Great audio interview with Jim Chanos by Barry Ritholtz.
Jim Chanos is one of my favorite managers because of the logical consistency of his arguments – a rarity even among successful managers. In the interview he critically reviews the current buyback craze, among other topics. He basically argues that corporate america, on average, has a return on assets (ROA) in the mid teens, whereas buying back stock gives you, again on average, an expected return of high single digits at best. He concludes that either the historic ROA way overstates current investment opportunities, or that management allocates capital poorly, neither of which is overly bullish for the stocks.
I happen to think that both conclusions are true: I have written about how distorted management incentives are the main culprit for poor capital allocation decisions, be it in M&A and buying back stock. I also think that managements are faced with poor outlook for organic growth, which is a result of the fact that a true liquidation of malinvestment of the past cycle has not happened due to accommodative monetary policy – a fact Marty Fridson pointed out at the Grant’s conference.
As Austrians always stress: it is not the absolute, but the relative price level that matters for companies’ investment decisions. Trying to avoid the liquidation of unviable businesses unnecessarily keeps the price level up by withdrawing scarce resources from the market. This, in turn, makes it more difficult for new entrepreneurs to earn a decent margin for their investments. To sum it up: there can be no profit if losses are not allowed…