Post New

Very excited about today's news on the investments in Google and the homebuilder.
If Greg can sensibly deploy the free cash flow coming into Omaha, the story could quickly change and the feeling of stagnancy could melt away.
Roughly $30 Billion in the past 6 months is a very solid start. (Occidental deal, Homebuilder, and Google.)
Add in some serious buybacks, increased operational efficiencies, and the stock could be off to the races again for the RIGHT reasons.
And maybe this investment with Google will lead to Google building out data centers with Berkshire Energy?????
And maybe the hunt for the mythical $150 Billion Elephant needed to move the needle will be replaced with a rapid fire series of 15-20 $10 Billion deals over the next 3 years?
Maybe there is more opportunity in this world for a business with $350 Billion and a highly energetic 63 year old CEO than we could have ever imagined?
While BRK may not be cigar butt liquidation cheap, at current prices the business has zero potential for fast growth priced in.
Looks like a great asymmetrical trade.
Go Greg!
Make Berkshire Compound Again!

I agree 100% .

Very excited about today's news on the investments in Google and the homebuilder.

Not me. I know nothing about homebuilding, but I know enough about AI to know there's virtually zero certainty as to who will end up profiting from it. If anyone. I don't think Google has any certainty about it either; they're spending massive amounts just out of fear they'll be left behind, which has a decent chance of happening anyway. Yes, there are some other, moat-ish aspects to GOOG, such as its positions in the ad market, youtube, and the android ecosystem. But these were all there a few years ago at 1/4 the price, when the Best Investor Ever continued to pass on the stock.

I see the GOOG investments as a huge red flag regarding Abel. He seems to be overconfident, and at one of the worst times in stock market history to be so. I want those tbills back.

Margin of safety

I see the GOOG investments as a huge red flag regarding Abel. He seems to be overconfident,

~$10B (or ~$20B now) isn't overconfident. $50-100B could be overconfident.

“ Not me. I know nothing about homebuilding, but I know enough about AI to know there's virtually zero certainty as to who will end up profiting from it.“ Good morning, if you are looking for certainty at these market valuations, get a dog. :) Greg has been dealt a very difficult hand. Do we want him to continue to hoard cash until we have 450 billion plus in tbills? Who would be the next motivated new buyer of Brk common under that scenario? At market highs where Buffett hasn’t found much value in years Greg found a way to invest in Google with a small discount, he can’t buy anything at last years lows. Greg isn’t running 350 billion in a closed end utility fund. I hope he invests 500 million plus in 1 or 2 of the new IPOs as well, one could be a five bagger or more. Greg has been given a difficult task, deploy record amounts of cash near market highs and in many cases very high valuations. I hope he buys back 4 billion plus brkb in the quarter as well. Greg has to attract new demand for our common , these are positive moves in real time, what would others do? Would 500 billion in tbills motivate new potential buyers of brkb common to act? Good luck to Greg and team Brk they have to play the cards they have been dealt.

But these were all there a few years ago at 1/4 the price

It is a bit startling from that point of view. There have been many good entry points over the years, and the quality of the business has been evident throughout, so why buy in 2025-2026?

As a random stake in the ground, a typical price-to-trailing-sales ratio for Alphabet in recent years has been about 6.6x. These new shares are being bought at 10x. (just as capex and real depreciation charges are exploding)
https://www.macrotrends.net/stocks/charts/GOOGL/al...

Great firm, great pick, shame about the entry price. I suppose maybe in the long run it doesn't matter *that* much if the future is as bright and (more importantly) long-lasting as I expect. It would just mean a few years of flatness before a long value growth trajectory. e.g., 3 years of 15%/year revenue growth and no price change would put it at that old typical valuation multiple. or 4.5 years of 10%/year.

Fortunately we already had a lot of shares purchased at a somewhat lower average price, which I believe represents about 2/3 of the soon-to-be total position.

Maybe Mr Abel was just a pinch more keen than Mr Buffett, enough to put it over the line even last year?


One thought: Alphabet could have funded this with borrowing or (unlike the other AI titans) out of cash flow from operations, but didn't. Why not? Because the stock price is towards the rich end of the scale, so funding with equity is cheaper.

Jim

“ Great firm, great pick, shame about the entry price.“ Good morning Jim , who has been a huge net seller of securities the past five years? Greg is underpaid to take this job. If Googl visits 325 before 400 he’s a bum and he’s no Buffett, I can hear it now, fire da bum. Lol, he already deserves a raise, imo. What a job he’s got, I hope he has non human skin. ::))

https://share.google/EgkmjkLSJLTdtGUXm

From the pre ious link. “” The shares are down 13% from ​their record high in May 2025, while the technology-heavy Standard & Poor's 500 (.SPX), opens new tab has risen 34% in ⁠the same period.
"Everyone has been waiting for Greg to do his thing, beyond Warren Buffett's shadow, and we're now ​seeing that," said Steven Check, president of Check Capital Management in Costa Mesa, California, which invests $2.4 billion including more than $700 ​million in Berkshire stock and options. "It's encouraging."

$80b is a lot to fund through cash, and it would have been a large debt offering. Yes they could have leveraged up but equity was the best option.

tecmo
...

"It is a bit startling from that point of view. There have been many good entry points over the years, and the quality of the business has been evident throughout, so why buy in 2025-2026?"

This was discussed previously. One likely reason the GOOGL purchases didn't start until Q3 2025 was that Ron Olson (Munger, Tolles & Olson & former BRK board member who retired on May 2025). Olson had also been on Google/Alphabet's board (retired 2024). Olson was also a personal attorney to Sergey Brin and Larry Page.

Buffett probably felt, and rightly so, that honesty and integrity was worth more than the enormous opportunity cost of not investing in GOOGL earlier, which in turn would have carried more than a whiff of impropriety.

https://www.shrewdm.com/MB?pid=563181903

Charlie whispering from his grave:

"A great business at a fair price is superior to a fair business at a great price."

And probably better than holding cash earning 3.5% in the face of rising inflation.

Alphabet was a lot cheaper a few years ago, but the business was also fundamentally different. Cloud, a utility like service, went from mostly an afterthought to driving a significant part of the business. YouTube has also grown its footprint significantly. I don't know why they didn't invest in Google earlier, they've always grasped why its a great business, but I don't think the comparison is entirely fair to management either -- particularly when one adds on the conflict of interest issues mentioned by BreckHutHigh. I would add the prior legal uncertainty to the conflict of interest problem, an issue that hits BRK different given its public prominence.

The firm is no longer on sale but I do expect GOOG to meaningfully beat cash, and other holdings like KO, over the next 5-10 years. When you have more cash than you reasonably deploy, the investment strikes me as a sound one.

It was mentioned earlier that the "real" reason was that Ron Olson was on the Alphabet's board and Berkshire's board. That's why they didn't buy earlier most likely.

I wasn't very happy to see the Google news today due to the dilution of my Alphabet shares. Also, Berkshire appears to be adding to its significant position in Alphabet at an elevated valuation. Do we want to be buying when Alphabet is selling?

While Alphabet’s massive $80 billion capital raise is largely headlined by its aggressive multi-billion dollar artificial intelligence infrastructure buildout, I am surprised more attention hasn’t been focused on Alphabet earmarking a whopping $30 billion of the proceeds to cover the 2026 calendar year tax obligations associated with the vesting of employee equity awards.

Also, Berkshire appears to be adding to its significant position in Alphabet at an elevated valuation. Do we want to be buying when Alphabet is selling?

Alphabet is raising cash to build out compute, with both debt and now, equity.

Yes, the equity is interesting, because why not issue more debt? Maybe the demand for compute is so high that they're going to be raising cash however they can. This is only the beginning.

My guess is Berkshire thinks Google is one of the best places today to soak up their cash, and the position is an Apple-like forever holding.

Granted, I don't like Google's valuation here either (I trimmed my position recently), but if they're holding for the next few decades then paying up becomes less important over time.

