Tuesday, April 26, 2022

The Blowback from Buybacks

If share buybacks achieve the desired intent, it's purely coincidental

Recent years have seen a spate of corporate buybacks, often in the multi-billion dollar range. These are predicated upon the belief, spurred by the people who support them, that they help to shore up a company's share price. This is a dangerously wrong, even pernicious belief. Why? 

The stock market is like an infinite sink in thermodynamics. One company is puny before the tidal forces of the market at large. And by far the largest factor that determines stock price is the movement of the market as a whole (as measured by key indices). If the market shudders or collapses (a la 2008 or last few months), your share is gonna get clobbered, no matter how much money you’ve poured in !!

Seen another way, it’s like trying to boil the ocean (or air condition the world). If you spend $5 billion in buyback and the market falls say 4-5%, your stock price is where it was and you’re $5 billion poorer !

What people don’t realize is, there’s a two-speed phenomenon here. The stock market isn’t a vault, it is an information discounting machine . The value in it is notional, and varies as information (about any factors economic, financial, geostrategic, psychological etc etc etc) is received . No single entity (or group of entities) can stage manage such a diverse range of information factors. Not large corporations, not even governments. 

The money in your company reserves on the other hand, is real money, earned by selling iphones or eyelenses or whatever. When you dump it in the market it’s not like placing it in a vault, it’s like dumping it in an ocean whose level depends upon a host of uncontrollable factors and which you cannot raise. Your hard earned real money is now entirely at the mercy of those uncontrollable factors.

If you dump that money in shareholder hands (or govt hands as tax) it’s still real money. (Of course they may still dump it in the stockmarket (or the ocean 😀) but that’s their lookout.

And oh, buybacks do make money. For advisors, consultants, investment bankers and the like. 


If you doubt the ‘stock mkt value is notional’ assertion, consider Bill Gates being worth $150 billiion or whatever. If he decides to encash tomorrow, can he get 150 billion in cash? The price will collapse and he’ll be lucky to get 50 bil !! Did any cash get destroyed? No. Then where did the 100 bil go? Nowhere, it wasn’t there physically in the first place! 😀 It existed purely as a notional artifact. That’s notional value for you. Or we saw Yahoo and Aol etc lose hundred billion + in value in a short time. That wouldn’t be possible if the value was real.