Most CEOs are not good capital allocators when it comes to their stock:
- They are not objective analyzing their company and thus not objective in share buyback. In the majority of cases they think their stock is a buy all the time. Why? Because they spend long hours trying to grow the business, they keep telling their customers how great their products are, they keep telling their board and Wall Street about the bright future of the business, etc. They start believing their own spin.
- Most CEOs don’t know the difference between a good company and a good stock. Often good companies make a horrible stock.
- Since they own a lot of stock options they have an inherent bias to be bullish and a tremendous bias to drive EPS growth at any cost (i.e. Colgate (NYSE:CL) buying its stock through late 90s and 2000s at 30 plus times earnings is an example of that). In fact since their stock options are linked to the stock price (not the total return to shareholders), the bias is always to buy back stock than to pay a dividend.
Buffett is not a typical CEO, in fact he is very hands off CEO. He doesn’t have stock options, he owns a lot of Berkshire (NYSE:BRK.A) stock and has a very long-term time horizon (an important difference). He has a tremendous track record as an investor (capital allocator) and is trusted in the market and the perceived value of Berkshire stock. A combination of all of the above means that when Buffett comes out and says we’ll buy back BRK stock, the market takes this as this stock is really cheap. At roughly 1x book, there is no Buffett premium priced into the shares.