I’m glad to see that BRK continues to be a one stop “diversified portfolio”. I feel like I ought to have a bit more in tech but am loath to buy anything in this high priced market with my level of knowledge. I also feel that this is a time to be cash heavy. BRK covers me on both those fronts, so I am content to leave a significant majority of my investments there. Warren said one of his reasons for retiring was to give the shareholders more exposure to Greg’s skills. I’ll take his advice and go along for the ride.

I am surprised more attention hasn’t been focused on Alphabet earmarking a whopping $30 billion of the proceeds to cover the 2026 calendar year tax obligations associated with the vesting of employee equity awards.

I'm not sure there's anything to talk about here. The vesting of employee equity awards doesn't generate a tax obligation for Alphabet - it generates a tax obligation for its employees. What Alphabet is doing is handling that tax obligation for them.

So in the absence of this arrangement, Alphabet issues $X worth of shares to its vesting employees. Employees need to sell $X*marginal tax rate of those shares to cover their own taxes.

Now, Alphabet will issue $X*(1-tax rate) to its employees. The employees will receive the after-tax proceeds, so will owe no further tax, while Alphabet will pay the cash tax obligation on behalf of its employees.

So rather than issuing a larger pre-tax number of shares to its employees, Alphabet issues a smaller post-tax number of shares to employees ($X*(1-tax rate)) and issues the tax effect-driven number of shares ($X*tax rate) to public.

I don't see any economic difference between the two arrangements, or any reason to be bothered by it.

You can get this information on page 3 of the pdf here:
https://abc.xyz/investor/news/news-details/2026/Al...

I am surprised more attention hasn’t been focused on Alphabet earmarking a whopping $30 billion of the proceeds to cover the 2026 calendar year tax obligations associated with the vesting of employee equity awards.
...
So rather than issuing a larger pre-tax number of shares to its employees, Alphabet issues a smaller post-tax number of shares to employees ($X*(1-tax rate)) and issues the tax effect-driven number of shares ($X*tax rate) to public.
I don't see any economic difference between the two arrangements, or any reason to be bothered by it.


For me, it's not the difference between the two methods (you're right, it's largely a wash), it's that this is highlighting the comp itself.

(a) What is the current market value of the shares issued as employee compensation in the last decade?
(b) What is the current market value of the shares created via option exercise of options issued to staff, net of the proceeds to the company at strike due to exercise?
(c) What was the total amount expensed as compensation in the company's books for the sum of those two?

Handing out shares like sweets is not very good management. The current market value of the A shares that Berkshire issued to buy Dexter Shoes is $17.83 billion. That should be a clear lesson for every CEO, but somehow it isn't.

Jim

For me, it's not the difference between the two methods (you're right, it's largely a wash), it's that this is highlighting the comp itself.

(a) What is the current market value of the shares issued as employee compensation in the last decade?
(b) What is the current market value of the shares created via option exercise of options issued to staff, net of the proceeds to the company at strike due to exercise?
(c) What was the total amount expensed as compensation in the company's books for the sum of those two?

I see the argument, but I can only partially agree with it, because it seems like assigning fault because the firm did extraordinarily well.

Two then-identical companies ten years ago granted equal-sized equity awards to employees. Firm A muddles along without ever increasing stock price. Firm B quintuples in value. Yet we get mad at Firm B because their ex post equity awards turned out to be incredibly valuable. Seems not quite right.

Firm A muddles along without ever increasing stock price. Firm B quintuples in value. Yet we get mad at Firm B because their ex post equity awards turned out to be incredibly valuable.

Yes, it’s a bit survivor biased in this regard. Still, Google is well past its startup days when it needed to draw talent with the promise of large stock options.

I see the argument, but I can only partially agree with it, because it seems like assigning fault because the firm did extraordinarily well.

Two then-identical companies ten years ago granted equal-sized equity awards to employees. Firm A muddles along without ever increasing stock price. Firm B quintuples in value. Yet we get mad at Firm B because their ex post equity awards turned out to be incredibly valuable. Seems not quite right.

Hmmm, I don't see it that way.

Sure, there is a pretty reasonable case for options in lieu of some salary for start-ups and early stage firms, when cash is tight, outcomes are wildly unpredictable, and the difference in opinion about the future lets one party do a deal with another very willingly.

But none of that reasoning applied to Alphabet 10 years ago, as it was then and remains one of the most spectacularly successful and profitable firms and cash generative firms of all time (or Microsoft 10-20-30 years ago, for that matter). It was and remans swimming in cash, so there was no shortage of cash to pay people. It was painfully obvious a decade ago that the 10 year value growth of a share would be very large, in the same way that it's painfully obvious now. This is a very, very profitable firm. So the true cost of those shares to the company was not the then current quote, but the long run essentially certain value.

The only motivation for this wheeze at a big profitable firm is to screw and fool shareholders by treating compensation as a shell game, taking the real (and gigantic, in the case of stock comp) economic cost of the comp substantially off the books and flattering short term results. Period. It's common and accepted and legal, but it's odious. The agency problem writ large.

I dare someone to go through the calculations I suggested. That will show the real staff costs, NOT in any material way dependent on a lucky unpredictable outcome invisible without hindsight, and the degree to which the true long run staff costs for continuing shareholders were obfuscated.

Jim

The current market value of the A shares that Berkshire issued to buy Dexter Shoes is $17.83 billion. That should be a clear lesson for every CEO, but somehow it isn't.

Compare that to the shares that Buffett issued to buy Gen Re, and the current market value of same - net of a generous guess at what Gen Re's now worth. BRK's quit reporting the details that would permit a guess. My estimate is that it's above 200,000 A shares. And don't claim that the GRN float permitted the purchase of other businesses. It didn't - cash flow was enough to cover those, even after the losses by GRN.

Just don't do it before eating a good meal.

The only motivation for this wheeze at a big profitable firm is to screw and fool shareholders by treating compensation as a shell game, taking the real (and gigantic, in the case of stock comp) economic cost of the comp substantially off the books and flattering short term results.

I saw some numbers of market wide share buy backs vs actual share count. Buy backs are in too many cases doing nothing to improve the shareholders piece of the pie, just keeping it from getting noticeably diluted, while management walks off with more and more of the company. It is so pervasive that it has become expected and BRK is the exception for being transparent.

iluvababyb:
Do we want to be buying when Alphabet is selling?

You do realize that whenever you invest in the growth of an enterprise by buying newly issued shares of stock, you are buying when the company you are buying is selling, right? I admit it it, it is a paradox that the absolutely most fundamental way you make money in stock is by buying when the company you are investing in, the company you are betting will make you richer, is selling.

R:)

Mungofitch:
The current market value of the A shares that Berkshire issued to buy Dexter Shoes is $17.83 billion. That should be a clear lesson for every CEO, but somehow it isn't.

Are you thinking the lesson is that you can still get rich through your shares appreciating from your net good works, even as others get rich with you by accepting those shares in payment in lieu of cash?

Or are you complaining that they spent those shares which are now worth so much more on buying Dexter shoes? How is buying Dexter shoes with shares at that then proceed to rise in value a lot any better or worse than offering shares to the public at some currently nice price, that then proceed to be worth a lot more than you sold them to the public for? And yet selling shares to the public at a low price and then watching those shares rise in value is virtually the definition of success of a stock offering.

R:

Handing out shares like sweets is not very good management. The current market value of the A shares that Berkshire issued to buy Dexter Shoes is $17.83 billion. That should be a clear lesson for every CEO, but somehow it isn't.

Berkshire also bought HH Brown Shoes for $161M in cash. Had they instead bought back 20,125 A shares with that money, those would have been worth $14B today!

Seems like the clear lesson is to buy things that will go up and continue to go up, not so much about how you pay for it. And that includes your own stock when appropriate.

The only motivation for this wheeze at a big profitable firm is to screw and fool shareholders by treating compensation as a shell game, taking the real (and gigantic, in the case of stock comp) economic cost of the comp substantially off the books and flattering short term results. Period. It's common and accepted and legal, but it's odious. The agency problem writ large.

