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Strategies & Market Trends : Value Investing
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To: Michael Burry who wrote (7456)6/8/1999 12:38:00 AM
From: James Clarke  Read Replies (1) of 78656
 
You're right about options. They are just another negative to be counted. But your analogy to the "minutia" of operating leases misses the point. Operating leases are already accounted for in earnings. Options aren't. It's their invisibility to GAAP accounting that makes them so insidious. And they are hurting Microsoft - you just don't see it yet. When Microsoft finally collapses under its own weight, options will be in large part to blame.

How to quantify the negative value of options? On Autodesk, my methodology was I believe to look at the cash flow statement and observe that they had bought back a lot of shares. But the share count had not gone down because of all the options exercises. So I simply said the cash used to buy back shares is compensation expense. I don't have the financials in front of me, but that is what I usually do - I think that was Autodesk. I've never heard of others using this methodology, but I find the disclosure in the annual report of options cost systematically low. I have several other methodologies to do this - I think about option accounting a lot - but this one is my favorite because it really gets to how much cash is this costing me. (and if they are not buying back shares, it shouldn't be too hard to figure out how much it would cost to buy back enough shares to keep the share count constant. That number is the cost of the options.)

But Mike, I don't think you wanted to say that dilution of 5% a year is minutia, did you? I agree it is one of many negatives to take seriously, it is just much more difficult to quantify than other negatives. And it is much bigger than most people think. And I might add...Mattel executives have fed at the options trough much more than I would like. Their proxy statement is simply unacceptable for a Fortune 500 company.
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