> The value is only from what other people are willing to pay for it?
Somehow every time I try to make this argument about stock buybacks, some people vigorously defend them as not just somehow a glorified Ponzi scheme.
Somehow every time I try to make this argument about stock buybacks, some people vigorously defend them as not just somehow a glorified Ponzi scheme.
The cash for buybacks comes from company operations, which they give to investors in exchange for destroying the outstanding security. The cash for Ponzi schemes comes from other investors, which they receive in exchange for issuing more securities and use to fund investors who want to cash out. They are in many ways opposites.
If the value of something is only "someone else will pay for it, and then later they will sell it", that to me is effectively the same as a Ponzi scheme. There's no inherent value in the actual thing being bought and sold other than the buying and selling of it. Maybe calling them "Pokemon cards for companies" would be a better way of describing why I find it nonsensical to claim there's any real link between the company and the stock unit when buybacks are the only way to make money off them.
Curious if you understand where the cash from a buyback comes from? That it's out of the corporate treasury, where it was previously accounted for as part of the profits of the corporation?
The issue to me is that the division between "money companies get from selling their shares" and "money companies get from selling their products" is artificial; whether it gets taxed differently is a procedural issue, not something that inherently defines what "value" is. When the value of something is only from selling it again in the future, it's inherently only valuable as long as there's someone else to pass it onto to sell it again later. Sticking the company in the middle of passing it along doesn't magically change whether it's sensible or not. That's what I mean by "effectively a Ponzi scheme", even if it's not strictly one in the definitional sense. The same arguments for why a Ponzi scheme is undesirable apply.
> Obviously it comes from the company; otherwise it's just a regular stock sale that doesn't need any additional descriptor.
This is incorrect. A buyback is when a company buys its stock. It is giving cash to shareholders, and taking the shares back. A stock sale is the opposite, when the company sells its stock and receives money from the new shareholders. The direction of cash flow is very important here, because a key difference between a Ponzi scheme and a buyback is that in a buyback, the company is distributing cash to investors, not taking cash in.
> The issue to me is that the division between "money companies get from selling their shares" and "money companies get from selling their products" is artificial
If you're collapsing these two, you're generalizing beyond the point of usefulness, and ignoring all of the reasons why people engage in economic activity in the first place.
There are many, many industries where the consumer does not even get to sell the object again in the future. When you go out to a restaurant, the meal disappears within an hour, leaving you with just memories and indigestion. When you go to an amusement park, you have fun while you're there and leave with nothing. When you pay rent, you have a roof over your head for the month and then nothing afterwards. When you go to a casino, you get your hopes and excitement up while you're there and leave with less than nothing. When you buy alcohol or tobacco, you're spending money on the privilege of poisoning yourself.
Almost everyone would consider these legitimate economic exchanges, though. They may be inadvisable on a time-preference basis because your money disappears and you end up with nothing durable in return, but few people would argue that a large part of our economy is made up of transactions like this.
You're right though that you can take the corporation out of the equation and they still make just as much sense. If you take the corporation, its accounting statements, and the corporate treasury out of the equation, then a buyback is taking money earned from providing goods and services, and distributing it to the shareholders. The difference from a dividend is which shareholders receive the distribution: in a dividend it is distributed equally across all shareholders (who continue to remain shareholders), while in a buyback it distributes the cash to the people who least want to own the business in the future, paying them out entirely and distributing future profits to a smaller set of shareholders.
When a company buys stock, the money comes from the company. You're literally saying the same thing as me and telling me I'm wrong. It's not worth it for me to read beyond that because it's not clear you're reading what I'm saying properly.
How do you see that as a Ponzi scheme?
A collectible card doesn’t have paying customers; many publicly traded companies do. They are real businesses that make money. When they make more, the price goes up.
You seem to ignore that.
The economy is not based on the stocks, but on the value the underlying companies produce. E.g. Tesla makes cars, Google runs a search engine. Such companies impact the real world - Baseball cards collect dust.
It’s a broken comparison.
Buybacks raise the EPS/earning-per-share by lowering the denominator (number of outstanding shares).
EDIT:
If P/E stays the same, but the E (earnings) grows, the P (price) has to grow too.
I think it’s quite uncontroversial to equate buybacks with dividends. Personally, I prefer dividends, even if they’re suboptimal tax-wise.
Buying shares means you own some of that; that is the value.
These companies likely pay their employees, and as a shareholder you get to partake and harvest value, without having to work for it.
If the company earns more than last year, the stock should be worth more. But of course, valuation clouds the picture, where dividends are usually simpler to model.
It’s no more “a piece of paper”, than a deed over a piece of land is. Would you also consider that “a collectible”?
You’re entitled to have your opinion, but I disagree with you on this.
Amazon currently has close to 11 billion shares of stock (https://www.macrotrends.net/stocks/charts/AMZN/amazon/shares...). Do you seriously believe that 1/11,000,000,000th control over Amazon in terms of voting rights is worth $240? A single vote is indistinguishable from meaningless.
I struggle with the same initial impression as you, and have reached an uneasy peace with the status quo by telling myself that the stock price is about the amount of dividends the company could issue in a dividend-friendlier tax environment, once its growth plateaus and it goes into cash-cow mode.
Completely agree about this part. I find it unethical that capital earns more than labor.
I don’t think that will ever change though, as capital also buys political power (in many countries).
That was my initial motivation for getting into dividend investing: If you can’t beat ‘em, join ‘em.
However, if they're at parity then the incentive is to just squeeze your assets for as much income as possible until you run their value into the ground. Which seems like a pressure for business owners / shareholders to be even more short-sighted than they already are.
Which is also my objection to a wealth tax actually (incentive to tank paper value of all holdings).
IDK. Taxation is sort of a blunt instrument and seems woefully inefficient compared to nationalizing assets on a case-by-case basis.
"Companies often act dumb, and therefore we should charge them less in tax" is not a particularly compelling argument to me.