[KTA] Thanks for this detailed discussion of your worldview and the basis for it and how it has booked over time.It is helpful in reading your posts. However, with all due respect some of your resting does appear somewhat circular and at times seems be aimed at justifying what I might choose to label your preconceived inclinations.
[MA] You’re welcome. My “resting” comes from observations of anomalous stock market behaviors.
[KTA] One example is that while I understand your descriptions of two systems which you label SC and SP , I believe that the descriptions are in fact if one system - free market capitalism- which experiences different types of distortion both temporally ( over time, not temporarily) and societally in its practical application.
[AM] Yeah, it’s all free market capitalism operating under an evolving business culture characterized as a mix of two business culture archetypes.
[KTA] One concrete illustration is the mistaken view of how managements allocate capital to reinvestment in their business vs. returning it to investors.
[MA] I don’t talk about how this is done. I talk about the decisions made affect external observables like stock market levels.
[KTA] Once the investments are decided upon which are necessary to sustain and grow the business and provide the required ROIC ( return on invested capital) and Xcode the WACC ( weighted average capital cost, then a decision has to made as to the appropriate leverage and how much equity should be utilized to support those investments. If there are excess earning ( or more accurately cash flow) , then that amount is available to return to shareholders either in the form of dividends ( regular or special) or share buybacks.
[MA] Dividends are a return to shareowners. Stock buybacks are paid to former shareowners. They provide no direct benefit to existing shareowners. But they do provide a benefit to existing shareowners, which was one of the causes of the anomalous behavior of the stock market.
[KTA]..it is either a total misunderstanding of the capital allocation prices and/ or outright demagoguery by liberal politicians to argue that if stock buybacks were curtailed that he money would be reinvested in the business.
[MA] If buybacks were curtailed the money used would probably go to dividends. In the 19th century, the large majority of earnings were returned to investors (though not all of them like today). And by this I do not mean in individual companies, obvious companies with scads of cash will invest that rather than borrow it, but on an economy-wide basis it is happening and debt levels are rising. It appears debt is today being used for investments that were financed with profits in the past.
[KTA] If additional investments were available that appeared to provide the requisite rate of return. , they would be made by a profit maximin management. And if hey did not profit the requisite rate of return they would destroy economic value and make us all marginally poorer on average. Lastly , the money returned to shareholders either directly through dividends or indirectly through stock buybacks does not disappear down a black hole. It is recycled by its recipients, often more efficiently than corporate management can do.
[MA] This is an example of what I mean by culture. You speak of requisite rate of return, and economic value being destroyed if this is not achieved. Rate of return is a financial metric, not an economic one. That the two are not separated in your mind is a manifestation of SP culture.
About 15 years ago GaveKal wrote a little book in which they talked about their platform company model. This was a company that outsources all the low-value, capital intensive activities keeping the high-value activities in-house, and by doing so generating most of the profits here. It’s a no-brainer from a financial point of view. And if one sees economics in terms of generating sales and profits and investments to produce more sales and profits, as you seem to, such an economist would see the same thing,
But economics is not just about sales, profits and investments. It is ultimately about goods and services, which are real things that are only *measured* in financial terms. It *matters* if critical stuff is being made in China if China invades Taiwan. An example I gave in my review of GaveKal’s book was of a consumer product company selling their branded merchandize entirely produced by foreign companies who take only a small share of the profit. What is there to stop them from cutting off shipments of your product to you and selling it themselves at a lower price to capture more of the profit for themselves?
Thanks for this detailed discussion of your worldview and the basis for it and how it has booked over time.It is helpful in reading your posts. However, with all due respect some of your resting does appear somewhat circular and at times seems be aimed at justifying what I might choose to label your preconceived inclinations. Particularly in the sphere of economics and the stock market, both of which are areas I have a fair amount of knowledge and experience. I will leave it to others to determine whether or not I qualify as an expert.
