This is going to be a rant. It’s about stock buyback programs. Stock buybacks are these great programs that are\u00a0loved and demanded\u00a0by MBA\u00a0suits and finance folks to trick public companies to spend their money on guess what:\u00a0buying themselves! Now think about this for a moment: The company that has\u00a0generated a hard earned profit, tries to put that money to work. And the best way they can come up with is buying more of its own. Cmon’ you’re kidding right? It isn’t investing in more R&D, thinking up new products, it’s not investing in\u00a0more aggressive marketing of existing products, it’s not investing in the sales force, it’s not buying other companies to grow new business, it’s not paying bonuses to high achieving employees, it’s not spending on shoring up their employees retirement plans. No, it’s spending on shareholder value, the reduction\u00a0of\u00a0dilution\u00a0in stocks to increase earnings per share. And why does this work so beautifully? Because influential investment funds own ridiculously large amounts of the publicly traded stocks and are benefiting disproportionally from such a buyback. “Just give me that money you’re having!” \u00a0But it gets better: Not only\u00a0doesn’t have \u00a0the company a good ideas how to grow its business faster than the competition, it does this kind of buyback usually during good times, when stock prices are high. Granted, nobody can predict the stock price and cost averaging takes care of some\u00a0inefficiencies, but shouldn’t this kind of investment then continue during bad times, when the stock prices are deflated? You would think. Price averaging works that way.\u00a0But NO, suddenly cash preservation takes precedence and stock purchases stop during bad times. Latest example:\u00a0Intel. They’ve been buying\u00a0their stock all three quarters long, until business turned really sour in Q4 of 2008. So they stopped buying back stock. The stock is 48% down since it’s high\u00a0in 2008. Not that I think preserving cash is a bad thing during these times. But it’s more important to invest the money in new products or business (you can’t save yourself out of a recession, you need to invest!) to emerge stronger when the next cycle starts. I’m not suggesting Intel isn’t doing that. It is. But it’s also having a stock buyback program because it fell slave to the fund managers. I’m convinced that stock buybacks weren’t a good idea to spend your money on in first place. Not in good times, and not in bad times. If you can’t find management to grow the business faster than investing in their own stock, get rid of them, is what I say. They’re out of ideas or have fallen\u00a0slaves to their investors. But\u00a0IMO the reason we have so many buyback\u00a0programs is that that’s really all\u00a0the MBA suits understand of the companies’ underlying businesses they\u00a0invest in.\u00a0And it’s the fastest way known to them to extract money. It’s easy to ask for, especially if you own huge chunks of stocks.\u00a0So give me more of\u00a0your hard earned\u00a0money!<\/p>\n","protected":false},"excerpt":{"rendered":"
This is going to be a rant. It’s about stock buyback programs. Stock buybacks are these great programs that are\u00a0loved and demanded\u00a0by MBA\u00a0suits and finance folks to trick public companies to spend their money on guess what:\u00a0buying themselves! Now think about this for a moment: The company that has\u00a0generated a hard earned profit, tries to … Continue reading Stock Buybacks<\/span>