The thing that gets me about buybacks is all that wealth vanishing if the stock market crashes for a long period (long recession/depression) when having cash to cushion the business is so important.
For sure, buybacks alongside the passive flows is basically phantom value, which means those stocks could suffer worse if these trends somehow stop or reverse.
I would push back a bit against the point about share buybacks. While I understand the point that they are effectively short-circuiting the hierarchical capital structure and potentially focusing on short-term gains at the expense of long-term profits, there is another way to look at it. If the company cannot generate sufficient returns with its current cash, it is prudent to return that cash to shareholders. This can be done in the form of a dividend, but it can also be done via share buybacks which are more tax efficient than dividends. Considering the people that sold their shares in the buyback program (i.e. the other side of the transaction a la Mises), they are now enable to re-allocate capital in a way that they see as more meaningful for generating long-term value. However, I do appreciate the nuance that those who are most likely to sell in a buyback are probably the most likely to seek out the type of short-term opportunities that result in long-term value destruction and bubbles which are encouraged by artificial interest rates, but nonetheless, the buyback mechanism itself seems to be a well-founded market mechanism.
Let me know if you disagree and if I am missing something.
One issue is that a dividend pays out value to each shareholder equally, whereas buybacks give insiders and executives preferential treatment in timing and price. While under current laws this is legal and fine, it is probably not the fairest. Also, buybacks should theoretically occur when the company fees their stock is undervalued relative to cash flow or expected future return (who better to know or have confidence than the experts at the company). However, the current market is so overvalued this is not what is occurring in practice. As stock prices go up we see more buybacks which should be the opposite.
The thing that gets me about buybacks is all that wealth vanishing if the stock market crashes for a long period (long recession/depression) when having cash to cushion the business is so important.
For sure, buybacks alongside the passive flows is basically phantom value, which means those stocks could suffer worse if these trends somehow stop or reverse.
I would push back a bit against the point about share buybacks. While I understand the point that they are effectively short-circuiting the hierarchical capital structure and potentially focusing on short-term gains at the expense of long-term profits, there is another way to look at it. If the company cannot generate sufficient returns with its current cash, it is prudent to return that cash to shareholders. This can be done in the form of a dividend, but it can also be done via share buybacks which are more tax efficient than dividends. Considering the people that sold their shares in the buyback program (i.e. the other side of the transaction a la Mises), they are now enable to re-allocate capital in a way that they see as more meaningful for generating long-term value. However, I do appreciate the nuance that those who are most likely to sell in a buyback are probably the most likely to seek out the type of short-term opportunities that result in long-term value destruction and bubbles which are encouraged by artificial interest rates, but nonetheless, the buyback mechanism itself seems to be a well-founded market mechanism.
Let me know if you disagree and if I am missing something.
One issue is that a dividend pays out value to each shareholder equally, whereas buybacks give insiders and executives preferential treatment in timing and price. While under current laws this is legal and fine, it is probably not the fairest. Also, buybacks should theoretically occur when the company fees their stock is undervalued relative to cash flow or expected future return (who better to know or have confidence than the experts at the company). However, the current market is so overvalued this is not what is occurring in practice. As stock prices go up we see more buybacks which should be the opposite.