Stock buybacks: how Wall Street has created "profits without prosperity"

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If a public company does this long enough and never goes private, eventually it becomes at least half financial services firm at the expense of the core business of providing products and services in the greater market.

A similar phenomenon exists when companies pile their treasury into real estate not needed for the core business. Eventually they transform into property holding companies where the ostensible main business is secondary at best.


I once explained it to someone with the imperfect analogy of using nitrous in your car engine-- you’ll go really fast for a while, then your engine will fall apart. The gains are a short-lived illusion.


Equity = Assets - Debt. Stock buybacks are simply shrinking the balance sheet. If profits remain the same w smaller market cap, good for stock owners. Some companies make mistakes reducing cash, others don’t.

Should we celebrate every time a company issued stock and raises cash? FYI this is the opposite of a stock buyback. What about raising funds with debt instead, is that preferred?

Incentives for CEOs and discussion against Friedman are a different subject altogether. But to suggest GEs problems were due to stock buybacks is inane to the extreme.


No, they’re also used to juice the stock if it suits the executives and shareholders.

If a company want to have that degree of control over the balance sheet and has lots of cash it can go private. The way buybacks are currently done is another symptom of the late-stage capitalist “securitise all the things!” mentality.

No, but we should celebrate when a company applies funds to innovation and R&D and better products and services to serve a wider consumer base.* Instead they hoard cash in treasury and do stock buybacks as is expedient to give the stock the appearance of being more in demand than it really is.

[* ETA: paying as much attention to stakeholder value as to shareholder value]


Here’s my take. No doubt stock buybacks are abused, you are effectively using company reserves to line the pockets of stockholders.

The nice thing about stock buybacks though, as opposed to dividends, is that they are sporadic. With dividends people expect them regularly (and not decreasing). That means with stock buybacks a company can strategically decide on a case-by-case basis if they want to invest in their employees, R&D, or stockholders. I think some companies also opt for stock buybacks in lieu of dividends because of tax implications (unrealized gains).

For a Bay Area tech company it’s a bit nuanced because so much of their employees’ compensation is equity, If they ever let the stock price fall too much some employees could be in danger of losing their homes in a place where real estate costs are so high.

The problem isn’t stock buybacks per-say, it’s when a company isn’t paying its employees competitively, not investing in employee growth, not giving equity to employees, not investing in the future (ex research) AND doing stock buybacks. Honestly that’s usually the case though isn’t it? I think some tech companies may be the exception.


The first 2 are investments, the third isn’t. Which is the main point of the post. Companies are being run to extract as much profit as possible rather than investing in their future


This situation is the logical outcome of the Harvard School of Business Mafia and their spin that “the only thing a corporation is responsible for is creating value for the stockholders”. Proponents of that theory use it both as a way to loot the companies and as a smokescreen to try to evade or negate government regulations.

There was a time in America when businessmen wanted to run companies; they wanted to make and sell things and do things that mattered. No more. Now, everybody wants to be nothing but a money manager who gets rich by making deals and shuffling money around. Everybody wants to be a broker, not a maker - no assets to worry about upkeep on, no liabilities, nothing but pure profit.


That isn’t the only choice though. They could adjust base salaries up. They could grant additional shares. They could adopt a more traditional bonus plan (i.e. pay cash not stock N times a year based on how well the company thinks it is doing).

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Elmer Fudd has a marvelous explainer about how it used to work.


Pfff…this is a big deal? Really? Nothing new here. It’s called the greater fool theory

Now this is a big deal!

You be the judge as to which one fools us the most :slightly_smiling_face:

Looting: The Economic Underworld of Bankruptcy for Profit, George A. Akerlof, Paul M. Romer, Robert E. Hall and N. Gregory Mankiw, Brookings Papers on Economic Activity, 1993.

Similar theme, not as advanced a case, updates on the theme continue. Any good parasite ensures the host lasts as long as it can.

There’s also the “Low Hanging Fruit” discussion by Tyler Cowan to consider, R&D doesn’t return what it used to because science appears to be hitting a bit of a wall or at least has slowed in ways that make many well-informed people think so.

So what’s left to incentivize business? That’s a broad question answered different ways in different countries with different outcomes. Labelling the resulting outcomes as “sociopathic” is almost perfectly circular reasoning.

So that debt clock is showing an amount equal to about one year of economic output from the United States. It’s a mighty and fundamentally productive economy that’s running up that debt, with cheap transport, good business security and lots of basic goods to ship to willing customers. If it’s only a year ahead on spending, that’s not actually so bad, really… :thinking: And much of that debt is floating around as currency, helping cement its position.

Try spending Canadian dollars and American dollars on your next overseas vacation and compare the experience (try spending Scottish pounds in England). Lots of folks are ready to take that American debt. Maybe they are greater fools… maybe they know that dollar bill buys stuff.

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