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perhaps time for a post-mortem. comparing the communications from berkshire hathaway (buffett) and dt’s bod is like chalk and cheese. what buffett reports to shs is clear and relevant, some of what dt focuses on is irrelevant from sh perspective and perhaps somewhat devious imho.
in all its communications dt, focuses on adjusted earnings before interest, tax, depreciation & amortisation (ebitda). as this metric does not take account of it and capital requirements, munger (buffett’s late business partner), succinctly recommended that whenever you see ebitda in a financial statement you should replace it with the words “bull**** earnings”. to build on this analogy, and for reasons given below, may i humbly suggest that adjusting ebitda by removing ongoing costs like share based compensation (sbc) is akin to the bull having a serious bout of diarrhoea.
sbc is a major cost to the owners as it dilutes their share of the ownership of the company, and, more importantly, their share of the company’s future earnings - real and more impactful on sh returns than the actual equivalent cost of the shares.
having read all of the buffett’s. annual sh letters, i think buffett would have written to sh.s. something like this:
dear sh. as owners of xxx i am pleased to report on what we are doing on your behalf to maximise your returns on your investment. the company goes from strength to strength with a high revenue growth rate and even higher commensurate growth in profit and the ensuing free cash flows. this, together with the financial strength of the company, means we are in a position to maximise your wealth creation buy buying back and cancelling shares - particularly beneficial now as the sp is being undervalued by the market.
we therefore propose to do this and will seek your approval. this will have the advantage of compounding your fractional ownership each year, on top of the anticipated rise in the free cash flow. with exponential growth on exponential growth you may expect exceptional returns when the market wakes up to the true value of your company. but the later this happens, the better your returns will be.
at the same time, we realise that our approach to share based compensation is working against the your interests as owners, reducing your fractional ownership rather than increasing it. and, unfortunately, the lower the sp the greater the dilution becomes. we therefore propose paying bonuses/incentives in cash in the future, which will be of no consequence to the profitability of the company, nor will it reduce the bonuses and incentives of the execs, but will make the accounts more transparent and understandable and allow you to get higher returns. however, we will still require management to buy shares in the market using their bonuses to achieve a certain percentage ownership. …………. yours sincerely, chairman, bod
some musings and i wish - but with this bod it would never happen
sorry - capitalised version
perhaps time for a post-mortem. comparing the communications from berkshire hathaway (buffett) and dt’s bod is like chalk and cheese. what buffett reports to shs is clear and relevant, some of what dt focuses on is irrelevant from sh perspective and perhaps somewhat devious imho.
in all its communications dt, focuses on adjusted earnings before interest, tax, depreciation & amortisation (ebitda). as this metric does not take account of it and capital requirements, munger (buffett’s late business partner), succinctly recommended that whenever you see ebitda in a financial statement you should replace it with the words “bull**** earnings”. to build on this analogy, and for reasons given below, may i humbly suggest that adjusting ebitda by removing ongoing costs like share based compensation (sbc) is akin to the bull having a serious bout of diarrhoea.
sbc is a major cost to the owners as it dilutes their share of the ownership of the company, and, more importantly, their share of the company’s future earnings -,real and more impactful on sh returns than the actual equivalent cost of the shares.
having read all of the buffett’s. annual sh letters, i think buffett would have written to sh.s. something like this:
dear sh. as owners of xxx i am pleased to report on what we are doing on your behalf to maximise your returns on your investment. the company goes from strength to strength with a high revenue growth rate and even higher commensurate growth in profit and the ensuing free cash flows. this, together with the financial strength of the company, means we are in a position to maximise your wealth creation buy buying back and cancelling shares - particularly beneficial now as the sp is being undervalued by the market.
we therefore propose to do this and will seek your approval. this will have the advantage of compounding your fractional ownership each year, on top of the anticipated rise in the free cash flow. with exponential growth on exponential growth you may expect exceptional returns when the market wakes up to the true value of your company. but the later this happens, the better your returns will be.
at the same time, we realise that our approach to share based compensation is working against the your interests as owners, reducing your fractional ownership rather than increasing it. and, unfortunately, the lower the sp the greater the dilution becomes. we therefore propose paying bonuses/incentives in cash in the future, which will be of no consequence to the profitability of the company, nor will it reduce the bonuses and incentives of the execs, but will make the accounts more transparent and understandable and allow you to get higher returns. however, we will still require management to buy shares in the market using their bonuses to achieve a certain percentage ownership. …………. yours sincerely, chairman, bod
i wish - and anyway it is too late.