3 ms·

We're not talking about profits here. Companies are borrowing money to buy back their own shares. And this trend continues to accelerate. Debt to GDP is at an a

We're not talking about profits here. Companies are borrowing money to buy back their own shares. And this trend continues to accelerate. Debt to GDP is at an all time high right now. An index fund, or someone who is buying-and-holding would have the exact same effect. The company makes a bid on it's own shares, and regardless if you are doing a buy-and-hold, or investing in an index fund, or a low information investor, you are not selling, even if the share price passes their inherit value. The point I'm making is this gives corporations an easy way to keep their stock prices stable and rising, without having to perform. This attracts more investors, which raises the price even further until it's way past what is should be valued at. If it keeps going like this, eventually the whole stock market will become way overpriced (a bubble) and crash like we've never seen before.

skybrian 7y ago
It's true that if they keep borrowing, eventually they will borrow too much. But I would guess CFO's know that. They may not be right about what's a sustainable level of debt, but they probably think there is a limit and not go past that. I speculated more about this here: https://news.ycombinator.com/item?id=20666217 https://news.ycombinator.com/item?id=20666217
- topmonk 7y ago
  You can call it a "service to bondholders" but just because a company does something doesn't mean its profitable and there isn't much profit in this, as far as I can see. It's like if you had 6 people who owned a pizza restaurant and one of them was the CEO. One day he calls a meeting and says, "Great news! I went to the bank to take out a loan, and paid Bob and Fred to buy their shares out. Now, as long as we continue to make a profit, we'll each make 50% more on our investment, the only catch is we have this debt hanging over our heads, and have to pay interest on that. Of course, if we start to lose money, your investment will lose out 50% quicker, but we won't talk about that. Also, I had to pay Bob and Fred enough that, in their opinion, it was more profitable to take the cash than own the company." The only thing this does for the investor is make their investment more volatile. It's the same effect as if you opened an account at a brokerage, bought one stock, and took out margin so you could own more shares. Only the company is basically forcing you to take on margin in this way. It's possible that it may make sense in some situations to do this, but given that it's so popular, I think the real reason is slight of hand. The EPS goes up and the stock price goes up to a premium compared to the rest of the market. Take anybody that's not doing their DD, by either using a system, such as "dogs of the dow", or buying an index fund or simply choosing stocks at random. If you can sell your stock at a higher price, you make more money per share sold, and since these investors basically can't tell shit from shinola, you might as well sell them at the shittiest price you can manage. If what I'm thinking is true, its somewhat hilarious that common wisdom is index funds and systems like "dogs of the dow" are commonly espoused as the best investments for new investors.

skybrian 7y ago

It's true that if they keep borrowing, eventually they will borrow too much. But I would guess CFO's know that. They may not be right about what's a sustainable level of debt, but they probably think there is a limit and not go past that. I speculated more about this here: https://news.ycombinator.com/item?id=20666217 https://news.ycombinator.com/item?id=20666217

topmonk 7y ago
You can call it a "service to bondholders" but just because a company does something doesn't mean its profitable and there isn't much profit in this, as far as I can see. It's like if you had 6 people who owned a pizza restaurant and one of them was the CEO. One day he calls a meeting and says, "Great news! I went to the bank to take out a loan, and paid Bob and Fred to buy their shares out. Now, as long as we continue to make a profit, we'll each make 50% more on our investment, the only catch is we have this debt hanging over our heads, and have to pay interest on that. Of course, if we start to lose money, your investment will lose out 50% quicker, but we won't talk about that. Also, I had to pay Bob and Fred enough that, in their opinion, it was more profitable to take the cash than own the company." The only thing this does for the investor is make their investment more volatile. It's the same effect as if you opened an account at a brokerage, bought one stock, and took out margin so you could own more shares. Only the company is basically forcing you to take on margin in this way. It's possible that it may make sense in some situations to do this, but given that it's so popular, I think the real reason is slight of hand. The EPS goes up and the stock price goes up to a premium compared to the rest of the market. Take anybody that's not doing their DD, by either using a system, such as "dogs of the dow", or buying an index fund or simply choosing stocks at random. If you can sell your stock at a higher price, you make more money per share sold, and since these investors basically can't tell shit from shinola, you might as well sell them at the shittiest price you can manage. If what I'm thinking is true, its somewhat hilarious that common wisdom is index funds and systems like "dogs of the dow" are commonly espoused as the best investments for new investors.