Stock Market

[eatemup]

How ever much it was, you gotta believe that the guy tried to overstay the welcome back then too

[Ben Rhimene]

I'd watch for more falls on Cruise lines despite no stimulus aid, hotels, Goldman, Boa, Microsoft, Berk. b, plug, vivant solar, etc.

Get ready Pumper! Today the Oracle of Omaha announced Q1 loss of $50 BILLION. Might be able to get the A on the cheap come Monday's opening bell...

[chloevankatie]

...........

[Ben Rhimene]

...........

Normally I find your posts more interesting. Good to learn you have a thing for extended elipses...

[mathguy]

Ben I think Chloe is either asking you to explain what you meant (hence the ellipsis as an indirect question) or she decided against whatever she originally posted & then quickly edited it to, ".......". One of those right, Chloe?

[chloevankatie]

Men love a little mystery, right?

I think I will leave my ellipsis to keep you guys guessing, lol. :)


So anyway, I have been reading one of the books suggested on the Billionaire's podcast and they talk about spin off's.

What do you guys think about spin off index funds? I didn't even know that was a thing.

[Ben Rhimene]

Men love a little mystery, right?

What do you guys think about spin off index funds? I didn't even know that was a thing.

A little mystery...not too much though.

I admit I was not aware of spin-off funds. Concept not suprising but wasn't sure volume would be consistent enough to warrant a fund. I will try to keep it brief but a lot underneath the question so likely a wordy reply...since this sub-forum isn't for those rushing for sex I won't apologize further.

As for my opinion, I would avoid. Here is my thinking behind that. In theory, corporations exist to provide strong (not necessarily highest) returns for shareholders while limiting shareholder liability. A corporation makes the best returns for shareholders by being the "best" at something. That leads to market share growth, more customers, more revenue, and ideally more profit to distribute to shareholders. That is the simple version, ignoring vertical or horizontal integration, etc.

In reality, though, corporations are run by people. People who are greedy and out to maximize self-interest. Look at various studies of CEO compensation relative to shareholder return (much less average employee compensation!). CEO is technically governed by the Board, but that is mostly fiction. How does CEO maximize his/her pay? Usually by growth. The problem is organic growth (example, McDonald's adding a Shamrock Shake to lure in new customers) is slow. Easiest way is for McDonald's to buy Sonic. Huge, immediate leap in revenue and store count, menu items, etc. The downsides can be many, though. Bad cultural fits often overlooked. While some cannabalism is good certain acquisitions bring too much meaning time needs to be spent disposing excess. And, of course, the seller is often selling because they believe they get maximum value, whereas buyer thinks more value can be squeezed out...one of them is wrong. So corporations grow organically and through M&A. As they grow the scalability gives economies...a positive. Do more with less.

At some point the company gets too big. Geographically, product mix, something. They have moved beyond the core competency/ies that made it successful. Which means they have sabotaged their own value. Sometimes management realizes this itself. Sometimes it is activist shareholders. Sometimes it is an inquiring potential buyer of assets that gets them to consider selling. Sometimes it is a business unit management team interested in splitting off the parent. So management decides to sell part of the company. Usually it is a separate business unit (individual legal entity) cuz it is clean and easy. In theory this should be a win-win, and why spin-off funds make sense. The surviving parent is leaner, back closer to its core, with more cash, and the spun company is either standalone or part of a new organization which theoretically can get more value out of it. Why not buy funds focused on theoretical win-wins?!

Because theory ignores the human factor, and humans screw up spin-offs. They overpay or aren't disciplined bidders because they are so focused on growth for the sake of increasing their own reputation/compensation. Because humans undervalue potential cultural rifts (a 50% divorce rate proves that). Or they fail to appreciate the added value the selling company provided, and recreating or adapting to the buyer's methods can be costly, time-consuming, or outright impossible, which kills many of the expected "synergies" the deal was supposed to add. Maybe the buyer bought a business unit with bad management that was artificially propped up by the seller's structure? Lots of potential issues. Value leakage everywhere.

