional approach to business.
François Rochon
François Rochon is very successful long-term investor based in Canada. He has also been an active writer and presenter on his investment ideas and philosophy. He also gave a presentation at the Value Investor Conference which was held in Omaha during the Berkshire Hathaway AGM. The Berkshire AGM weekend attracts thousands of investors and many meetings and conferences are held around it
Thomas Chua wrote a summary about about Rochon’s presentation and it can be accessed here and is well worth reading. His approach is very similar to the long-term that I advocate here and try to follow ( not always successfully!). Rochon has also given a number of talks including this one here and also writes a detailed annual letter to his investors which can be seen here.
I hope you find the above interesting and I hope you have a great week.
Best Regards
Sanjiv