One example is that while I understand your descriptions of two systems which you label SC and SP , I believe that the descriptions are in fact if one system - free market capitalism- which experiences different types of distortion both temporally ( over time, not temporarily) and societally in its practical application. IMHO- your distinction is arbitrary and it is a continuum with the underlying basic structure the same and the disparate causality which you attribute to these systems is also arbitrary rather than fact based experimentally justified. One concrete illustration is the mistaken view of how managements allocate capital to reinvestment in their business vs. retuning it to investors. This is based by a framework developed and guidelines decided upon by a board of directors in consultation with management subject to any legal constraints, indeed the priorities are obviously different for every company, particularly those in industries with widely divergent capital needs. Once the investments are decided upon which are necessary to sustain and grow the business and provide the required ROIC ( return on invested capital) and Xcode the WACC ( weighted average capital cost, then a decision has to made made as to the appropriate leverage and how much equity should be utilized to support those investments. If there are excess earning ( or more accurately cash flow) , then that amount is available to return to shareholders either in the for. Of dividends ( regular or special) or share buybacks. In reality, how much is returned to shareholders in the form of dividends vs. buybacks is a function of many factors, including the efficiency of the tax treatment of whatever methodology is decided upon. But it is either a total misunderstanding of the capital allocation prices and/ or outright demagoguery by liberal politicians ( think Pocohantas🙂, I mean Elizabeth Warren) to argue that if stock buybacks were curtailed that he money would be reinvested in the business. If additional investments were available that appeared to provide the requisite rate of return. , they would be made by a profit maximin management. And if hey did not profit the requisite rate of return they would destroy economic value and make us all marginally poorer on average. Lastly , the money returned to shareholders either directly through dividends or indirectly through stock buybacks does not disappear down a black hole. It is recycled by its recipients, often more efficiently than corporate management can do. The claim stock buybacks are a precision of SC is a bogeyman that only the misinformed attempt to justify
BTW - I do not disagree that there are real perversions of stakeholder capitalism which have been harmful both to our economy and individual investors. The two I would single our are first- the asymmetric nature of the benefits of stick options for management rather than stockholders - . It is “ a heads I win, tails you lose” situation. Second is the growth of the professional managerial clad as corporate size and complexity has increased and as institutional ownership has replaced direct individual ownership as Berle and Means presciently identified 91 years ago. The aforementioned trends have in effect departed the power of the property holders ( share owners) from the power to influence the management of the corporation. In effect now professional corporate managers in effect collude with investment managers to disenfranchise share holders and transfer wealth from the owners of the business to management, often egregiously compare to the results of their management. Correcting that abuse would be a much more productive use of the politicians and crusading populists than decrying stock buybacks. Crony capitalism is the real perversion, not your SP.
[KTA] Thanks for this detailed discussion of your worldview and the basis for it and how it has booked over time.It is helpful in reading your posts. However, with all due respect some of your resting does appear somewhat circular and at times seems be aimed at justifying what I might choose to label your preconceived inclinations.
[MA] You’re welcome. My “resting” comes from observations of anomalous stock market behaviors.
https://mikealexander.substack.com/p/how-anomalies-drove-my-social-science
[KTA] One example is that while I understand your descriptions of two systems which you label SC and SP , I believe that the descriptions are in fact if one system - free market capitalism- which experiences different types of distortion both temporally ( over time, not temporarily) and societally in its practical application.
[AM] Yeah, it’s all free market capitalism operating under an evolving business culture characterized as a mix of two business culture archetypes.
https://mikealexander.substack.com/p/how-economic-culture-evolves
[KTA] One concrete illustration is the mistaken view of how managements allocate capital to reinvestment in their business vs. returning it to investors.
[MA] I don’t talk about how this is done. I talk about the decisions made affect external observables like stock market levels.
[KTA] Once the investments are decided upon which are necessary to sustain and grow the business and provide the required ROIC ( return on invested capital) and Xcode the WACC ( weighted average capital cost, then a decision has to made as to the appropriate leverage and how much equity should be utilized to support those investments. If there are excess earning ( or more accurately cash flow) , then that amount is available to return to shareholders either in the form of dividends ( regular or special) or share buybacks.
[MA] Dividends are a return to shareowners. Stock buybacks are paid to former shareowners. They provide no direct benefit to existing shareowners. But they do provide a benefit to existing shareowners, which was one of the causes of the anomalous behavior of the stock market.
https://mikealexander.substack.com/p/looking-at-the-stock-market-in-terms
[KTA]..it is either a total misunderstanding of the capital allocation prices and/ or outright demagoguery by liberal politicians to argue that if stock buybacks were curtailed that he money would be reinvested in the business.
[MA] If buybacks were curtailed the money used would probably go to dividends. In the 19th century, the large majority of earnings were returned to investors (though not all of them like today). And by this I do not mean in individual companies, obvious companies with scads of cash will invest that rather than borrow it, but on an economy-wide basis it is happening and debt levels are rising. It appears debt is today being used for investments that were financed with profits in the past.