Look at companies that grew too big and had bad spin-offs. GE...poster child of ignoring the human factor. Time-Warner AOL is another. Countless smaller ones that don't get the same press.

My take is wait a year or 2 post-spin and buy the shares of those that proved they could manage in a different setting. Sure, you likely pay more, but you have de-risked by not buying a bucket which surely has some mistakes in it.

[pumpernickel]

Get ready Pumper! Today the Oracle of Omaha announced Q1 loss of $50 BILLION. Might be able to get the A on the cheap come Monday's opening bell...

The day has come.

[Ben Rhimene]

The day has come.

Excellent. I'm still on the B-team.

[chloevankatie]

A little mystery...not too much though.

I admit I was not aware of spin-off funds. Concept not suprising but wasn't sure volume would be consistent enough to warrant a fund. I will try to keep it brief but a lot underneath the question so likely a wordy reply...since this sub-forum isn't for those rushing for sex I won't apologize further.

As for my opinion, I would avoid. Here is my thinking behind that. In theory, corporations exist to provide strong (not necessarily highest) returns for shareholders while limiting shareholder liability. A corporation makes the best returns for shareholders by being the "best" at something. That leads to market share growth, more customers, more revenue, and ideally more profit to distribute to shareholders. That is the simple version, ignoring vertical or horizontal integration, etc.

In reality, though, corporations are run by people. People who are greedy and out to maximize self-interest. Look at various studies of CEO compensation relative to shareholder return (much less average employee compensation!). CEO is technically governed by the Board, but that is mostly fiction. How does CEO maximize his/her pay? Usually by growth. The problem is organic growth (example, McDonald's adding a Shamrock Shake to lure in new customers) is slow. Easiest way is for McDonald's to buy Sonic. Huge, immediate leap in revenue and store count, menu items, etc. The downsides can be many, though. Bad cultural fits often overlooked. While some cannabalism is good certain acquisitions bring too much meaning time needs to be spent disposing excess. And, of course, the seller is often selling because they believe they get maximum value, whereas buyer thinks more value can be squeezed out...one of them is wrong. So corporations grow organically and through M&A. As they grow the scalability gives economies...a positive. Do more with less.

At some point the company gets too big. Geographically, product mix, something. They have moved beyond the core competency/ies that made it successful. Which means they have sabotaged their own value. Sometimes management realizes this itself. Sometimes it is activist shareholders. Sometimes it is an inquiring potential buyer of assets that gets them to consider selling. Sometimes it is a business unit management team interested in splitting off the parent. So management decides to sell part of the company. Usually it is a separate business unit (individual legal entity) cuz it is clean and easy. In theory this should be a win-win, and why spin-off funds make sense. The surviving parent is leaner, back closer to its core, with more cash, and the spun company is either standalone or part of a new organization which theoretically can get more value out of it. Why not buy funds focused on theoretical win-wins?!

Because theory ignores the human factor, and humans screw up spin-offs. They overpay or aren't disciplined bidders because they are so focused on growth for the sake of increasing their own reputation/compensation. Because humans undervalue potential cultural rifts (a 50% divorce rate proves that). Or they fail to appreciate the added value the selling company provided, and recreating or adapting to the buyer's methods can be costly, time-consuming, or outright impossible, which kills many of the expected "synergies" the deal was supposed to add. Maybe the buyer bought a business unit with bad management that was artificially propped up by the seller's structure? Lots of potential issues. Value leakage everywhere.

Look at companies that grew too big and had bad spin-offs. GE...poster child of ignoring the human factor. Time-Warner AOL is another. Countless smaller ones that don't get the same press.

My take is wait a year or 2 post-spin and buy the shares of those that proved they could manage in a different setting. Sure, you likely pay more, but you have de-risked by not buying a bucket which surely has some mistakes in it.

The sapiosexual in me finds it so hot and erotic when you write such long and detailed intellectual posts and talk nerdy to me.

