RE: WTB spent £150mill in buy back...25 Feb 2019 20:29
Dave Collum: Had an arithmetic epiphany. I do an analysis on the simple company and I concluded that if a company has cash on the books and they take the cash and they do a corporate buyback and the market is liquid enough the buyback doesn't influence the price, that the shares should move precisely zero. 0/0 the shares should not move.
I look at this, I go, how is that possible? It turns itself right out of the arithmetic. And I say okay, let's assume that they do push the price of the shares up. What I end up concluding is the per share ownership of productive assets by the share buyback that push ups, that pushes the share price up actually drops so the investors who are sitting on the shares while the company is buying back shares is actually losing. They own a smaller fraction of the company on a per share basis, so the value of their shares is going down.
And meanwhile, the price of their shares are going up because the bid is driving them up and I realized that while they are doing share backs to push the bid up they are actually depleting the net worth, in reality, of the investors who are sitting on those shares. And that hit me last night. And so I sent something to Adam and he sent something back. I called my brother and I called a friend at Goldman or ex-Goldman and I said to him, look at this. Tell me what I'm missing. He couldn't see a hole in this. Get Adam to send me a rough draft of part one before you upload it. I want to wedge in a little bit more. I had actually missed this -- I actually had drawn the wrong arithmetic conclusion on what share back should do to prices.
And then, of course, the share buyback to the extent that when you drive up the shares by putting a bid under them, there is no mathematical way to predict how much they should go up because it depends on the nonlinearity of the whole liquidity thing. An example I said was that Kodak one time jumped $4.00 on the last 200 share trade of the day. That's how little you can push a share up with.
So, when a company is putting a constant bid under its shares, what it is doing is forcing the valuations to the roof. And meanwhile, it turns out the -- it's hurting the investors to the extent that, although the shares are soaring. The per share ownership of productive assets is dropping. And that's the part I didn't get.
Chris Martenson: I don't get that -- why is the per share ownership -- because a million shares half of away I still own one of those thousand shares doesn't my percentage allocation go up?
Dave Collum: Let me see if I can do it verbally. We have 900 million of what we will call the value of the company and 100 million of what we will say is assets. Somewhere where they store their money. If they take the 100 million and they buy back shares and it doesn't move the share price, they will drive -- they will drive the share count from -- let's say 100 million shares at 10 bucks a share, what they will do is take 10 million shares off the market, but t
Sign In
Follow the stocks
