Lollapalooza

In his speech on the intersection of economics and psychology at Harvard in 1995, Charlie Munger listed 24 standard causes of human misjudgment. A few examples include:

·         Bias from over-influence by social proof

·         Bias from over-influence by authority

·         Bias from deprival or loss

On their own, each can lead to errors in decision making. Combined together, Munger said you get a “lollapalooza effect,” which can create large-scale shifts in human behavior.

In Q2 ’20, stock buybacks by U.S. companies nearly halved. Grappling with uncertainty and loss of profits, CEOs pulled back on their share repurchase activity. There was public criticism of stock buybacks by authority figures during the market downturn, disincentivizing this form of capital allocation. Presidential candidate Joe Biden urged every CEO in America to commit to a year of no stock buybacks. CEOs turned to returning cash to shareholders in the form of dividends, the most tax inefficient form of capital allocation. U.S. companies distributed $119B worth of dividends in Q2 ‘20, the highest amount since 2009. 

Noteworthy names not on the list of companies that shied away from share repurchase activity were Apple and Berkshire Hathaway, which bought back shares worth $18B and $5B, respectively, in Q2’ 20. The market’s misappraisal of share prices presented an opportunity to acquire shares at attractive levels for the first time in years.

The CEOs of these companies safeguarded themselves from human biases and act decisively.