With that being said, however, you may just be exactly the type of investor that has proved the point that Joel Greenblatt was making in his book. That most investors undervalue spin-offs tremendously and it makes them such a good buy. He says that spin-offs tend to have the luxury of being supported by the parent company and have a higher likelihood of surviving financially and the time to buy is early in the game when the stock is still undervalued, and many investors invested in the parent company will actually just dump the stock. However, he also says you have to do your homework and keep up with the news regarding the company and read the prospectus.

Ain't nobody got time for that.

While doing my research on the topic, I found that spin-off index funds existed. I didn't even know that spin-off index funds were a thing either, and I thought maybe this would be a way to be able to reap the rewards of making the financial investment and receiving higher returns without wasting my free time reading a bunch of prospectus that would put me to sleep faster than ambien.

"A comprehensive study conducted at Purdue University revealed that spinoff shares achieved an excess return of more than 10% per year above the US stock market return over 36 years – between 1965 and 2000. Researchers recently extended the study up to 2013, and the results were the same."

Joel Greenblatt says spin-offs typically outperform the market and the research I have done independently of his book shows the same.

By studying Warren Buffett, I have learned how to value an individual stock, but I have no idea how to rate a fund's performance. I also have tried to research spin-off's independently of Joel's book, and have found some information to confirm what he says, but I still don't feel like I have found enough information to make me feel confident in this assessment.

Perhaps I should actually look for a plethora of individual spin-off companies and track stock growth over the last few decades myself to make my own independent assessment.

[Ben Rhimene]

The sapiosexual in me finds it so hot and erotic when you write such long and detailed intellectual posts and talk nerdy to me.

Um, ok, sure. I sure as fuck wasn't talking to Mathguy. And here I thought I was just sharing germane info...

With that being said, however, you may just be exactly the type of investor that has proved the point that Joel Greenblatt was making in his book. That most investors undervalue spin-offs tremendously and it makes them such a good buy. He says that spin-offs tend to have the luxury of being supported by the parent company and have a higher likelihood of surviving financially and the time to buy is early in the game when the stock is still undervalued, and many investors invested in the parent company will actually just dump the stock. However, he also says you have to do your homework and keep up with the news regarding the company and read the prospectus.

Ain't nobody got time for that.

This is where the ride gets fun. The data-set is crucial at this point. Let me just say I have been the spinner (NOT in hobby sense, as you know!), as well as spinee. The math has NEVER worked. The expected synergies never arrive in the expected timeframe.

"A comprehensive study conducted at Purdue University revealed that spinoff shares achieved an excess return of more than 10% per year above the US stock market return over 36 years – between 1965 and 2000. Researchers recently extended the study up to 2013, and the results were the same."

Purdue. Not a powerhouse in terms of finance. Boilermakers are beer+shot?

The time frame they chose is telling. 20 years ago. Not really the same economy is it? Enron was still a thing 20 years ago, wasn't it?

My goal is NOT to dissuade you; rather it is to get you critically think thru the BS, of which there is much!

[chloevankatie]

Um, ok, sure. I sure as fuck wasn't talking to Mathguy. And here I thought I was just sharing germane info...

Poor Mathguy. You're breaking Mathguy's heart.

[Devildog72]

A little mystery...not too much though.

I admit I was not aware of spin-off funds. Concept not suprising but wasn't sure volume would be consistent enough to warrant a fund. I will try to keep it brief but a lot underneath the question so likely a wordy reply...since this sub-forum isn't for those rushing for sex I won't apologize further.

As for my opinion, I would avoid. Here is my thinking behind that. In theory, corporations exist to provide strong (not necessarily highest) returns for shareholders while limiting shareholder liability. A corporation makes the best returns for shareholders by being the "best" at something. That leads to market share growth, more customers, more revenue, and ideally more profit to distribute to shareholders. That is the simple version, ignoring vertical or horizontal integration, etc.

