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I'm really glad this comment exists. Just because this article is written by 3 PhDs and posted by HBR doesn't mean it isn't complete nonsense. The comment by Mi

I'm really glad this comment exists. Just because this article is written by 3 PhDs and posted by HBR doesn't mean it isn't complete nonsense. The comment by Michael O'Hare in the comments section of the HBR article is also a good explanation of the complete misunderstanding of market fundamentals by the authors.

charliemil4 7y ago
Conflating buy backs with dividends is hazardous reasoning. Dividends are direct payments to investors who will presumably stay investors — the buy back is a ‘buy out’ of existing shareholders. There are quite a few more reasons a buy back is different from a dividend - but probably the most interesting bit is this: for a massive company with limited places to compound their retained earnings, by buying back stock the company pays all the dividends it would pay in perpetuity immediately in that instant. This is all fine and sometimes prudent in a net present value equation.... as long as the cash flows remain consistent* *which is now the issue at hand with Covid-19
- crazygringo 7y ago
  > Dividends are direct payments to investors who will presumably stay investors — the buy back is a ‘buy out’ of existing shareholders. I don't think that's true at all. Every day there's massive liquidity -- buying and selling -- of any publicly traded stock. Buybacks are generally implemented gradually over time, to the best of my knowledge, and are simply buying the shares people are selling daily regardless, the existing liquidity. Obviously because there's slightly more demand, the price creeps slightly higher, and a margin of people decide to sell (e.g. for $201) where they wouldn't have sold slightly lower (e.g. for $199). But obviously those people were generally looking to sell in the first place. So the idea that buybacks somehow discourage or reduce investing or discourage long-term investment seems totally mistaken.
  - charliemil4 7y ago
    The shares purchased in a buy back go on the corporation’s balance sheet (sometimes to be retired) - it’s a way to control float along with other things. This is the crux of the issue - you are increasing a liability (debt) to shift another liability (shareholder equity to tStock) — this in theory is meant to increase the earnings per share by reducing the share count and lower your overall weighted cost of capital. (Debt is most always cheaper than equity in terms of a cost of capital) If this is a truly capitalistic society - what should really happen is that all the bought back stock needs to be reissued (sold back) into the market — but that would create excess supply, reduce price, then freak out everyone’s 401k. Finance is a crazy web and really cool - but massively complex. So you are right that there is liquidity every day, but that liquidity does not affect the total number of publicly traded shares until the purchaser is the corporation itself (the buy back). The real screwed up compounding variable in liquidity is who is actually buying (awesome when it’s actual primary investment aka private fundings and ipos, and messy when it’s the secondary market aka the ticker price) — guess what’s even more messy: Passive Funds like ETFs. Passives (where 401ks live) are now the primary vehicle of investment for average America so really no individual investor is actually buying an individual stock- instead you buy a ‘share’ in a prorated basket of stocks based on ratios set in investor agreements (vanguard ishares etc). When money goes into the ETF, the fund buys 10% x, 10% y... so on of the basket of stocks they market. No earnings have changed, no cash flows, but external secondary market forces now drive the market. This is what Michael Barry (of the Big Short) is waiting for next - along with Water, which will be the next decades issue.
    - crazygringo 7y ago
      I don't think ETF's are relevant to the discussion at hand, and of course liquidity doesn't change the number of shares, nobody's saying it does. But your main point in this comment seems to be: > If this is a truly capitalistic society - what should really happen is that all the bought back stock needs to be reissued (sold back) into the market... But why should stock buybacks have to result in shares later being reissued, and what on earth does that have to do with "true capitalism"? None of that makes any sense at all. The entire point of a buyback is to raise the stock price, as an alternative to issuing dividends. Saying that stock needs to be reissued later is like saying all dividends ought to be paid back by investors in the future. It doesn't make sense, indeed defeats the entire point.
- deleted 7y ago
  [deleted]
tryptophan 7y ago
>3 PhDs and posted by HBR And people wonder why anti-'intellectualism' is on the rise. When you see this sort of stuff happening over and over and over again, you start to think that maybe believing people or giving their ideas more credit because of the letters after their name might not be a great idea. I think its sad, the legitimacy the sciences brought to education and its institutions is being eroded and abused by non-science folks who dress up all their BS in scientism and use that legitimacy to push it onto others.

