In his 2001 Scion Capital Letter, Michael Burry says investors who turn over the most stones will find the most success. Here’s an excerpt from the letter:
When evaluating an options compensation program, one must weigh the net value creation from (a) the issuance of excess options-related stock at prices higher than intrinsic value and (b) the tax benefit associated with the program against the net value destruction from (a) buying stock back at market prices higher than intrinsic value and (b) issuing options-related stock at prices lower than intrinsic value.
Such an evaluation is most illustrative when it encompasses several bull and bear cycles in the company’s history.
Also, note that this methodology does leave open the potential for tremendous value destruction if option-related stock is consistently issued at a discount to intrinsic value while an ongoing buyback consumes stock at a significant premium to intrinsic value.
To be clear, there is no easy rule of thumb, and digging through ten or more years of SEC filings to find the relevant numbers and trends is not generally a task most investors like to pursue. Certainly it is easier to listen to someone else’s opinion regarding the company’s growth rate or some other easily understood metric. It is likely, however, that the investors in the habit of overturning the most stones will find the most success.
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