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It's a simplified example. Of course it will move the markets, and buying back half the outstanding stock is highly unlikely in any case. I just used those fi

by philk 16y ago

It's a simplified example. Of course it will move the markets, and buying back half the outstanding stock is highly unlikely in any case. I just used those figures to make the math simple.

yummyfajitas 16y ago
Lets assume you are correct. In that case, you should do the following: Go buy shares at $1.01 during the buyback (people will sell to you rather than FictionCorp, since you are the best bidder), then sell them at $3.00 after the buyback is finished. This is a moneymaking opportunity whenever the share price is below $2.00. Come back when you are rich and I'll believe you found an inefficiency in the market. Until then, I think you are wrong.
- philk 16y ago
  You don't need to believe I've found an inefficiency in the market. Fred Wilson outlined one in the original article, the market cap of the company was less than the cash they had in the bank[1]. If you believe markets are always efficient[2] then I ask you to explain the tech crash in 2001. The NASDAQ lost 78% of its value over two and a half years and is still down ~60% from its peak. [1] Of course if you don't have control over the management and they're spending profligately enough to eliminate the advantage you wouldn't invest. Fred Wilson was the Chairman, however, so that was a non-issue. [2] They are mostly efficient, but at times human psychology causes them to be over or undervalued, ie during bubbles or after crashes.
- jakarta 16y ago
  Look, I understand that this wont persuade you. From other threads, I know you are a hardcore proponent of EMH. But someone else might find this insightful: Buybacks work in theory, but they depepnd on a lot of factors. Essentially what you are trying to do is shrink the existing share count, so that EPS goes up which presumably drives your share price up in the longer term. E.g.: $10 in net income / 10 shares = $1 EPS. Lets say right now you are trading at a 6x multiple, the market is nervous about your prospects. You think your shares are undervalued and that you are probably worth 10x (perhaps your industry average). So you buyback 20% of your shares, existing share count decreases from 10 to 8. EPS goes up to $1.25 per share. But, one of the uncertainties behind a buyback is the fact that you never know when or how much management will actually buyback. They will sometimes announce a plan that would buyback 20% of shares, but only do that over maybe 10 years. Thats why your bit about timing the buyback just doesn't work. Let's say somehow you do manage to buyback the 20% in just one year (the market hates your company). So with an EPS of $1.25, if the market keeps giving you that 6x multiple, in theory your shares should be worth at least $7.50, not the $6 before. Moreover, if the buyback signals enough confidence in the company, maybe the market will realize it and you will return to the 10x multiple you had before, so your shares go to $12.50 But see nobody can time when the market works or when the market will catch on to the value of your company. Benjamin Graham said that is one of the great mysteries of the stock market when he testified before congress. It is during that lag time when the share price does not move that investor confidence can waiver and maybe they will sell -- ultimately not realizing the value that eventually comes from the buyback and reduced share count.
  - yummyfajitas 16y ago
    From other threads, I know you are a hardcore proponent of EMH. I don't know where you get that idea. I work for a hedge fund, which would be really dumb if I believed markets were efficient. That would mean my expected bonus is $0 [1]. When a rich person tells me "markets were inefficient, and now I'm rich", I often believe them. When a person tells me "look, a whole bunch of idiots are throwing their money away, but I'm not going to take it off their hands", I'm a little skeptical. And when someone says "look, the markets are inefficient in a manner that is extremely obvious and easy to exploit", I'm also a bit skeptical, since most such inefficiencies have already been arbed away. Lastly, my trading strategy doesn't require the buyback to complete. All it requires is that philk's claim actually occurs: that the buyback transfers money from sellers to shareholders. Using his numbers and my proposed buy price of $1.01, the moment the buyback has transferred at least $0.02/share from sellers to shareholders, the strategy has become profitable. [1] Not strictly true, since a bonus behaves like a call option on profits, but you get the picture.

by philk 16y ago

It's a simplified example. Of course it will move the markets, and buying back half the outstanding stock is highly unlikely in any case. I just used those figures to make the math simple.

yummyfajitas 16y ago

Lets assume you are correct. In that case, you should do the following: Go buy shares at $1.01 during the buyback (people will sell to you rather than FictionCorp, since you are the best bidder), then sell them at $3.00 after the buyback is finished. This is a moneymaking opportunity whenever the share price is below $2.00. Come back when you are rich and I'll believe you found an inefficiency in the market. Until then, I think you are wrong.

philk 16y ago
You don't need to believe I've found an inefficiency in the market. Fred Wilson outlined one in the original article, the market cap of the company was less than the cash they had in the bank[1]. If you believe markets are always efficient[2] then I ask you to explain the tech crash in 2001. The NASDAQ lost 78% of its value over two and a half years and is still down ~60% from its peak. [1] Of course if you don't have control over the management and they're spending profligately enough to eliminate the advantage you wouldn't invest. Fred Wilson was the Chairman, however, so that was a non-issue. [2] They are mostly efficient, but at times human psychology causes them to be over or undervalued, ie during bubbles or after crashes.
jakarta 16y ago
Look, I understand that this wont persuade you. From other threads, I know you are a hardcore proponent of EMH. But someone else might find this insightful: Buybacks work in theory, but they depepnd on a lot of factors. Essentially what you are trying to do is shrink the existing share count, so that EPS goes up which presumably drives your share price up in the longer term. E.g.: $10 in net income / 10 shares = $1 EPS. Lets say right now you are trading at a 6x multiple, the market is nervous about your prospects. You think your shares are undervalued and that you are probably worth 10x (perhaps your industry average). So you buyback 20% of your shares, existing share count decreases from 10 to 8. EPS goes up to $1.25 per share. But, one of the uncertainties behind a buyback is the fact that you never know when or how much management will actually buyback. They will sometimes announce a plan that would buyback 20% of shares, but only do that over maybe 10 years. Thats why your bit about timing the buyback just doesn't work. Let's say somehow you do manage to buyback the 20% in just one year (the market hates your company). So with an EPS of $1.25, if the market keeps giving you that 6x multiple, in theory your shares should be worth at least $7.50, not the $6 before. Moreover, if the buyback signals enough confidence in the company, maybe the market will realize it and you will return to the 10x multiple you had before, so your shares go to $12.50 But see nobody can time when the market works or when the market will catch on to the value of your company. Benjamin Graham said that is one of the great mysteries of the stock market when he testified before congress. It is during that lag time when the share price does not move that investor confidence can waiver and maybe they will sell -- ultimately not realizing the value that eventually comes from the buyback and reduced share count.
- yummyfajitas 16y ago
  From other threads, I know you are a hardcore proponent of EMH. I don't know where you get that idea. I work for a hedge fund, which would be really dumb if I believed markets were efficient. That would mean my expected bonus is $0 [1]. When a rich person tells me "markets were inefficient, and now I'm rich", I often believe them. When a person tells me "look, a whole bunch of idiots are throwing their money away, but I'm not going to take it off their hands", I'm a little skeptical. And when someone says "look, the markets are inefficient in a manner that is extremely obvious and easy to exploit", I'm also a bit skeptical, since most such inefficiencies have already been arbed away. Lastly, my trading strategy doesn't require the buyback to complete. All it requires is that philk's claim actually occurs: that the buyback transfers money from sellers to shareholders. Using his numbers and my proposed buy price of $1.01, the moment the buyback has transferred at least $0.02/share from sellers to shareholders, the strategy has become profitable. [1] Not strictly true, since a bonus behaves like a call option on profits, but you get the picture.