And we would live happily ever after – with dividends and the value of our stock continuing to grow at 8% annually.
Notably, Buffet’s example does not contemplate the ability for some shareholders (who prefer less liquidity) to purchase shares from those who prefer more liquidity, but this is exactly what a share buyback program creates.
In this example, if one partner deemed the intrinsic value of the shares to be higher than the market price (say 150% of book value), than that partner would much rather take her share of the profits as a dividend and buy the shares her partner is selling for 125% of book value.
Though if the buying partner were the CEO and renowned investor named Warren Buffet, the prospect of selling shares would look dramatically less enticing since it would highlight the fact that Buffet thought he was getting a good deal by buying your shares at the price you were selling.
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