I don't think it is the "only" motivation though this is a big part of it. The other motivation is competition for talent. There was a time, especially in hotbed areas of tech (SF, etc), where the talent wouldn't even consider an offer without options. I mean, even if company A offered $350,000/yr and company B offered $200,000/yr + options, talented dynamic people looking for a new challenge would gravitate to company B, and less talented less dynamic looking-for-a-sure-thing people would gravitate to company A. And very likely the talented dynamic people would turn company B into a much bigger success than the folks at company A. That's just the nature of human beings.

You do realize that whenever you invest in the growth of an enterprise by buying newly issued shares of stock, you are buying when the company you are buying is selling, right? I admit it it, it is a paradox that the absolutely most fundamental way you make money in stock is by buying when the company you are investing in, the company you are betting will make you richer, is selling.

If it were JUST the company selling as a way to raise money to fund future growth, it would be perfectly fine.

But it isn't - it's the VCs selling, the round B, C, D, E, etc investors selling, it's employees selling, and it's management also selling. Nearly everyone is selling some at the IPO, and only public shareholders (individually and via myriad funds) who are buying. All those other investors are EXITING, or at least partially exiting, at the IPO. It wasn't always like that.

I’ve been trying to find out the terms of BRK’s investment in Alphabet. Not much out there. Tidbit from today’s WSJ:

“ Abel spoke with Goldman Sachs , Alphabet’s banker, on Sunday to work out the terms of Berkshire’s participation in the company’s stock offerings and later connected with Alphabet CEO Sundar Pichai and finalized the deal Monday, people familiar with the matter said. Berkshire is getting those shares at a steep discount to where they trade.”

If anyone has more info, I’d love to know.

abromber

“ Abel spoke with Goldman Sachs , Alphabet’s banker, on Sunday to work out the terms of Berkshire’s participation in the company’s stock offerings and later connected with Alphabet CEO Sundar Pichai and finalized the deal Monday, people familiar with the matter said. Berkshire is getting those shares at a steep discount to where they trade.”


It looks like BRK paid $351 for the new $10B in shares, it was trading at $385 on Friday, so they got about an 8% discount to market. Not sure that is what I would consider "steep discount", but what do I know...



tecmo
...

“Abel spoke with Goldman Sachs , Alphabet’s banker, on Sunday to work out the terms of Berkshire’s participation in the company’s stock offerings and later connected with Alphabet CEO Sundar Pichai and finalized the deal Monday, people familiar with the matter said. Berkshire is getting those shares at a steep discount to where they trade.”

It looks like BRK paid $351 for the new $10B in shares, it was trading at $385 on Friday, so they got about an 8% discount to market. Not sure that is what I would consider "steep discount", but what do I know...

Thanks. Looks like Greg is comfortable if he can get an 8% discount on the entry price for his public market deals, and he's willing to participate on a non-preferred basis, where WEB frequently used to get another 10% of the upside through preferreds, warrants, etc. I agree 8% is not a"steep" discount for the lead investor in a round, but it's certainly not a bad deal. I'd take it lol. I suspect he (Greg) will have a chance to do more of these deals: 8% discount, MFN, maybe a valuation cap. I wonder if they used a SAFE...

PS I kind of like it that it isn't easy to discover the terms on the internet lol. Very old-school. Onward!

abromber

Interesting, that preferred shares are being offered (tickers GOOGM & GOOGN) that are expected to yield around 6.5%. They are mandatory convertible at a price of around 25% above current price. Abel chose not to buy those and opted for shares at 8% discount.

I guess Alphabet is not as desperate as OXY and BAC to offer 8% preferred convertible at market price without premium.

If anyone has more info, I’d love to know.

Me too! I'd love it if there were some warrants that came along with those shares.

Interesting, that preferred shares are being offered (tickers GOOGM & GOOGN) that are expected to yield around 6.5%. They are mandatory convertible at a price of around 25% above current price. Abel chose not to buy those and opted for shares at 8% discount.

That's because Berkshire doesn't want current yield, that would just serve to increase the cash levels even more, and would cause more currently taxable income. Berkshire, like me and most holders of Berkshire stock, prefer CHOOSING ourselves when to realize income and pay taxes on it.

If anyone has more info, I’d love to know.

Me too! I'd love it if there were some warrants that came along with those shares.

Appears to be a straightforward share purchase, with no mention of any warrants. :(

This is how the SEC filing describes the private placement:

Concurrent Private Placement:
On June 1, 2026, the Issuer entered into a stock purchase agreement with an affiliate of Berkshire Hathaway Inc. (“Berkshire Hathaway”) for the sale of 14,212,035 shares of Class A Common Stock at a price per share of approximately $351.81 and 14,359,656 shares of Class C Capital Stock at a price per share of approximately $348.20, for gross proceeds of $10 billion (the “Private Placement”). In connection with the Private Placement, the Issuer has agreed to provide Berkshire Hathaway with certain registration rights. The shares are being offered and sold to Berkshire Hathaway in a private placement pursuant to Section 4(a)(2) of the Securities Act. The shares have not been registered under the Securities Act, or the securities laws of any other jurisdiction, and may not be offered or sold in the United States absent registration or an applicable exemption from such registration requirements. The Private Placement is expected to close concurrently with the Stock Offering, subject to customary closing conditions. The closing of the Private Placement is not conditioned upon the closing of the Stock Offering or the closing of the Depositary Shares Offerings.
(https://www.sec.gov/Archives/edgar/data/1652044/00...)

GOOGL and every other hyper-scaler who is racing to create some dominant position in AI is constrained by power and electricity. Where has Greg spent most of his career? I have a sneaking suspicion we will hear more about deals between BRK energy and GOOGL in the future and Greg may have wanted some upside to helping GOOGL with this problem beyond typical utility like returns.

It looks like BRK paid $351 for the new $10B in shares, it was trading at $385 on Friday, so they got about an 8% discount to market. Not sure that is what I would consider "steep discount", but what do I know...


Have you ever seen one of those stores that jacks up prices on some items, then promotes a big sale offering markdowns (not far from the original price)?

That isn't what Alphabet has done here, but I feel the ostensible discount is pure anchoring. Alphabet is one of my favourite firms in the world, but the richness of recent valuation levels, to my untutored eyes, seems a lot more than the balm of an 8% discount to Mr Market's current mood.

I do think it will work out fine given time, but other than the formidable resilience of the business itself I don't see a margin of safety in the price.

It's a discount from "nosebleed" to merely "painful", but for the purchase of something that will ultimately prove valuable. I might think of that as good capital allocation but without evidence of good timing. Within the demanding standards of Berkshire's history of patience, there is perhaps just the tiniest whiff of impatience in the air.

Jim

Alphabet is one of my favourite firms in the world, but the richness of recent valuation levels, to my untutored eyes, seems a lot more than the balm of an 8% discount to Mr Market's current mood.

I do think it will work out fine given time, but other than the formidable resilience of the business itself I don't see a margin of safety in the price.


I recall a lunchtime discussion at work sometime in 2005 about GOOG. One guy said "I cannot see buying GOOGLE it's too expensive, you'd have to have $10,000 to buy a round lot, it makes more sense to buy a $10 stock."
I said "So take your $100 and buy just one share."

Here we are in 2026, GOOG is $355 and has split total 40-1. So his $100 would now be worth about $14,200.

His cheapness made him miss out on a 142 bagger.

I might think of that as good capital allocation but without evidence of good timing.

My first thought that hearing Berkshire was buying $10B in a private placement was, uh, what?

What I might have expected to see in its place was, "Berkshire loaned $10B to GOOG via an x year, 5% bond, plus warrants" (to purchase GOOG before 2041 at 1.5x today's price)

...therefore locking in no downside, plus a potential windfall. The Buffett Way, if you will.

GOOG needs the capital, right? So, why is the deal for a bunch of cash in exchange for a minor, one-time price break?

I see the probable upside in this deal. What I don't see is any downside insurance.

