Jacques, RE: "Buffett's dislike for options is, believe or not, in your best interest as a shareholder of INTC."
I'll believe Andy Grove on what's best for high-tech, before Buffett who doesn't know anything about high-tech.
news.ft.com
"The new panel is given added weight by the presence of academics, former executives and regulators, including Andy Grove, chairman of Intel"
RE: "If you had understood what he was saying in the early 90's, you might not have maxed out your 401 (k)'s with INTC when it was it was selling at levels north of where it is now."
You don't sound sincerely caring, but more as if you're trying to attack on a personal level in an effort to win your point. Unfortunately, your facts are wrong: I worked for MS, not Intel. My ms-401k was started in 1990, and was, and is, fully in MSFT, and at MS. That's an account I don't touch for several reasons. Regarding your comment about its performance: $52.28 (Friday's MSFT price) / $1.80 (1990 MSFT price) = 29X's return. I recall Buffett's comments about Microsoft back then too.
Btw, INTC delivered a 13X's return during this period, so your comment about INTC being lower today is significantly false by a factor of 13.
RE: "He understood what the ultimate consequence of high tech's accounting of options would be."
High-tech's crash had absolutely nothing to do with options. You are uninformed on this matter.
RE: "It's a shame you can't see that."
It's a shame you can't see real hard facts.
Options have the following benefits for investors/companies:
Using an example for say any $200M high-tech company:
From the perspective of a company, indirect costs if AG's proposal on Options goes through, could be:
$1.5M /yr (Option companies have the ability to pay employees 10% less than market value)
$8M /yr (Additional OverTime that an option-based culture delivers)
$2.5M /yr (AG's FICA proposal)
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$12M /yr costs that would have been invested back into R&D if it weren't for AG's proposal.
Assuming fixed costs (i.e. absorption of $12M costs to keep costs fixed), AG's proposal could translate into a headcount reduction, for each of the above three items as follows:
15 less employees per 200 employees
25 less employees per 200 employees
80 less employees per 200 employees
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120 less employees per 200 employees
(From the perspective of tax collectors:
Which would cost the State of California approximately 120*$1300 (max UE/mo)*6 mo*2(one-time State extension)= $1.9M/yr per 200-employee company.
This type of headcount reduction isn't your typical cost-saving headcount reduction that results in the stock going up, but instead would negatively impact operations and thus valuation, and so applying the standard est valuation calculation (that's often used for startups in this economy) of $1M valuation/employee, the resulting estimated capital loss to investors is: $120M. [Note: Intel has 85,000 employees and has a market cap of $125B, or $1.5M/employee, as another point of comparison.] The marcap reduction would cost the Federal Government approximately $24M in capital gains loss (assuming cap gains tax is 20%) per 200 employee-company. [Double-checking this calculation another way: $12M not invested in R&D would translate into approximately $120M less in return, assuming a minimum industry standard 10X return on R&D. Using these two different methodologies, the calculation seems to check out.)
So, AG wants to get $2.5M so he can lose $26M/year (1.9M + 24M) in tax revenue per $200M-valued company. What kind of logic is that?
Oh, but the above AG-proposed, disaster doesn't even include the tax loss from reduced company growth due to a negative impact onto corporate culture that his proposal would have, here's where the real loss is:
There's an incredibly huge, indirect-cost to AG's hostile-to-hightech proposal (that AG just doesn't know how to compute because it's an intangible thing called "Motivation"): his proposal basically would shift high-tech's corporate culture (hard-driving, creative & intense) into one of those low-growth deadweights. This impact would be the worse impact out of all items mentioned above. It would negatively impact high-tech innovation, companies, high-tech investors, high-tech employees, and seriously & negatively impact tax revenue. The calculation: Deadweights grow at 5%/yr in a healthy economy, while highly competitive growth mid-size companies grow say 20%/yr over a ten year period after an IPO (assumes applicable to the industry's most competitive companies, not the average ho-hum company), and this translates into .2 * (LT cap gains tax) * 1038M-125M (delta growth between deadweight & growth over 10 years)/10 yrs (divide by ten to normalize back to one year) = $18.26M less in Cap Gains Tax per company.
==> So, AG wants to gain $2.5M so he has a net tax loss of $44.26M in tax revenue per year per company ?
Going back to a more normal IPO year (before the boom, say 1995, neither a boom year nor a bust year), there were 352 companies that went public in one year. AG's proposal could negatively impact Tax Revenue by $15.6B (352*44.26M) on a given year.
So, AG's proposal could result in:
==> $15.6B LOSS IN TAX REVENUE PER YEAR
From the perspective of investors:
Now, let's look at the negative impact of AG's proposal onto investors. The est net loss to just investors could be: $913M (i.e. 1035-125)M less in cap gains per company for investors to use, say in retirement (which probably creates even more indirect costs, as more lean on Soc Sec in retirement.) For 352 companies/year, that's $322B less for Investors over ten years for just those 352 companies (i.e. excludes any companies created during the other 9 years). Including successful companies from the other 9 years, but only the top 25% companies from all ten years, this would translate into a net loss to investors of $880B over ten years, nearly a TRILLION dollars.
So, AG wants to have a "knee-jerk" reaction to Enron (more on that in my next post), so he can kill nearly a TRILLION dollars in future investor gains, projecting out ten years? That's essentially like saying, he's going to kill high-tech over the next ten years. And goodness-knows how much in tax revenue will be lost too?
If his proposal goes through, I believe there's a possibility AG will turn this economy into an economy nothing more than what you can find outside of the USA. Ho-hum.
AG is only invested in bonds, and he has no hands-on experience with high-tech innovation, nor a driven high-tech corporate culture. My brother is a government Economist, in policy-making, and was one of the 360 or so Economists that won the NSF award given out every year to the brightest 360 students in the USA, attended the best Econ dept in USA at that time (MIT), an incredibly smart person, but Economists as a whole unfortunately do not count intangible factors. They are very careful to only count what they know they can count with absolute accuracy, and unfortunately, to the heck with any intangible factor, like drive and corporate culture, even though it's the most important ingredient to GDP. Why doesn't AG acknowledge this incredibly important point and count this factor, when he proposes policy?
ECONOMISTS DO NOT COUNT THE INTANGIBLE FACTORS EVEN THOUGH THEY'RE THE MOST SIGNIFICANT FACTOR TO GDP. Intangible factors, like the positive impact options have on this economy in creating driven, competitive corporate cultures that in turn create growth companies. (Michigan does such an excellent job at calculating consumer sentiment, so why can't they do what AG can't do, which is: GO TO SILICON VALLEY AND COUNT THE INTANGIBLE FACTORS THAT GROW GDP.) (I believe the only school that even got close to counting any kind of intangible factor (but unrelated to this topic) was something Chicago did in the early 90's and they won a nobel prize for it.)
The bottom line is, with AG's proposal, Investors could lose one of their best ways to ensure growth companies flourish and prominently exist in the USA. Is AG anti-stock investor? What is his agenda?
RE: "The tragedy is that Amy J's of the world will have personally suffered from a set of circumstances that they thought they fully understood."
Bingo
My weath rides on high-tech and I don't want AG to mess up high-tech by negatively impacting options that fuel motivation and competition, thus corporate growth.
Amy J Note: my calculations are loose, but the point is accurate. |
