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Traditionally (before the 90s) stock index growth was driven by retirement investment, which is driven by demographics (more workers or richer workers). Recentl

Traditionally (before the 90s) stock index growth was driven by retirement investment, which is driven by demographics (more workers or richer workers). Recently, most dollars added to public exchanges come from corporate buybacks (companies seeking to go private). The only disadvantage to private investment is liquidity. Otherwise, it's way better to be non-public (less hostile takeovers, less activist investors, less regulations, less mandatory transparency, less managing for 1Q instead of 5Y). This feels like more evidence for a tipping point between capital and labor.

fludlight 11y ago
Buybacks are driven solely by a desire to appease shareholders by increasing earnings per share in a seemingly risk-averse manner. However, buybacks tend to only happen when the valuation is already sky high. Only a handful of companies have the discipline to buy back stock when the valuation is low and pursue a secondary when it's high.
- brianwawok 11y ago
  So all the people who make the buyback decisions are paid in stock. It is in their own self interest to buy back as much stock as possible, and inflate the per share price, right?
  - fludlight 11y ago
    In the short run, yes; but companies live and die by decisions about the medium run.
- throwaway_xx9 11y ago
  > desire to appease shareholders FTFY: s/shareholders/management with incentive options/g
- gozur88 11y ago
  Shareholders like buybacks over dividends for tax reasons. You don't pay taxes on a stock's appreciation until you sell it, so the investor chooses when the taxable event occurs. I'm planning on liquidating most of my investments after I retire and have no wage income, so I save a lot of money when a corporation does buybacks instead of disbursing dividends this year when I'm employed and in a higher tax bracket.
yummyfajitas 11y ago
Buybacks (rather than dividends) are just about taxes. Suppose a company worth $100 (100 shares outstanding) wants to return $10 in cash to shareholders. Two choices: a) Dividends. Each shareholder receives $0.10/share in taxable dividends payable in the same calendar year. Share price drops to $0.90/share. b) Buyback. The company buys 10 shares, leaving share price at $1 but now only 90 shares outstanding. With option (a) each shareholder must pay taxes on $0.10 in the same tax year. With option (b), shareholders can choose not to pay taxes immediately by not selling. Also taxes are paid on ($1 - cost basis) which might be a lot less than $0.10/share. This is only evidence of the fact that people will structure their transactions to avoid taxes. Without taxes favoring buybacks they would be identical to dividends.
- HappyTypist 11y ago
  Also the capital gains tax is less.
- lmm 11y ago
  A change in behaviour in this regard might distort comparisons, if people are e.g. comparing the S&P 500 now to 10 years ago and not doing proper total return accounting (which, sure, is a dumb thing to be doing in any case).

fludlight 11y ago

Buybacks are driven solely by a desire to appease shareholders by increasing earnings per share in a seemingly risk-averse manner. However, buybacks tend to only happen when the valuation is already sky high. Only a handful of companies have the discipline to buy back stock when the valuation is low and pursue a secondary when it's high.

brianwawok 11y ago
So all the people who make the buyback decisions are paid in stock. It is in their own self interest to buy back as much stock as possible, and inflate the per share price, right?
- fludlight 11y ago
  In the short run, yes; but companies live and die by decisions about the medium run.
throwaway_xx9 11y ago
> desire to appease shareholders FTFY: s/shareholders/management with incentive options/g
gozur88 11y ago
Shareholders like buybacks over dividends for tax reasons. You don't pay taxes on a stock's appreciation until you sell it, so the investor chooses when the taxable event occurs. I'm planning on liquidating most of my investments after I retire and have no wage income, so I save a lot of money when a corporation does buybacks instead of disbursing dividends this year when I'm employed and in a higher tax bracket.

yummyfajitas 11y ago

Buybacks (rather than dividends) are just about taxes. Suppose a company worth $100 (100 shares outstanding) wants to return $10 in cash to shareholders. Two choices: a) Dividends. Each shareholder receives $0.10/share in taxable dividends payable in the same calendar year. Share price drops to $0.90/share. b) Buyback. The company buys 10 shares, leaving share price at $1 but now only 90 shares outstanding. With option (a) each shareholder must pay taxes on $0.10 in the same tax year. With option (b), shareholders can choose not to pay taxes immediately by not selling. Also taxes are paid on ($1 - cost basis) which might be a lot less than $0.10/share. This is only evidence of the fact that people will structure their transactions to avoid taxes. Without taxes favoring buybacks they would be identical to dividends.

HappyTypist 11y ago
Also the capital gains tax is less.
lmm 11y ago
A change in behaviour in this regard might distort comparisons, if people are e.g. comparing the S&P 500 now to 10 years ago and not doing proper total return accounting (which, sure, is a dumb thing to be doing in any case).