Who's watching the watchmen?
Many of us have, no doubt, read the body of literature and/or observed the research detailing management teams' propensity towards pursuing value-destroying activities--repurchases, empire-building, or whatever other incremental investment unit. The interesting part, as investors, is assessing. We, as analysts and investors, are faced with the task of determining just what constitutes value creation.
But as humans, we too are subject to many of the follies detailed by behavioral finance. In context, does that makes us as ill-suited to judge capital allocation decisions as managers? An example: individuals will consistently regard ill-timed repurchases as stupid, with hindsight. Many a money manager has undressed an executive on this basis, for repurchasing shares at the height of a bull market. Humorously enough: Were these managers in cash during that time? Similarly, we'll often employ frames--setting a story up in hindsight, selectively collecting and detailing information in proof of or against a given case or story.
So a relevant question as we assess managers: Are we really any smarter than them, or simply fitting story "x" to the flavor of the day? After all, a capital allocation decision 3 years past may seem stupid today, but brilliant 4 years down the line.