And downside insurance is why I own so much BRK. I mean, being retired and all

-sutton
not a financier, but geez

@mungerish, IMHO, you’re spot on. This $10B investment is a masterful opening gambit for Greg Abel's era as CEO. He’s taking the classic Buffett "circle of competence" and updating it for the AI age by realizing that the ultimate tech bottleneck is a heavy industrial problem he spent his entire life solving.
Good stuff!
Silverlinin

But it isn't - it's the VCs selling, the round B, C, D, E, etc investors selling, it's employees selling, and it's management also selling. Nearly everyone is selling some at the IPO, and only public shareholders (individually and via myriad funds) who are buying. All those other investors are EXITING, or at least partially exiting, at the IPO. It wasn't always like that.

There are two possible outcomes.

1) You buy in at the IPO and proceed over the next little while to make a nice return on your investment. In which case who cares whether some round of investors who came before you were cashed out by your investment.

2) You buy in at the IPO and proceed to not make much money. In which case who cares whether some round of investors were cashed out by your investment.

The point being, Either the IPO was a good deal at the price you bought it or it wasn't, and whether some round of investors came before you or not and made money or not as you bought in on the IPO is completely irrelevant.

Going even further, Mungofitch seems to be saying that if a company is paying its employees more than HE thinks is appropriate that that is somehow bad, no matter how successful the company is. If I read his posts correctly, he pretty much said that the outperformance of google stock could be used to show that they had paid their employees too much by some definition that he seems to find compelling. My question would be: if this is google paying its employees too much, then why isn't some better managed company eating their lunch? Why isn't some other company hiring people at a reasonable price and then performing in google's space in a competitive way such that they make more than google and therefore grow faster than google and displace google?

If you are offered an outsized return by a company which you think is paying its employees too much, precisely what is your definition of too much? If google is running one of the most successful companies ever measured by profitability, who are you or me or anyone to tell them they are overpaying their employees? By what standard do you judge overpayment if not "they weren't very profitable that's how I knew they were overpaying their employees?"

R:

Going even further, Mungofitch seems to be saying that if a company is paying its employees more than HE thinks is appropriate that that is somehow bad, no matter how successful the company is.

Yes.

I think it's bad because it is extremely expensive in the long run for continuing shareholders. It is a method of compensation almost certainly chosen precisely because the true long run cost is very well concealed, despite being so much higher. To management, it seems like free money: they can give out shares like lollipops and it doesn't hurt the metrics they dance to.

Ignore buybacks, as they are a totally separate issue of capital allocation. Imagine, for example, that 20% of all Alphabet shares that ever existed owe their origin to options or stock granted to employees at some point in the past. In that case, any one of the shares of a traditional origin long ago would, absent that issuance, be worth 25% more today and could therefore be assumed to have a market price 25% higher today. (at the same market cap, of course). Those share grants and options were in lieu of more obvious cash, so you'd have to deduct what it would have cost in pure salary and bonuses to employ those same people. But I think it's fair to say that, in our hypothetical, that cash cost would have been vastly VASTLY less than 20% of the current market cap of Alphabet. In this hypothetical, I think those people would have worked quite happily for far less than $899 billion in total salary.

So, either management are spending shareholders' wealth unnecessarily because they are cynical and it makes them look good in the short term while mostly hiding the true cost, or they are spending shareholders' wealth unnecessarily because they are not smart enough to figure out that that's what they're doing. Neither result makes me think that management is doing a good job. Cash is a one time expense, but a share is a greedy claim on all future success, the Dexter Shoe problem.

None of this is particularly surprising. This isn't specific to Alphabet, of course, it's a widespread phenomenon and Alphabet is not the worse offender. It's a legal wheeze that hurts long term shareholders, so it gets used. The motivation is, I believe, almost entirely related to getting an unlimited hiring budget in a way that almost completely obfuscates the true long run cost. The agency problem measured in billions.

All that being said, Alphabet's moats are so strong that it can withstand a remarkable number of dumb management moves, which is why it has made it such a great investment despite spending equity like water. But the shareholders would still be better off without those moves.

Jim

To management, it seems like free money: they can give out shares like lollipops and it doesn't hurt the metrics they dance to.
I only had one job with stock options. The headhunter recruiting me said “THIS is where you are going to make your real money”. It was an oil company, and I worked there during an extended decline in oil prices, so my options were worthless. Upper management had their option prices adjusted to cash in but the run of the mill professionals got nothing.

The companies that pay the highest stock based comp and total comp in general are in the qqq. The lowest cost public company that I know of the past 50 years is Brk, they paid zero stock based comp and Buffett and munger worked virtually free. The 2-3 percent of equity Buffett and munger didn’t take compounded for shareholder benefit for 50 years. For fun I googled this, “ Over a 15-year period, the Invesco QQQ Trust significantly outperformed Berkshire Hathaway Class B shares, driven by the massive bull run in large-cap technology stocks.A performance breakdown highlights these key differences:15-Year Annualized Returns: The Invesco QQQ ETF generally achieved returns exceeding 20% annualized, while BRK-B tracked closer to a 13% annualized gain over the same span.Sector Focus: QQQ is heavily concentrated in the top 100 non-financial companies on the NASDAQ, which have benefited from rapid digitization and AI tailwinds. Berkshire Hathaway acts more like a diversified conglomerate, weighted heavily toward insurance, financials, and consumer staples.“”

"In this hypothetical, I think those people would have worked quite happily for far less than $899 billion in total salary...So, either management are spending shareholders' wealth unnecessarily because they are cynical and it makes them look good in the short term while mostly hiding the true cost, or they are spending shareholders' wealth unnecessarily because they are not smart enough to figure out that that's what they're doing."

Jim, there's at least a third (and fourth) possibility: management wants to incentive its people to think long term and do such a great job that -- if they are successful -- they get rich along with the shareholders. After all, the shareholders provide capital, but nothing else. It is the people who work for the company who actually produce wealth using that capital, so giving them a piece of the action doesn't seem insane to me. And in the case of GOOG, it seems to have worked out pretty well for everyone. If the company had failed, the shareholders would not be complaining about the equity they "lost."

BTW, I looked it up. GOOG doesn't report salary expenses per se, but for 2025, it looks like it paid out roughly $60B in cash compensation, and about $25B in equity compensation. I based that on the average salary per employee and the number of employees, which is public info. I have no idea if that is too much or too little, but the people making the decision (the board) are shareholders, too, and I generally assume they are acting in their own interest, not philanthropically towards the employees. They are just making a different calculation than you are about what is in their best interest.

By contrast, I'm OK with BRK paying Greg $25M in cash and letting him buy his own shares if that's what he wants to do, even though the prior guy worked for a lot less. He's worth it to me because he will produce the future earnings that I will enjoy from my living room. If they had given him stock instead of cash, I would not have minded that either. I might have preferred it; I was happy to see that he was buying shares and putting skin in the game. It's an expense to BRK either way. And I'm thinking long-term.

Equity compensation is often abused, which is bad for shareholders. The post-dating, re-dating, and other nonsense that goes on with options is especially indefensible. But when done correctly, equity compensation is a useful and important tool to align interests and reward productive behavior, which is good for shareholders. The devil is in the details.

I suspect you'll explain why I'm wrong, and that's OK, too, for like all good Shrewders, I am here to learn.

abromber

Over the past 10 years, the Invesco QQQ Trust (QQQ) has significantly outperformed Berkshire Hathaway Class B (BRK.B). The QQQ delivered an annualized return of roughly 21.9%—amounting to a total return of over 620%—while BRK.B achieved a more modest annualized return of around 12.9%.

Equity compensation is often abused, which is bad for shareholders. The post-dating, re-dating, and other nonsense that goes on with options is especially indefensible. But when done correctly, equity compensation is a useful and important tool to align interests and reward productive behavior, which is good for shareholders. The devil is in the details.
I suspect you'll explain why I'm wrong, and that's OK, too, for like all good Shrewders, I am here to learn.

