In his latest paper titled – Wealth Transfers: Redistribution of Value via Capital Allocation, Michael Mauboussin explains why investors should pay more attention to management’s actions regarding buying and selling the company’s stock. Here’s an excerpt from the paper:
Companies can affect wealth in a couple of ways. First, they can make investments in their operations that earn in excess of the cost of capital. This activity benefits capital providers. But sustaining returns above the cost of capital is challenging because of competition and the inevitable maturation of various markets for goods or services.
Companies can also transfer wealth by buying or selling mispriced stock. The evidence shows that in the aggregate companies do sell high and buy low, which means that transacting shareholders fare worse than ongoing holders.
Astute investors focus on a management’s ability to allocate capital and tend to focus on investments in the business. This is appropriate. But investors should also be aware of the impact of management actions with regard to their own stock. The essential guide is the gap between price and value.
Finally, many investors count on mispriced stocks regressing toward their value per share over time as a means to generate excess returns. Wealth transfers show that actions by management can change the value per share without any change in the underlying fundamentals of the operations.
You can read the entire paper here:
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