In reality, though, corporations are run by people. People who are greedy and out to maximize self-interest. Look at various studies of CEO compensation relative to shareholder return (much less average employee compensation!). CEO is technically governed by the Board, but that is mostly fiction. How does CEO maximize his/her pay? Usually by growth. The problem is organic growth (example, McDonald's adding a Shamrock Shake to lure in new customers) is slow. Easiest way is for McDonald's to buy Sonic. Huge, immediate leap in revenue and store count, menu items, etc. The downsides can be many, though. Bad cultural fits often overlooked. While some cannabalism is good certain acquisitions bring too much meaning time needs to be spent disposing excess. And, of course, the seller is often selling because they believe they get maximum value, whereas buyer thinks more value can be squeezed out...one of them is wrong. So corporations grow organically and through M&A. As they grow the scalability gives economies...a positive. Do more with less.

At some point the company gets too big. Geographically, product mix, something. They have moved beyond the core competency/ies that made it successful. Which means they have sabotaged their own value. Sometimes management realizes this itself. Sometimes it is activist shareholders. Sometimes it is an inquiring potential buyer of assets that gets them to consider selling. Sometimes it is a business unit management team interested in splitting off the parent. So management decides to sell part of the company. Usually it is a separate business unit (individual legal entity) cuz it is clean and easy. In theory this should be a win-win, and why spin-off funds make sense. The surviving parent is leaner, back closer to its core, with more cash, and the spun company is either standalone or part of a new organization which theoretically can get more value out of it. Why not buy funds focused on theoretical win-wins?!

Because theory ignores the human factor, and humans screw up spin-offs. They overpay or aren't disciplined bidders because they are so focused on growth for the sake of increasing their own reputation/compensation. Because humans undervalue potential cultural rifts (a 50% divorce rate proves that). Or they fail to appreciate the added value the selling company provided, and recreating or adapting to the buyer's methods can be costly, time-consuming, or outright impossible, which kills many of the expected "synergies" the deal was supposed to add. Maybe the buyer bought a business unit with bad management that was artificially propped up by the seller's structure? Lots of potential issues. Value leakage everywhere.

Look at companies that grew too big and had bad spin-offs. GE...poster child of ignoring the human factor. Time-Warner AOL is another. Countless smaller ones that don't get the same press.

My take is wait a year or 2 post-spin and buy the shares of those that proved they could manage in a different setting. Sure, you likely pay more, but you have de-risked by not buying a bucket which surely has some mistakes in it.

In my career, I have had the pleasure of executing 26 M&A transactions in addition 6 spin-offs in the last 5 years... (Yes, that is masochism at it’s best). I couldn’t agree more, Ben. Analysts and CEOs alike, hugely underestimate the human and cultural impact of these transactions. These impacts will drive or impede for the first year to year and a half, depending on the transaction (spin or sale), until leadership And middle management can come in line or be replaced.

This is the first time I have heard of spin-off funds, but being on restricted trade status for so long that it is not surprising. And yes, in the corporate world marriage is also better than divorce, just like personal life...

Another aspect that impacts spin-offs is the thought that 1+1 doesn’t equal 1... if you split a company, it splits from 1 to 2. You cannot expect the sum of the two balance sheets to equal the original company. There is ALWAYS a level of cost dis-synergy, whether that be in the functions (HR, Finance, IT, and Real Estate) or in the fact that you cannot leverage the economies of scale with Your vendors anymore. This impact can be substantial and coming back to Ben’s comment, it usually takes a year to year and a half to right the ship.

[chloevankatie]

Thanks guys. I'll go back to reading my books.

[Ben Rhimene]

In my career, I have had the pleasure of executing 26 M&A transactions in addition 6 spin-offs in the last 5 years... (Yes, that is masochism at it’s best). I couldn’t agree more, Ben. Analysts and CEOs alike, hugely underestimate the human and cultural impact of these transactions.

Hiya Devil and welcome aboard. Your last 5 sound like my first. My cardiologist wouldn't approve...he worries about my PMs from CVK!

Analysts! There is a reason that word starts with anal; their heads are so far up management's ass it isn't funny.