In his recent interview with WHG Clube do Livro, Michael Mauboussin discussed one example of how companies destroy wealth. Here’s an excerpt from the interview:
Mauboussin: The third observation is that if you’re not earning your cost of capital, growth is bad. The faster you grow the more wealth you’re actually going to destroy.
Warren Buffett’s got a great line where he says, when you find yourself in a hole, the first thing you do is stop digging.
That’s a good example of that and you might say well gee you know how does that happen in the real world? Well one example where it’s very prominent is mergers and acquisitions. How many times have you seen a deal announced that is purported to be accretive to earnings, so it adds to earnings or earnings growth, but the stock price proceeds to go down.
There’s an example where there was a large investment the market deemed to be net present value negative, even though from a pure accounting point of view earnings went up.
You can watch the entire discussion here:
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