I don't think you're wrong, I just think personally that it's more abused and much more costly for shareholders in the long run than you might. The accounting is better than it once was, but still far from realistic and still contains too many perceived "savings" that are actually costs. It's largely a racket to hide true costs from investors and tax departments.

The accounting is complicated, and I'm sure I've got it wrong, but for example I think a vesting stock grant is valued at the cost of the shares the day the program for a given employee was enacted, and that expense (always at that same original stock price!) is spread over the N years of vesting. Cut short if the person leaves. So if after five years the stock price has doubled, the booked cost of giving the person stock in year five is half its market value at the time.

I think a better way to do it would be to take a page from the semi-fiction of US bond issuance: the government isn't allowed to buy new bonds from itself, they have to be sold into the market then bought on the open market. So each time options are issued, I'd like to see firms instead be required to have previously sold publicly listed warrants with the same expiry and terms on the open market. If they want to give some of those to an employee, they should have to buy them on the open market at the going rate to give to the person. Each time stock lands in the hand of an employee (vests), the firm should have to buy that stock on the open market that day and hand it over. The cost of those open market purchases would of course be a current period expense at current cash cost, booked under employee compensation. Plus in both cases they'd have to pay all usual payroll taxes on that dollar amount, since it's just pay--giving any tax advantage to stock and option compensation is a bad idea.

Under those terms, the value that the employee receives, and the true cost to the company, and the bookkeeping cost to the company would all agree both in time period and amount. They might all be wrong because of transient price irrationality, but they would at least agree with the market value at the time--every member of the public would be able to lay out a dollar amount equal to the booked compensation cost and get the same value in return in the same time frame. As they would all be full expenses the moment that it arrives (free and clear) in the employee's hands, the reality of the expense would be entirely visible to all parties, including the compensation plan of the boss.

It would probably still be a lot of pointless long run dilution, but at least it wouldn't be done for reasons of hiding costs, and it wouldn't be incentivized.

Jim

either management are spending shareholders' wealth unnecessarily because they are cynical and it makes them look good in the short term while mostly hiding the true cost, or they are spending shareholders' wealth unnecessarily because they are not smart enough

I think there is a third possibility. It may make sense to make employees an ownership stake in their work, especially if the most Google is building is being built by these skilled workers.

a third (and fourth) possibility: management wants to incentive its people
.......... It is the people who work for the company who actually produce wealth using that capital, so giving them a piece of the action doesn't seem insane to me.

BRK paying Greg $25M in cash ... He's worth it

That´s how capitalism works, right. But while not insane it gets ever more immoral for me.

Latest example is what an SAP Insider just told me: The many IT oldtimers here are familiar with Hynix. He told me they have full order books for many years to come, using their power in a very thin market for longterm contracts with customers who need their chips.

What he then told me shocked me: Hynix totally depends on their very best developers, around 300 core employees. He asked what I think they earn per year. Me: "$10 Million?". He replied Hynix gave them 10-year contracts paying $650 Million. Me, shocked: "$650 Million over 10 years?". He: "$650 Million per year". That was 2 days ago and my mind now refuses to accept that he really said that, thinks I might have misunderstood (though it was in German, my mother tongue).

And he added that Google (or another company? I was too shocked to really listen to his words) followed with $450 pay packages for their core developers.

If even half true (I know that insider well, know that he doesn´t tend to joking when it comes to such) modern area capitalism is obscene beyond words.

What I just wrote that my insider said can´t be, right? My mind refuses to believe it. Please somebody knowing about Hynix and this pay package for their core developers tell me where I misunderstood my guy.

either management are spending shareholders' wealth unnecessarily because they are cynical and it makes them look good in the short term while mostly hiding the true cost, or they are spending shareholders' wealth unnecessarily because they are not smart enough
...
I think there is a third possibility. It may make sense to make employees an ownership stake in their work, especially if the most Google is building is being built by these skilled workers.

Sure. There's always an agency problem to worry about, but the job of a boss to do the detailed capital allocation. Maybe the boss thinks this truly is the best use of that capital. Fair enough.

But if they feel that's the best allocation of capital, it should be plain old compensation expense at the true cost (market price at the moment it is free and clear in the employee's hands being the best available approximation), with no distortions or perverse incentives or tax dodging. The full true cost should hit every level of bookkeeping, from executive compensation down to the departmental budget. And the public financial statements, of course.

One side effect of my suggestion of having to buy the gifted securities on the open market is that the company has to have the cash to do so, and the share count is unaffected at the moment of that transaction. In some extreme circumstances, they might have to do a secondary offering to raise the necessary cash.

Jim

What I just wrote that my insider said can´t be, right? My mind refuses to believe it. Please somebody knowing about Hynix and this pay package for their core developers tell me where I misunderstood my guy.

Hynix is South Korean. It would make a lot more sense if this were KRW (South Korean Won), where 650M W is $417K USD.

I've never heard of a pay package like $65M USD annually (let alone $650M USD annually) in development of any kind, outside of a couple of rumors of 9-figure signing bonuses from Meta for elite AI researcher/developer types. The math doesn't add up for $50-100B USD revenue and 300 employees making $.65B USD.

650M KRW / 415K USD is what I'd expect critical, principal developers to be making before performance bonus. While reading up on this, the South Korean employees have a profit sharing based bonus pool, and everybody is benefiting from the memory shortage. It sounds like a lot of employees are looking at 6 and low 7 figure bonuses this year.

It would make a lot more sense if this were KRW (South Korean Won), where 650M W is $417K USD.

I´ll ask my guy again (I´ll probably see him next Friday). But he definitely was not talking about "ordinary" amounts like $417k USD/year.

I don’t know if this is exactly what you are advocating, but Fairfax Financial buys all award shares on the open market.

“As part of that initiative, close to 10 years ago we decided to have a general principle that our annual bonuses to senior executives across the company would be awarded 50% in cash and 50% in Fairfax shares that vest in five years. As these bonus shares are awarded, the company buys the shares in the market (which comes out of shares outstanding) and they are recorded as treasury shares, as shown in the table below. As the shares are vested and or exercised, the shares are then reissued and come out of treasury shares and back into shares outstanding.

“You can see over the years our treasury shares have increased from 0.6 million to 1.8 million today. We think this is fantastic and hope they continue to grow over time.

“You will notice that the treasury shares acquired have remained relatively consistent over the last five-year period, especially when compared to our increased employee numbers. Our total compensation, including benefits, paid to our employees worldwide was $2.9 billion in 2025, of which $189 million was awarded in Fairfax shares. As I have said in the past, we would love to have all our employees as owners of Fairfax. Of course, no new shares are issued for these plans. They are all bought in the market.”

https://www.fairfax.ca/wp-content/uploads/2026/03/...

I don’t know if this is exactly what you are advocating, but Fairfax Financial buys all award shares on the open market.

That certainly sounds like an improvement over simply printing shares as as needed as a "free" source of money.

But the accounting is problematical...probably not one shareholder in 1000 has an intuitive yet accurate grasp of the true economic meaning of non-cancelled treasury shares. I sure don't : )

If they are ultimately cancelled, it's just a normal buyback-and-cancel, the exact reverse of a fresh stock offering. If not, the firm eventually parts with them, it's just a stock investment like the purchase of shares in any other firm. Until you know which it turns out to be, you don't know the economic meaning of the treasury share balance.

At a guess, I think this is still a tax wheeze or a bit of a misdirection. I'm guessing that the accounting treatment is that the stock buyback at the beginning of the period is not counted as a corporate expense, merely a reverse share issuance like any other stock buyback. That amount is likely expensed when some of those shares vest years later at the original buyback cost, not the current market value. But the taxable income to the recipient is the fair market value on the day of vesting. It's not exactly straight forward when a company pays something to someone but the accounting/tax cost of one party is perhaps wildly different from the accounting/tax cost for the other. The time value of that money (or the market value change of the shares) appears nowhere. The books say that the company spent $1 to get an employee $2 in income, likely without employer-side payroll taxes due.

