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I think doing this points to a dysfunctional system. You're betting that your company's financials and stock price will improve, so you get debt to buy back th

by mtgx 8y ago

I think doing this points to a dysfunctional system. You're betting that your company's financials and stock price will improve, so you get debt to buy back the stock. It's no different than an individual getting into debt to buy say Nvidia stock because they think the price of the stock will keep rising. This is always a mistake in the long term, and it should be discouraged - for both individuals and companies. It's even worse when you see companies like Apple with tens or hundreds of billions of dollars in cash getting debt to buy back its stock. Come on. This is a disaster waiting to happen. We shouldn't have to wait until the economy slows down/a recession arrives to figure this one out. It's clearly dysfunctional/a bad thing to have in an economy.

shaki-dora 8y ago
I could just as easily describe the net result as companies using debt instead of investment to finance operations. A practice that is far older than publically-traded stocks, and absolutely common. The wisdom of privately buying stock with debt stems from a consideration of the risks involved. But a company is going to shoulder its risk of operations, no matter how you turn it. I also don't get your criticism of Apple's practice: It's well understood that it happened for tax considerations, and surely them holding billions of dollars in cash cannot, in anyway, be worse than not having billions of dollars in cash? In any case, the current tax "amnesty" seems to be in the process of resolving that particular accounting nightmare of yours.
- lumost 8y ago
  It's worth calling out the systematic distortion here. As a rational investor one may buy into a stock under the thesis that the company is going to perform buybacks with debt. As you can be long until the debt buybacks end, and the company implodes. A smarter investor would acquire large stakes in companies capable of issuing debt and lobby the boards to perform buybacks, allowing a form of corporate raiding with less capital invested and dramatically more reward. Both of these strategies rely on the greater fool hypothesis, but in a period with historically low interest rates and an implicit hedge that the fed would stimy any wide spread defaults it's a valid investment strategy.

by mtgx 8y ago

shaki-dora 8y ago

I could just as easily describe the net result as companies using debt instead of investment to finance operations. A practice that is far older than publically-traded stocks, and absolutely common. The wisdom of privately buying stock with debt stems from a consideration of the risks involved. But a company is going to shoulder its risk of operations, no matter how you turn it. I also don't get your criticism of Apple's practice: It's well understood that it happened for tax considerations, and surely them holding billions of dollars in cash cannot, in anyway, be worse than not having billions of dollars in cash? In any case, the current tax "amnesty" seems to be in the process of resolving that particular accounting nightmare of yours.

lumost 8y ago
It's worth calling out the systematic distortion here. As a rational investor one may buy into a stock under the thesis that the company is going to perform buybacks with debt. As you can be long until the debt buybacks end, and the company implodes. A smarter investor would acquire large stakes in companies capable of issuing debt and lobby the boards to perform buybacks, allowing a form of corporate raiding with less capital invested and dramatically more reward. Both of these strategies rely on the greater fool hypothesis, but in a period with historically low interest rates and an implicit hedge that the fed would stimy any wide spread defaults it's a valid investment strategy.