Maximizing Shareholder Value (LOL)
Drama. “Maximization” doesn’t mean anything in the world of our experience which is defined as all that we know by discrete events with newly discovered paths, or alternatives, in a “space” that is growing as we speak and only weakly constrained by the past. Nevertheless, it’s a clarion call for corporate raiders and “greenmail” and a thin wedge that can split rocks because nobody ever asks, What do you mean? as if the answer is too obvious to even contemplate the question.
Sarbanes-Oxley Act of 2002
Moreover, the dictum in law (securities regulation and omnibus measures such as the Sarbanes-Oxley Act and Dodd-Frank Act) that is often cast about and casually appealing to votes by proxy, is that the Board of a company shall “maximize shareholder value” but it can only be argued as the Board shall “do no harm”; and it is possible to determine whether “harm” has been done or not, but it is not possible to determine whether “shareholder value” has been “maximized”.
We’re moved to talk about this because there is no doubt that we have more money because of “activist shareholders” and we can take our profits and move on to some other investment. But, we were happy with what we had – that’s why we had it – and now we might have to find something else, or continue to ride on the gravy train possibly with some new “belts and braces” to protect our price against some new hazards not foreseen by the new or old management scurrying to “increase” shareholder value, now, or else.
Case in point: Wal-Mart Stores Incorporated announced yesterday that it was initiating another $15 billion buyback of its own stock, replacing a similar program that was started in 2011 and is just finishing up with about $700 million left to spend (Reuters, June 7, 2013, Wal-Mart Board Approves Another $15B in Stock Buybacks). It’s noteworthy, however, that the program still had nearly $10 billion to spend last year (ibid, Reuters) and the $50 shares in 2011 were already costing $60 by that time and are trading at $75 today.
It’s also noteworthy that the ownership interest of the family trust, Wal-Mart Enterprises LLC, has been pushed upwards above 50% by the last share buyback program, and that the percentage ownership of other large blocks has also been increased proportionately with thanks to the many shareholders who took their profits and sold out at lower prices.
Our ownership criteria is, of course, uncomplicated – Red Line Stock Price (SP) above the Black Line Risk Price (SF), and for no other reason – because the Risk Price (SF) is our provably good estimate of the “price of risk” which resolves the conflict between “risk seeking” and “risk averse” investors within the “demonstrated societal norms of risk aversion and bargaining practice”.
Hercules & Cerberus
This latter criteria – the demonstrated societal norms of risk aversion and bargaining practice – covers a lot of ground and reflects anything that is known about the stock price, and the laws that might affect it, and the demonstrated aspirations of the investors by whatever fancies they might have.
We too can then do just nothing, and join the smart money with an investment that is provably “as good as cash” and “better than money” absent a “surprise” that we know perfectly well how to deal with (with a stop/loss or collar; please see almost any of our (B)(N)-Company posts) and respect the next champion of “maximizing shareholder value”. Thank you very much.
Exhibit 1: (B)(N) WMT Wal-Mart Stores Incorporated – Risk Price Chart
(B)(N) WMT Wal-Mart Stores Incorporated
Wal-Mart Stores Incorporated operates retail stores in various formats under 69 banners. Its operations comprise three reportable business segments: Walmart U.S., Walmart International and Sam’s Club.
(Please Click on the Chart to make it larger if required.)
The calculated Risk Price (SF) is a provably effective estimate of the “price of risk” which is “the least stock price at which the company is likeable” (Goetze 2009) and “likeability” is determined by the demonstrated factors of “risk aversion” – we want to keep our money and obtain a hopeful return above the rate of inflation – and the properties of portfolios of such stocks. Stock prices that are less than the price of risk can be said to be “bargain prices” but with the risk attached that the company might never get a higher price other than that due to ambient volatility or “surprise”; on the other hand, investors who are willing to pay the “full price” above the price of risk, and buy and hold the stock at those prices, must also be confident, and have reason to believe, that the company will produce those values, absent new information.
Please see our Posts, The Price of Risk, August 2012 and The Nash Equilibrium & Its Stock Price, October 2012, for more information on the theory.
To see what else “risk averse” investing can do for us, please see our recent Posts, The Wall Street Put, April 2013, and earlier Posts such as The Dow Transports, March 2013, or The Risk Adjusted Dow, March 2013, or The Canada Pension Bond, February 2013, and for a more colorful description of investment risk and the application of the “price of risk” to mergers & acquisitions, please see our Post, Bystanders & Collateral Damage, April 2013.
Postscript
We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product
The Perpetual Bond™“
Alpha-smart with 100% Capital Safety and 100% Liquidity”
Guaranteed
With No Fees and No Loads on Capital
For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.Disclaimer Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.
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