Well killing time before tomorrow's report I thought I would respond to the Graham article. Was very interesting reading and have been thinking about it the last couple of days. It's an interesting ethical question.....
http://csinvesting.org/wp-content/u...more-dead-than-alive-3-parts-by-b-grahams.doc
As Croasian mentioned Graham is writing about a specific period of time during the great depression where there had been capital raisings during the 1920s bull run and many had borrowed in order to participate. When the market crashed we had the extraordinary situation where the market capitalisation of many companies was less than the cash they had in the bank. To put things in perspective this situation is somewhat analogous to what happened with Slater and Gordon, except even SGH isn't trading this low. SGH - currently trading at $1.80 ish - to be in the same situation would need to be trading at around $0.48 based on cash held at FY17 (report tomorrow will give a different number).
At that price the market expectation would need to be unbelievably pessimistic, so the view could be assumed to be that the company would bleed the money it held till there was nothing left. If true the ethical thing would be for the executives to liquidate the company which would probably never happen because (being human) they're more concerned with their own jobs than the investors. On the other hand if the market was wrong and the company was a going concern after all then it would be deeply undervalued. So is it ethical to buy back in this scenario?
Graham rightly contends that there is a conflict of interest between those who sell and those who hold and that a buyback screws over the sellers to benefit the holders.
Who does the company have an obligation to? Is the company's obligation to exiting shareholders and current holders equivalent?
Its at this point we need to consider the difference between the scenario of a buyback for a company like Shine with that of a company during the Great Depression. Firstly with record unemployment during the depression, many holders were desperate for liquid cash, also there would have been margin calls for the loans taken in the bull run and this would lead many to sell who under normal circumstances would have continued to hold. i.e. selling for factors entirely separate from the share price or the company's perceived health.
So you would have seen many previously long term holders exiting and on a mass scale.
Their situation is obviously pitiable and it would be a complex question to determine how responsible they are for their own plight. An unbiased objective look at the situation would certainly not place all the blame on their shoulders - but it also wouldn't place no blame.
Regardless that's an academic question at this point. A buyback for a company like Shine in 2017 is in an entirely different proposition - if we determine SHJ to be currently undervalued (as I do).
First off Shine has not conducted a capital raising so that is not a factor.
Another important concern is the type of person who is likely to be selling. Certainly we can consider a real life need for liquidity to be far less common of a motivating factor than it was in the 1930s. Anyone who is a long term holder and with no real world need for short term liquidity must factor the impact of a buyback into their decision to sell, and there is no ethical concern in that case.
We can also consider in a 2017 buyback (compared to the 1930s) that a larger percentage of sellers would be short term holders. Which is to say people who are more likely to view the stock as more of a tradable commodity than as a business. A question we should ask is: does a company have an equivalent responsibility to day traders as it does to long term holders? While I'm sure it does in a legal sense, I would say that ethically it does not. We can conclude that Shine's executives in 2017 have (on balance) a greater responsibility towards ongoing holders than to exiting ones.
Ethics aside another consideration is the type of holder that the company wishes to attract. Buybacks (when stock is undervalued) incentivise a trend towards longer term holders. This has real world impacts on the types of actions executives are incentivised to take leading to a better probability of long term health of the business.
(20min delay)
