What We're Reading

Previous studies about the relationship between managers' upbringing and their performance have focused on educational differences, including whether the managers attended elite universities or had access to education-related networks of influential people who could later help boost their careers. Such studies tend to find that managers with a stronger educational background tend to deliver better performance.

After writing “Here’s The Perfect Metaphor For Recent Fed Policy,” I had to pick up a copy of The Dao of Capital. Mark Spitznagel just has a unique way of looking at the markets that really resonates with me.

One thing that really jumped out at me while reading it was Spitznagel’s research regarding Tobin’s Q, (though he calls it, “The Misesian Stationarity Index”). It struck me for two reasons. First, I haven’t seen much research like this elsewhere and second, the opinions I have seen regarding it are all of a dismissive nature.

Just Google “Tobin’s Q” and you’ll find all sorts of pieces proclaiming, ‘Don’t worry about Tobin’s Q,’ and, ‘Tobin’s Q is not an effective way to time the market,’ etc. Actually, both of these sentiments are incorrect.

Spitznagel’s research published in the book shows investors should be worried about the extreme level of Tobin’s Q today for the simple fact that is a very good way to time the market.

But before I get into that I should probably explain w

At their worst, stock buybacks can be a form of corporate cannibalism. Often the unspoken motive is to use extra cash to boost earnings per share by reducing the number of shares among which the company's profits are divided. But that can be a slippery slope says Kevin Beech, an Analyst at Behind The Numbers.  "If they don't keep repurchasing stock, their earnings will take a hit. So it can turn into a sort of an addiction."

Another question is how prudent will they be in their repurchase?  Will they do so at a high p/e (flashback to NFLX Reed Hastings buying back @ $300/share in 2011) or will they do so on weakness and during dips? 

Still others actually target names with a share repurchase as short candidates for a variety of (very possibly prudent) reasons.  (Hat tip to veteran member GT)

Lastly you must ask yourself do companies with stock buybacks perform as well, better or worse than the S&P?  Talking heads would have you believe a stock repurchase drives prices higher........