As always, I am playing with fire when I critique Warren Buffett, but he does indulge in hyperbole (I hope that is all it is..) when he strays from his preferred habitat. In fact, my previous post on him evoked some strong responses. In the last Berkshire Hathaway report, he is quoted as saying “Both Charlie and I believe that Black-Scholes produces wildly inappropriate values when applied to long-dated options… Academics’ current practice of teaching Black-Scholes as revealed truth needs re-examination. For that matter, so does the academic’s inclination to dwell on the valuation of options....
Equity Risk Premiums: The 2011 Edition
As many of you who have been readers of my posts know, I have a bit of fixation on the equity risk premium and have had several posts on the topic. The equity risk premium is what investors charge over and above what they can make on a riskfree investment to invest in equities, as a class. The reason for the fixation is simple. The equity risk premium is a central number in both corporate finance and valuation. In corporate finance, it determines the costs of equity and capital for firms, and by extension, their investment policies. It also drives the choice between debt and equity and determines...
Merck and Pfizer: Thoughts on investing as a patriotic duty and market efficiency
We have an interesting long-term experiment in the making in the pharmaceutical business, as two of the largest players - Pfizer and Merck announced their plans for the future. Pfizer was the first up, announcing its plans to buy back stock and rein in R&D. Pfizer has been an active acquirer over the last few years, buying Wyeth for $68 billion in 2009, and this announcement seems to at least implicitly suggest at least a pause in, and perhaps an abandonment of, that strategy.Merck responded with a very different vision of its future, suggesting that it would be investing more in R&D...
Dividend Policy for the 21st century
This is the fourth of a series of posts that I have on dividend policy, starting with the one noting the shift from dividends to stock buybacks, moving on to examining whether buybacks are good news for stockholders and then looking at the consequences for investment strategies of the shift. In this post, I would like to examine how companies should think about dividends in a globalized economy, with relatively few safe havens.The best way to describe dividend policy at most US and European companies is that dividends are sticky. Put differently, the dividend per share this year at most companies...
The unemployment rate: A look at the sampling question.
The unemployment numbers for the United States came out yesterday and they seemed internally inconsistent. Payrolls increased by only 36,000 (a significant disappointment, since payrolls need to increase by 200,000 or more to make a dent in unemployment) but the unemployment rate dropped from 9.4% to 9%. The news, though, gives me a chance to talk about one of my favorite topics: sampling, statistics and standard error.Staying on the unemployment numbers, it is worth examining how they are computed. The best source is the Bureau of Labor Statistics (BLS), which provides details on how it computes...
The Shift to Buybacks: Implications for investors
A couple of posts ago, I noted the shift from dividends to stock buybacks at US corporations, a shift that is already starting to have ripple effects in other markets. In 2010, about 60% of the cash returned by S&P 500 companies came from stock buybacks, whereas only 40% took the form of dividends. Since so much of investment lore is built around dividends, there are consequences for investors of all types:a. The dividend player: In the earliest days of equity markets, the advice given to investors was simple. Find a stock that pays a "big" dividend, and growth then is pure icing on the cake;...
