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Who's to say what the intrinsic value is though? If you have an opinion on that you should be trading on it until the value comes in line and at that point buyb

Who's to say what the intrinsic value is though? If you have an opinion on that you should be trading on it until the value comes in line and at that point buybacks are fine. Buybacks tend to happen at the worst times (boom years) and cut out in recessions which is counter to what you'd want as an investor. Though if you think of it more as an alternative to special dividends it makes more sense.

tptacek 8y ago
They aren't saying there's a clearly readable intrinsic value for any given company, only that there is some intrinsic value, and that prices can float both below and above it. When they do, buybacks destroy value. Obviously, management will always have some argument to support the higher value implied by a buyback (it could hardly be otherwise, unless you think management could with a straight face argue that they should overpay for their own stock). When they guess wrong --- and they're clearly incentivized to guess high --- they cause problems.
- skybrian 8y ago
  The thing is, if management is wrong about the price, aren't the shareholders wrong too? It doesn't make sense for shareholders to own stock that they think will go down. If they really think that, they should sell. So shareholders should think the stock is either fairly valued or undervalued, almost by definition. Any shareholders who don't sell during a buyback are compensated by owning a larger share of the company at what should be considered a fair or generous price from their point of view. The place where this breaks down is when you believe a company would have a higher intrinsic value, provided that it has sufficient financing. But this isn't based on the stock price; it's based on your theory of how much money you think the company will need. Also, from a non-shareholder's point of view (say, bondholders), a buyback means the company's ownership changed, it has less cash, and they didn't get anything for it.

tptacek 8y ago

They aren't saying there's a clearly readable intrinsic value for any given company, only that there is some intrinsic value, and that prices can float both below and above it. When they do, buybacks destroy value. Obviously, management will always have some argument to support the higher value implied by a buyback (it could hardly be otherwise, unless you think management could with a straight face argue that they should overpay for their own stock). When they guess wrong --- and they're clearly incentivized to guess high --- they cause problems.

skybrian 8y ago
The thing is, if management is wrong about the price, aren't the shareholders wrong too? It doesn't make sense for shareholders to own stock that they think will go down. If they really think that, they should sell. So shareholders should think the stock is either fairly valued or undervalued, almost by definition. Any shareholders who don't sell during a buyback are compensated by owning a larger share of the company at what should be considered a fair or generous price from their point of view. The place where this breaks down is when you believe a company would have a higher intrinsic value, provided that it has sufficient financing. But this isn't based on the stock price; it's based on your theory of how much money you think the company will need. Also, from a non-shareholder's point of view (say, bondholders), a buyback means the company's ownership changed, it has less cash, and they didn't get anything for it.