8 ms·

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

35 points by anderzole 15y ago

mrb 15y ago
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.
- aidenn0 15y ago
  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.
wasd 15y ago
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.
- beatle 15y ago
  you got this info from an intern who got this information from a talk from some guy other than the CEO/CFO?
  - elithrar 15y ago
    > 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.
  - wasd 15y ago
    I'm pretty sure it was Tim Cook who gave the talk but because I don't remember exactly, I didn't cite.
vacri 15y ago
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?
- bcrescimanno 15y ago
  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).
  - wmf 15y ago
    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?
    - mordero 15y ago
      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.
  - adamtmca 15y ago
    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.
    - bcrescimanno 15y ago
      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.
brisance 15y ago
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.
jakarta 15y ago
Buffett has called Henry Singleton the greatest capital allocator of all time: http://en.wikipedia.org/wiki/Henry_Earl_Singleton 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-great-american-capitalist/ http://www.observer.com/2003/04/the-brain-behind-teledyne-a-...
- orijing 15y ago
  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.
ksec 15y ago
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.
yason 15y ago
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.
- TDL 15y ago
  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.
wmat 15y ago
"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?

35 points by anderzole 15y ago

mrb 15y ago

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.

aidenn0 15y ago
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.

wasd 15y ago

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.

beatle 15y ago
you got this info from an intern who got this information from a talk from some guy other than the CEO/CFO?
- elithrar 15y ago
  > 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.
- wasd 15y ago
  I'm pretty sure it was Tim Cook who gave the talk but because I don't remember exactly, I didn't cite.

vacri 15y ago

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?

bcrescimanno 15y ago
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).
- wmf 15y ago
  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?
  - mordero 15y ago
    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.
- adamtmca 15y ago
  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.
  - bcrescimanno 15y ago
    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.

brisance 15y ago

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.

jakarta 15y ago

Buffett has called Henry Singleton the greatest capital allocator of all time: http://en.wikipedia.org/wiki/Henry_Earl_Singleton 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-great-american-capitalist/ http://www.observer.com/2003/04/the-brain-behind-teledyne-a-...

orijing 15y ago
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.

ksec 15y ago

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.

yason 15y ago

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.

TDL 15y ago
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.

wmat 15y ago

"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?