So, sure, getting stock into the hands of executives so they care more about the fortunes of the firm is a good idea. But it's kind of like buying Playboy to read the articles. Sure, it might be true, but it might not be the whole story.

Jim

Maybe $650M/year/300 people or a bit more than $2M/year each?

If even half true (I know that insider well, know that he doesn't tend to joking when it comes to such) modern area capitalism is obscene beyond words.

Nobody is ever truly happy, when providers of capital earn a large amount, it's "capitalism is obscene", and when labor earns a large amount, it's also "capitalism is obscene". 🤣

IPO is not a good deal. its a wrapper round his businesses . the shares he gets are montrous, and they are trying to make a virtue out of reserving more than double the normal for retail investors.
its a con . and Jo (e) Public will be left holding the bag when it goes wrong.

Nobody is ever truly happy, when providers of capital earn a large amount, it's "capitalism is obscene", and when labor earns a large amount, it's also "capitalism is obscene".

Unfortunately labor never "earns a large amount"...

Richest 0.1% of Americans own 24.3% of stocks.
Rest of richest 1% own 25.9%.
Rest of richest 10% own 37.2%.
Bottom 90% of Americans own 12.6%.
Bottom half of US owns 1.1%.

https://www.federalreserve.gov/releases/z1/dataviz...

Mungo:
Imagine, for example, that 20% of all Alphabet shares that ever existed owe their origin to options or stock granted to employees at some point in the past. In that case, any one of the shares of a traditional origin long ago would, absent that issuance, be worth 25% more today and could therefore be assumed to have a market price 25% higher today. (at the same market cap, of course). Those share grants and options were in lieu of more obvious cash, so you'd have to deduct what it would have cost in pure salary and bonuses to employ those same people. But I think it's fair to say that, in our hypothetical, that cash cost would have been vastly VASTLY less than 20% of the current market cap of Alphabet.

And then most importantly:

In this hypothetical, I think those people would have worked quite happily for far less than $899 billion in total salary.

It's lovely that you think that. That the smartest, most successful companies in the world are just randomly spending a trillion$ on an input they don't need to be spending it on. That the companies that are getting the most out of their employees could cut what they are paying those employees by a trillion$ without impacting either the quality or quantity of what they get from those employees.

It would be even more lovely, what with the way western rationality seems to work, if you had evidence for this.

Where are the google-like companies that have shown your belief to be true? The companies that got google-like results from their work force while paying them a trillion$ less than the google work force has been paid? Where are the companies that, at least in terms business value growth performance, have eaten Google's lunch because they didn't stupidly flush a trillion$ of the value of the company down the toilet which is Google's mindlessly stupid overpayment of its work force?

Why are not the best performing companies in the world just like Google... EXCEPT without a form of wasteful stupidity, amounting to a one trillion$ stupidity tax on their business value?

So really, to distill my question to you:
You seem to believe that Google et al. are overpaying their work force by a material amount, even as there exists no Google-prime that does what Google does EXCEPT skips the material overpayment.

Would you classify your belief as rational?

R:

mungofitch:
All that being said, Alphabet's moats are so strong that it can withstand a remarkable number of dumb management moves, which is why it has made it such a great investment despite spending equity like water. But the shareholders would still be better off without those moves.

Or a possible other explanation.

Google's management has been entrusted with great moats kept full of alligators by constant superiority in technical achievement. These moats are associated with some of the most spectacular returns to investors that investors have ever seen.

In an abundance of caution, Google's management has determined that SPLITTING the riches between the people who bought a ticket to go on the ride with the people who's job it is to keep the ride going is their safest path forward. Rather than an unconscionable return to investors only, they have opted for an unconscionable return to workers as well. Rather than risking that a workforce paid as if the work they produced was supporting just another large cap company growing at a slightly higher rate than average, they have decided to reduce the THEORETICAL return of their investors to a rate which is just half-unconscionable by increasing the pay of their workforce by a half-unconscionable amount.

Is this a stupid thing to do?

The result seems to be a bunch of rich investors and a bunch of rich employees in an enterprise whos technical lead has been sustained for decades.

So maybe the explanation is that you really do get more for your money when you pay more money, that a trillion$ more pay can be properly managed in such a way to produce well more than a trillion$ more value, which according to most of what we think about business should not be a complete shock.

Maybe the story is simpler than you think, and that paying for results, managed right, gets you results, and it isn't just a rip off of the non-employee shareholders who have some sort of god given right to unconscionable returns that the employees do not have.

R:)

"Unfortunately labor never "earns a large amount"...

Richest 0.1% of Americans own 24.3% of stocks."

I grew up in very poor circumstances. Through many decades of hard luck, pursuit of education, investing wisely and yes some luck for certain, I am in the .1%


Got there by working my ass off

" Is this a stupid thing to do?"


In most cases insiders with options own little stock. The ex-div days reduces the stock price which doesn't help option holders.

IF in fact paying the div reduces demand for the common, it would in fact be stupid to pay a div rather than go all in buybacks.

You seem to believe that Google et al. are overpaying their work force by a material amount

Absolutely!

Show me the incentive, I'll tell you the outcome.

The accounting rules and tax code and financial reporting and management incentive schemes all conspire to make it seem to those not paying attention as if paying with equity is cheaper than paying with cash. But it isn't. Since there is a very large and inappropriate bias in favour of the practice, way too much of it happens.

If all of the ways in which the tables were hugely tilted in favour of equity comp and against cash comp were removed, making it a wash in terms of cost to the shareholder/tax/reporting, then any remaining equity comp would be the carefully considered best decisions of management. They aren't, so they aren't.

Tell the boss he can hire way more expensive people without the full cost ever showing up in the statements or being visible to shareholders or affecting his bonus if only he does it in a certain way, which way do you think the average boss will jump?

Jim

“Got there by working my ass off”
————————
…as did many on this board who now spend a similar effort trying to find the most efficient & deserving beneficiaries for the results of this work.

https://fred.stlouisfed.org/series/WFRBLTP1246

ciao

"…as did many on this board who now spend a similar effort trying to find the most efficient & deserving beneficiaries for the results of this work."

the vast majority of my estate will go into a GLAT with say a 20 year life:

https://www.wealthspire.com/blog/clat-charitable-l...

worth checking out.

We all have our favorite causes.

“ worth checking out.”

Tks for the ref & link……nice explanation….currently in process of big trust restatement….hope the current estate exclusion does not get significantly reduced in next administration!!!

ciao

“Got there by working my ass off”

As did all his live my father (welder) and my mother (secretary), without ever having had the slightest chance to "invest wisely" (as there was not one $ to invest after living expenses), to belong to that "0.1%" or any other bracket above the lowest one quoted by banksy.

As did all his live my father (welder) and my mother (secretary), without ever having had the slightest chance to "invest wisely" (as there was not one $ to invest after living expenses), to belong to that "0.1%" or any other bracket above the lowest one quoted by banksy.

And now, here you are with your fancy stocks and your fifty-dollar ideas about how to make more money by investing your money.

The economic surplus of your parents' lives appears to be embodied in their investment in you!

Given a choice between improving the past and improving the future your parents seem to have chosen improving the future and it seems to have worked out. Got to love them for that! IMHO.

I hope the future belongs to people like your parents, and their descendents. I am very afraid that trying to improve the past is some kind of sucker's game.

R:

Mark:
But it isn't - it's the VCs selling, the round B, C, D, E, etc investors selling, it's employees selling, and it's management also selling. Nearly everyone is selling some at the IPO, and only public shareholders (individually and via myriad funds) who are buying. All those other investors are EXITING, or at least partially exiting, at the IPO. It wasn't always like that.

And it also didn't used to be that the connecting rods were made in one factory, the fuel-injectors in another, and the chips that controlled it all were made in yet another factory. But the "excelsior," the "onward and upward" of our technical economy are a story of unrelenting specialization, standardization, and mass-production until the most exquisite expression of technology is no longer a graphite pencil.