charliemil4 7y ago

Conflating buy backs with dividends is hazardous reasoning. Dividends are direct payments to investors who will presumably stay investors — the buy back is a ‘buy out’ of existing shareholders. There are quite a few more reasons a buy back is different from a dividend - but probably the most interesting bit is this: for a massive company with limited places to compound their retained earnings, by buying back stock the company pays all the dividends it would pay in perpetuity immediately in that instant. This is all fine and sometimes prudent in a net present value equation.... as long as the cash flows remain consistent* *which is now the issue at hand with Covid-19

crazygringo 7y ago
> Dividends are direct payments to investors who will presumably stay investors — the buy back is a ‘buy out’ of existing shareholders. I don't think that's true at all. Every day there's massive liquidity -- buying and selling -- of any publicly traded stock. Buybacks are generally implemented gradually over time, to the best of my knowledge, and are simply buying the shares people are selling daily regardless, the existing liquidity. Obviously because there's slightly more demand, the price creeps slightly higher, and a margin of people decide to sell (e.g. for $201) where they wouldn't have sold slightly lower (e.g. for $199). But obviously those people were generally looking to sell in the first place. So the idea that buybacks somehow discourage or reduce investing or discourage long-term investment seems totally mistaken.
- charliemil4 7y ago
  The shares purchased in a buy back go on the corporation’s balance sheet (sometimes to be retired) - it’s a way to control float along with other things. This is the crux of the issue - you are increasing a liability (debt) to shift another liability (shareholder equity to tStock) — this in theory is meant to increase the earnings per share by reducing the share count and lower your overall weighted cost of capital. (Debt is most always cheaper than equity in terms of a cost of capital) If this is a truly capitalistic society - what should really happen is that all the bought back stock needs to be reissued (sold back) into the market — but that would create excess supply, reduce price, then freak out everyone’s 401k. Finance is a crazy web and really cool - but massively complex. So you are right that there is liquidity every day, but that liquidity does not affect the total number of publicly traded shares until the purchaser is the corporation itself (the buy back). The real screwed up compounding variable in liquidity is who is actually buying (awesome when it’s actual primary investment aka private fundings and ipos, and messy when it’s the secondary market aka the ticker price) — guess what’s even more messy: Passive Funds like ETFs. Passives (where 401ks live) are now the primary vehicle of investment for average America so really no individual investor is actually buying an individual stock- instead you buy a ‘share’ in a prorated basket of stocks based on ratios set in investor agreements (vanguard ishares etc). When money goes into the ETF, the fund buys 10% x, 10% y... so on of the basket of stocks they market. No earnings have changed, no cash flows, but external secondary market forces now drive the market. This is what Michael Barry (of the Big Short) is waiting for next - along with Water, which will be the next decades issue.
  - crazygringo 7y ago
    I don't think ETF's are relevant to the discussion at hand, and of course liquidity doesn't change the number of shares, nobody's saying it does. But your main point in this comment seems to be: > If this is a truly capitalistic society - what should really happen is that all the bought back stock needs to be reissued (sold back) into the market... But why should stock buybacks have to result in shares later being reissued, and what on earth does that have to do with "true capitalism"? None of that makes any sense at all. The entire point of a buyback is to raise the stock price, as an alternative to issuing dividends. Saying that stock needs to be reissued later is like saying all dividends ought to be paid back by investors in the future. It doesn't make sense, indeed defeats the entire point.
deleted 7y ago
[deleted]

tryptophan 7y ago

>3 PhDs and posted by HBR And people wonder why anti-'intellectualism' is on the rise. When you see this sort of stuff happening over and over and over again, you start to think that maybe believing people or giving their ideas more credit because of the letters after their name might not be a great idea. I think its sad, the legitimacy the sciences brought to education and its institutions is being eroded and abused by non-science folks who dress up all their BS in scientism and use that legitimacy to push it onto others.