[KTA] If additional investments were available that appeared to provide the requisite rate of return. , they would be made by a profit maximin management. And if hey did not profit the requisite rate of return they would destroy economic value and make us all marginally poorer on average. Lastly , the money returned to shareholders either directly through dividends or indirectly through stock buybacks does not disappear down a black hole. It is recycled by its recipients, often more efficiently than corporate management can do.
[MA] This is an example of what I mean by culture. You speak of requisite rate of return, and economic value being destroyed if this is not achieved. Rate of return is a financial metric, not an economic one. That the two are not separated in your mind is a manifestation of SP culture.
About 15 years ago GaveKal wrote a little book in which they talked about their platform company model. This was a company that outsources all the low-value, capital intensive activities keeping the high-value activities in-house, and by doing so generating most of the profits here. It’s a no-brainer from a financial point of view. And if one sees economics in terms of generating sales and profits and investments to produce more sales and profits, as you seem to, such an economist would see the same thing,
But economics is not just about sales, profits and investments. It is ultimately about goods and services, which are real things that are only *measured* in financial terms. It *matters* if critical stuff is being made in China if China invades Taiwan. An example I gave in my review of GaveKal’s book was of a consumer product company selling their branded merchandize entirely produced by foreign companies who take only a small share of the profit. What is there to stop them from cutting off shipments of your product to you and selling it themselves at a lower price to capture more of the profit for themselves?
Thanks for this detailed discussion of your worldview and the basis for it and how it has booked over time.It is helpful in reading your posts. However, with all due respect some of your resting does appear somewhat circular and at times seems be aimed at justifying what I might choose to label your preconceived inclinations. Particularly in the sphere of economics and the stock market, both of which are areas I have a fair amount of knowledge and experience. I will leave it to others to determine whether or not I qualify as an expert.
One example is that while I understand your descriptions of two systems which you label SC and SP , I believe that the descriptions are in fact if one system - free market capitalism- which experiences different types of distortion both temporally ( over time, not temporarily) and societally in its practical application. IMHO- your distinction is arbitrary and it is a continuum with the underlying basic structure the same and the disparate causality which you attribute to these systems is also arbitrary rather than fact based experimentally justified. One concrete illustration is the mistaken view of how managements allocate capital to reinvestment in their business vs. retuning it to investors. This is based by a framework developed and guidelines decided upon by a board of directors in consultation with management subject to any legal constraints, indeed the priorities are obviously different for every company, particularly those in industries with widely divergent capital needs. Once the investments are decided upon which are necessary to sustain and grow the business and provide the required ROIC ( return on invested capital) and Xcode the WACC ( weighted average capital cost, then a decision has to made made as to the appropriate leverage and how much equity should be utilized to support those investments. If there are excess earning ( or more accurately cash flow) , then that amount is available to return to shareholders either in the for. Of dividends ( regular or special) or share buybacks. In reality, how much is returned to shareholders in the form of dividends vs. buybacks is a function of many factors, including the efficiency of the tax treatment of whatever methodology is decided upon. But it is either a total misunderstanding of the capital allocation prices and/ or outright demagoguery by liberal politicians ( think Pocohantas🙂, I mean Elizabeth Warren) to argue that if stock buybacks were curtailed that he money would be reinvested in the business. If additional investments were available that appeared to provide the requisite rate of return. , they would be made by a profit maximin management. And if hey did not profit the requisite rate of return they would destroy economic value and make us all marginally poorer on average. Lastly , the money returned to shareholders either directly through dividends or indirectly through stock buybacks does not disappear down a black hole. It is recycled by its recipients, often more efficiently than corporate management can do. The claim stock buybacks are a precision of SC is a bogeyman that only the misinformed attempt to justify
BTW - I do not disagree that there are real perversions of stakeholder capitalism which have been harmful both to our economy and individual investors. The two I would single our are first- the asymmetric nature of the benefits of stick options for management rather than stockholders - . It is “ a heads I win, tails you lose” situation. Second is the growth of the professional managerial clad as corporate size and complexity has increased and as institutional ownership has replaced direct individual ownership as Berle and Means presciently identified 91 years ago. The aforementioned trends have in effect departed the power of the property holders ( share owners) from the power to influence the management of the corporation. In effect now professional corporate managers in effect collude with investment managers to disenfranchise share holders and transfer wealth from the owners of the business to management, often egregiously compare to the results of their management. Correcting that abuse would be a much more productive use of the politicians and crusading populists than decrying stock buybacks. Crony capitalism is the real perversion, not your SP.
Interesting read Mike. I especially liked that you included the justifications for your beliefs. Glad to see you’ve had a good life!