Without the exit of going public there would be, essentially, no venture capitalists, no firms that specialized in just how you got companies from a market cap of $10,000 up into the millions. If every time you had someone who figured out how to do this, they had to, for obscure moral or aesthetic reasons that are hard to justify with math or physics, hold that investment for the next 20 years to prove their moral worth and depth of character, we would have no steady stream of new start-ups.

Y-combinator isn't a bug, it is a feature.

R:

Given a choice between improving the past and improving the future your parents seem to have chosen improving the future and it seems to have worked out.

They choose nothing. They had no choices.

Enough.

Not sure what your point is. You seem bitter about the past

Everyone has their challenges. Life can be hard

Enjoy what you have left of it

Without the exit of going public there would be, essentially, no venture capitalists, no firms that specialized in just how you got companies from a market cap of $10,000 up into the millions. If every time you had someone who figured out how to do this, they had to, for obscure moral or aesthetic reasons that are hard to justify with math or physics, hold that investment for the next 20 years to prove their moral worth and depth of character

Oh come on. Traditional lock-up period is 180 days, the SpaceX lock-up is as short as 70 days in some cases, and has other rolling tiers at 90, 105, 120, and 135 days. While that prevents a gigantic block from coming online all at once, it also allows the cash-out of large offerings much sooner than usual - making it more lucrative to play the “cashing out IPO” game than the “this is a solid company” exercise it is meant to be.

In the 1990’s most VCs held the shares between 3 and 6 years. Today three years is a lifetime, and with these “new SpaceX rules” it will continue on down the path of funding the roulette wheel of capital formation instead of the “building blocks” of industrial health.

“20 years.” Give me a break.

Without the exit of going public there would be, essentially, no venture capitalists, no firms that specialized in just how you got companies from a market cap of $10,000 up into the millions. If every time you had someone who figured out how to do this, they had to, for obscure moral or aesthetic reasons that are hard to justify with math or physics, hold that investment for the next 20 years to prove their moral worth and depth of character, we would have no steady stream of new start-ups.

I don't disagree with the gist of this. And what I wrote was not a moral judgement of any sort. It was simply a statement of opinion that IPOs today can't possibly be as lucrative as IPOs in the past. That's because all the early rounds of investment have been done privately and those investors will reap the vast majority of the reward. The public part of the investment is now much later and much less return remains to be had.

" Oh come on. Traditional lock-up period is 180 days, the SpaceX lock-up is as short as 70 days in some cases, and has other rolling tiers at 90, 105, 120, and 135 days. While that prevents a gigantic block from coming online all at once, it also allows the cash-out of large offerings much sooner than usual - making it more lucrative to play the “cashing out IPO” game than the “this is a solid company” exercise it is meant to be."


In what decade was the, "traditional lock up period 180 days"? Certainly not the 80s and 90s. Try 1 and 2 years.

Have retail participants of the ipo been told that if they, flip it, they will never see an ipo again?

How do you suppose the market makers will trade the stock from the open?

How many insiders selling in the first 6 months will become wealth manager clients of the underwriters at say a negotiated .35 % fee?

The nasdaq 100 will be buying about 10-15 % of the float shortly after the close of the IPO?

The Soprano family is sick they didn't think of this in the 90s.

In 3-5 years others will look back on these gimmicks like the 07-08 housing market where they found new innovative ways to sell to first time buyers aka retail with little down, with an interest only adjustable-rate mortgage. What could go wrong? Let's see what happens in years 2-5.

I'm laying 5 to 1 Gregs phone is not ringing from Musk. :)

longtimebrk: I am not bitter about the past. Apparently I was simply unable to express what I tried to express.

And I am looking forward to the future. Because IBKR just sent me this:

We wanted to make you aware that Interactive Brokers has launched new functionality which enables eligible clients to participate in Initial Public Offerings (IPOs).

I can participate on SpaceX´s IPO and get rich quick 😂

Mark:
I don't disagree with the gist of this. And what I wrote was not a moral judgement of any sort. It was simply a statement of opinion that IPOs today can't possibly be as lucrative as IPOs in the past. That's because all the early rounds of investment have been done privately and those investors will reap the vast majority of the reward. The public part of the investment is now much later and much less return remains to be had.

I don't think we are very far apart in how we look at this stuff.

I do think you underappreciate how much there is to make in the public market, how much more value is gained after the stocks go public than during the IPO.

Take Google for example. When Google went public in 2004, its market cap at EOY 2004 was $29 billion. I would say this caps what the pre-IPO investors made off Google at $29 billion.

Since then Google's market cap has risen to $3,789 billion. In addition, Google has bought back $337 billion of shares in the last 8 years. I think this means post IPO investors in Google have made $3,789+$337 - $29 = $4,097 billion, or 141 times as much as the VCs made in the pre-IPO phase of Google's life.

Is Google unique in having numbers like this? Well certainly not completely, probably not even a little. AAPL, NVDA, and a few other companies have all smashed through the $1,000 billion mark for post-IPO investors while very likely having only done at most tens-of-billions for the pre-IPO investors.

So I think the suggestion that the early investors "reap the vast majority of the reward." is precisely wrong, even overwhelmingly wrong.

I just did a quick check on NVDA and it returned at most $0.7 billion to its pre-IPO investors, while it has, to date, handed off more than 5,000 times that much in market value in its post-IPO life.

If I am being poly-anna-ish about this, I'd love to see the counter examples showing the VCs making bank while the rest of might should just get savings accounts.

Cheers,
R:)

I

Goofyhoofy:
“20 years.” Give me a break.

I have heard some of what SpaceX has done to game-ify the SP500 for its benefit. I am skeptical that this is a good thing for the world.

Two other things I think about:

1) Has SpaceX/Musk's game-ification of SP500 for the SpaceX IPO actually made it a better investment? I don't go to war with the army I want anymore than I invest with the public rules and laws that I want, I invest with the laws and rules we all in common have. In catch-22 someone is about to walk across the grass in the park despite the "do not walk on the grass" sign. "what would happen if everybody did that?" asks his civic-minded companion? "Then I'd be a damn fool not too" he replies, and sad to say, this is as far as my civic virtue usually reaches. If the world hands me a game-ified IPO that might make me richer, I am likely to go for it.

2) I've always wondered, if the stock has gone public and is now tradable, but ALL the IPO shares that were sold are in principle locked up, then WTF is the market SUPPOSED to be trading?

So its not that 180 days or whatever is too much or too little, but rather, what is the whole underlying idea about going public, but putting some kind of unenforcable limit measured in days weeks months OR years in when these shares, which are supposedly now publicly traded, can be actually publicly traded?

Inquiring minds want to know.

R:

Is Google unique in having numbers like this? Well certainly not completely, probably not even a little. AAPL, NVDA, and a few other companies have all smashed through the $1,000 billion mark for post-IPO investors while very likely having only done at most tens-of-billions for the pre-IPO investors.
So I think the suggestion that the early investors "reap the vast majority of the reward." is precisely wrong, even overwhelmingly wrong.

Interesting that you pick three of the, perhaps the most successful companies in recent history to demonstrate your point. I wouldn’t know how to do it, but I suspect if I could find a normalized way to do the calculation for all companies which have gone public the math would point in a quite different direction.

I once inherited a station with a ratings problem (I didn’t want to go, but that’s another story), and the CEO decided that to “help” he would get a consultant for us. Who came to town, and in our first (and only) meeting told us this would be pretty easy, all we had to do was “find another Oprah.” I should have fired him on the spot, but because he was a download from above I bit my lip and kept my mouth shut.

We never did find another Oprah. Nobody ever found another Oprah. All of the networks and syndicators, all of the thousands of individual stations, all of the talent scouts and agents and agencies never found another Oprah.

Beware of picking the very best, brightest, sweetest cherries when you’re going to cherry pick your argument, because it’s utterly unconvincing.

I have heard some of what SpaceX has done to game-ify the SP500 for its benefit.

I thought I saw that the S&P wasn't going to be drinking this particular Kool-aid. Has something changed?

