Yesterday’s post was titled “Buying Back your Stock on the Cheap“. The post covered a situation where a company is warning the public markets that business is bad. The stock price and debt have fallen dramatically. In the meantime, the company and its CEO are buying equity and debt.
Rob Powell of Telecom Ramblings posed the question of how should we view this relative to the mirror image–when companies talk-up their companies and then raise money at higher prices (or personally sell their shares). What is the ethics of each scenario?
This is a question that Warren Buffett answers oh-so-well. Many months back, I wrote a post on the topic called “High Stock Price = Bad (sometimes)“. This is a hugely important topic and I encourage my co-workers (particularly executives) to read it carefully.
The gist of Buffett’s point is this: executives should aim to have their stock price reflect the intrinsic value of the company, not more and not less. The Oracle of Omaha cautions his shareholders that this means he does not view his mandate to get the stock price to be as high as possible; instead, his promise centers around the goal of having the stock price reflect intrinsic value.
This is in contrast to how many executives view their job: they believe the goal is to get their stock price as high as possible. On one level, they are right. On another level, they are wrong and the mistaken notion could lead to dire consequences. The executive must understand the subtle but all-important nuance in the principle that Warren Buffett holds so dear to his heart. My answer to Rob Powell’s question lies in the Oracle’s wisdom.
I will pick this up Thursday.
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