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There’s now also moral hazard too with the rise of indexing and retirement. They need to keep the WHOLE stock market up. Many fewer investors now do any resea

by gzu 7y ago

There’s now also moral hazard too with the rise of indexing and retirement. They need to keep the WHOLE stock market up. Many fewer investors now do any research and chose companies based on fundamentals. The companies that exist today must exist forever into in roughly the same proportions to keep SP 500 index from falling too heavily. Companies exploit this relationship now by destroying their balance sheets and using buybacks to boost their relative market caps vs other companies to capture more passive investment money flow. There’s a good argument (elsewhere) that because vanguard of we’ve entered a pseudo communist market system.

mrep 7y ago
> Companies exploit this relationship now by destroying their balance sheets and using buybacks to boost their relative market caps vs other companies. Buying back shares doesn't increase your market cap, it increases the value of each individual stock since they now own a larger percentage share of future earnings. > to capture more passive investment money flow. It has no real effect because index funds will actually have to sell stock from companies who do buybacks in order to decrease their share of the company back to normal proportional levels.
- gzu 7y ago
  In practice it does increase market cap because constantly buying back shares increases PE multiple growth which then makes the stock then sell at a higher valuations since they are showing (artificial) growth. The long term stability of those buybacks isn’t taken into account with valuation models. Every new dollar put into index funds gets invested proportionally in each company to the market cap of SP 500. Microsoft gets bid nearly 4.5c on every dollar. The top 10 stocks combined get 25c on every dollar.
  - mrep 7y ago
    > The long term stability of those buybacks isn’t taken into account with valuation models. Really? The money that can be made in finance results in billions of dollars of wages and you think the PHDs they can hire with that money cannot properly evaluate the effect of stock buybacks in their valuation models? > Every new dollar put into index funds gets invested proportionally in each company to the market cap of SP 500. Microsoft gets bid nearly 4.5c on every dollar. The top 10 stocks combined get 25c on every dollar. What's your point?
deleted 7y ago
[deleted]

by gzu 7y ago

mrep 7y ago

> Companies exploit this relationship now by destroying their balance sheets and using buybacks to boost their relative market caps vs other companies. Buying back shares doesn't increase your market cap, it increases the value of each individual stock since they now own a larger percentage share of future earnings. > to capture more passive investment money flow. It has no real effect because index funds will actually have to sell stock from companies who do buybacks in order to decrease their share of the company back to normal proportional levels.

gzu 7y ago
In practice it does increase market cap because constantly buying back shares increases PE multiple growth which then makes the stock then sell at a higher valuations since they are showing (artificial) growth. The long term stability of those buybacks isn’t taken into account with valuation models. Every new dollar put into index funds gets invested proportionally in each company to the market cap of SP 500. Microsoft gets bid nearly 4.5c on every dollar. The top 10 stocks combined get 25c on every dollar.
- mrep 7y ago
  > The long term stability of those buybacks isn’t taken into account with valuation models. Really? The money that can be made in finance results in billions of dollars of wages and you think the PHDs they can hire with that money cannot properly evaluate the effect of stock buybacks in their valuation models? > Every new dollar put into index funds gets invested proportionally in each company to the market cap of SP 500. Microsoft gets bid nearly 4.5c on every dollar. The top 10 stocks combined get 25c on every dollar. What's your point?

deleted 7y ago

[deleted]