Baltassar

I've always wondered, if the stock has gone public and is now tradable, but ALL the IPO shares that were sold are in principle locked up, then WTF is the market SUPPOSED to be trading?

The new 555 million (or more) shares that are being issued will be trading! Some brokerages want their customers to wait a week or two before selling, but not all of them.

I'm just glad (and proud) that I bought and held-to-date Google in 2011, Amazon in 1997, Netflix in 2012, Apple in 2008 and Nvidia in 2013 (oops, I sold Nvidia in 2014 after a double).

conifer

I have heard some of what SpaceX has done to game-ify the SP500 for its benefit.
...
I thought I saw that the S&P wasn't going to be drinking this particular Kool-aid. Has something changed?

There is a theory (not mine) that goes something like this:
xAI, like the other LLM firms, is scrambling to build the data centres it needs.
Yet they leased out a huge amount of computing power to Anthropic and Alphabet, against the business needs of xAI, to generate some immediate revenue, mainly for the purpose of making 2026 look profitable at the group level, since the S&P requires a year of profitability before index inclusion.

Nothing wrong with profits, of course. But there is a case to be made for trying to make the profits within your putative areas of business.

Jim

Yet they leased out a huge amount of computing power to Anthropic and Alphabet, against the business needs of xAI, to generate some immediate revenue, mainly for the purpose of making 2026 look profitable at the group level, since the S&P requires a year of profitability before index inclusion.


I thought that was an interesting data point, they would rather have their competitors use the infrastructure rather than use it themselves... seems to say a lot about the confidence they have in their business.

tecmo
...

I thought that was an interesting data point, they would rather have their competitors use the infrastructure rather than use it themselves... seems to say a lot about the confidence they have in their business.

I guess you can't complain if they're being rational. Arguably they have the cheapest cost of capital in the world, so they can be the low cost supplier of anything capital intensive?

Jim

I thought that was an interesting data point, they would rather have their competitors use the infrastructure rather than use it themselves... seems to say a lot about the confidence they have in their business.

Not really. The Colossus 1 system, previously used by xAI but is now full of older/less state of the art GPUs than what its newer Colossus 2 system is using. By some measures, those GPUs have 5x the training capability. It's a testament to how quickly the technology is evolving. And that agreement is also a very short term lease, on the order of months. xAI can reclaim that infrastructure for its own purposes quite fast.

Claiming that this move (which is generating insane levels of profit for xAI, BTW) proves that xAI has a lack of confidence in its business is like claiming Amazon doesn't have confidence in its AWS business simply because it lets its competitors rent out its own servers.

Mungofitch, referring to paying Google engineers with stock instead of cash:
It is a method of compensation almost certainly chosen precisely because the true long run cost is very well concealed, despite being so much higher.

First, some things I have learned about Google as I looked into this:
1) In the 21 years it has been public, the market cap of the company has grown by 27% APR or 150X from $0.03T to $4.30T
2) Its "trend" P/E ratio has risen from less than 17 to about 19 during that time (based on fitted exponentials to its Earnings and Market Cap growth to smooth them)
3) Share dilution due to SBC (Stock Based Compensation) has been 26%: of all shares ever issued, 26% of them were as a result of paying employees in shares instead of cash.
5) The average price of a share used to pay an employee over all shares so used has been $50/share, much less than the stock's ~$350 per share current price.

Essentially, Mungofitch's complaint about this is that paying early employees with shares that, at the time you publicly awarded those shares to those employees, were trading for MUCH LESS than their current $350 or so price can "almost certainly" be explained because the high cost of that practice to future shareholders was very well concealed, and these employees could have been paid from cash on hand instead.

Of course, back in 2004, say, when Google went public, every share of google bought or sold on the exchange went for around $2.50, its split adjusted price. Everybody who decided to invest in Google had merely to give Google $2.50 for each split-adjusted share they bought, despite the fact that only 21 years later that share would be worth 140 times as much. Was this engaged in because it was easy for Google to hide the true long term cost to other shareholders of letting people buy shares for $2.50 cash (split adjusted)? If using each split-adjusted share to raise $2.50 cash was kosher, why is using each split-adjusted share to pay $2.50 of salary "almost certainly" concealment?

Do investors have some grand moral claim for MORE THAN 140X returns on their $2.50 investments? Is it immoral to offer the same deal to employees by paying them in shares at the exact same dollar conversion that they were being exchanged for cash in public at the time?

Some of what Mungofitch says suggests that by using shares instead of $2.50 cash, Google was getting some erroneous accounting treatment that was SO erroneous that it amounted to a fraud being perpetrated upon existing shareholders (I hope I am not overstating Mungofitch's distaste for this practice).

In fact, every share used to pay an employee was accounted for identically to a new share issued to raise cash in a public offering. And the precise numbers of shares and the values of salary they were used to pay were dutifully recorded in 10-Q's, 10-K's, and published reports.

Further, every cent of tax including social security and medicare withholding that would have been taken by the US Government had the salary been paid in cash was taken, in cash, from Google when Google paid shares out to its employees in compensation.

I can only guess that Mungofitch concern is that the shares delivered to the employee were valued at the time they were promised to the employee, even though they generally did not get given to the employee until a year or two later at that value. But there was nothing secretive about this. But certainly if I promise to pay you $2000 a month on my mortgage for the next 30 years in 2025, but by 2045 each $1 is worth only 1/2 what it was worth when I made the promise in 2025, I still, with no scandal, pay you $2000 a month in 2045. We have a long history of making promises in nominal terms but at future dates, and sticking to them, without it being considered deceptive.

So what is it about raising $2.50 cash for a share whose future value is $350 that is totally OK, while using that same share at that same time to pay $2.50 in salary is "almost certainly" for the purposes of deception?

Still wondering.

And that agreement is also a very short term lease, on the order of months. xAI can reclaim that infrastructure for its own purposes quite fast.

I've heard the Anthropic deal is for three years. Though it can be cancelled by either party, so you're right that they could take it back. You know, in case xAI ever gets any clients and needs it for something : )

(latest market share under 2%, allegedly)

Jim

Goofy:
Interesting that you pick three of the, perhaps the most successful companies in recent history to demonstrate your point. I wouldn’t know how to do it, but I suspect if I could find a normalized way to do the calculation for all companies which have gone public the math would point in a quite different direction.

Regarding my observation that earnings in the public market seemed to be at least 1000's of times larger than in the pre-IPO market based on NVDA, AAPL, and GOOGL.

I would argue that the more interesting cases to understand would be where a lot of money is made. And in those cases, looking at 3 stocks that have made TRILLIONS for their owners, the amounts made post-IPO are 100s or 1000 times a much as the amounts made by the pre-IPO VCs.

But let us see what we can say about the VC vs Public markets as a whole.

Total US investment in Venture Capital: ~$1.25T.
Total return to VC in the US every year vary wildly, from about $100B to about $700B per year.

Total US investment in public stock: $66T to $77T.
Total return in public stocks, about 10% annually, rising to 16% annually in recent 10 year period. This would suggest a range of $6.6T to $9T per year.

Total invested in public markets / total invested in VC : 50 to 60 x as much in public stock as in VC.

Total annual returns in public markets / returns in VC : 7 to 90 x as much in public markets as in VC.

So overall, post-IPO stock gains are 7 to 90 times as large as pre-IPO gains. VCs are NOT sucking up most of the gains, not even close. Rather the opposite, public markets suck up way more gains from stocks than do pre-IPO VCs.

R:

I've heard the Anthropic deal is for three years. Though it can be cancelled by either party, so you're right that they could take it back. You know, in case xAI ever gets any clients and needs it for something : )

The terms are a bit confusing.

xAI committed to only 6 months, after which if either party wishes to cancel, they can do so with 3 months notice.

But the agreement allows and supports a total term length of 3-years unless cancelled.

Elon has stated that the short term nature and easily cancelable terms were his own demand, not Anthropic's, and that Anthropic wanted to secure a much longer period.

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