7 ms·

One interesting fact I learned the other day: IBM did 140 billion in stock buy backs in the last decade. They have a 100 Billion dollar market cap. I think t

One interesting fact I learned the other day: IBM did 140 billion in stock buy backs in the last decade. They have a 100 Billion dollar market cap. I think that is a bit of what we have going on right now. A system propped up by injected cash, which works for now because everyone plays along. Most of this injected money goes into the pockets of the rich, who are the ones holding the assets that the FED is bailing out. Modern extreme economic inequality is a function of monetary policy, not political policy.

mywittyname 6y ago
A stock buyback is theoretically the same as a dividend, in that it should reduce market cap by roughly the amount of the buyback. I do agree with your sentiment though. I feel like the wealthy in this country have developed the perfect scheme for leeching the wealth from this country. We will only know how bad it was after the postmortem, at which point, we will be (figuratively) dead.
- LordFast 6y ago
  Is it too jaded to say that it most likely has always been, for all time? And that we are simply more aware of it these days?
  - Loughla 6y ago
    I think it's more subtle now, though, and harder to be aware of. Back in the day, robber-barons simply exploited the working class through substandard working conditions, and outright theft of money or property [citation needed]. Now, though, you need a deep understanding of global monetary policy, tax law, and labor laws to be able to connect the dots. So I would argue that now is different from earlier times in history, because those who are exploiting the system have finally figured out how to a) hide it well enough, and b) co-op members of the classes being exploited to fight for those doing the exploiting through misdirection and propaganda.
    - sixQuarks 6y ago
      That's the craziest part of all of this. The exploited actively support the politicians who cause maximum exploitation and vilify those who would actually help them. It's insane.
      - basch 6y ago
        Isn't that why they are politicians though? Because they were able to promise one thing to the masses and deliver another to their funders? If they were bad at that, they wouldnt get propped up.
      - Loughla 6y ago
        Honestly, it just doesn't make sense. And my experience, when you sit down with, and I'm going to say extremely conservative people because they are the ones I would put in this category, and explain it to them using facts, they just dig in their heels and ignore you. Humans. What weird things. Source: I talk politics with family all the time; I'm vilified as the weirdo, brainwashed, college liberal in a family of conservatives.
- quickthrowman 6y ago
  Only it isn’t the same. Dividends are taxable, capital gains are only taxable upon closing a position.
  - umeshunni 6y ago
    Ok, so it's even better than a dividend. That would explain why it's used.
  - mywittyname 6y ago
    Yes. The reason I say theoretically is because, from a business perspective, they aren't different. Whether you buy your own stock or distribute a dividend shouldn't matter from a market cap perspective. It's still cash the company used to have, but no longer does and the market cap will reflect both equally. Now some investors prefer buybacks for tax reasons, others may not. It depends entirely upon how they invest. If you're a buy-and-hold, then it's favorable due to lack of taxes, but if you rebalance a lot (which most mutual funds do), then it doesn't matter.
- mrlala 6y ago
  >A stock buyback is theoretically the same as a dividend I don't think that is true at all. A dividend is literally "We are paying out some amount of cash. If our stock price is $40 and we give $5 to each shareholder the shares should immediately go down to $35". Although since the stock price should be a NPV of the company's cash flow, they technically have even less working capital to create returns over the years, so I think the price should go down by even more than $5.. but that's a different discussion... In a stock buyback.. let's say the price is $40 and they buy the equivalent of $5 back from the market. Well.. yes they gave away $5 but they also gained $5 of value because they are now holding the shares. It's a net zero transaction if their stock price doesn't change from it. Which.. it shouldn't unless you think it's a signal of something. Yes there's a bit more details, but value is not "given away" in the same sense. In the dividend example, the company gave away money. In a stock repurchase, they gave away money in return for shares of (almost) equal value.
  - colinmhayes 6y ago
    When companies do buybacks they don't control the shares they buyback, the shares disappear. The market cap of the company decreases because they know have less assets but the stock price doesn't because the cap is split over less shares. Either way, the market cap theoretically decreases by the amount paid out.
jonfw 6y ago
You're not giving the whole picture if you don't mention that IBM's market cap has seen very significant decline over that time period. IBM has been producing insane cash-flow over this period and their strategy was to pay out dividends/buybacks rather than to invest in new markets Is IBM even getting bailout money? What does IBM have to do with the bailouts?
- onlyrealcuzzo 6y ago
  Part of what allows a company to have insane cashflow is issuing corporate bonds at artificially low prices because the Treasury is manipulated by the Fed.
  - bequanna 6y ago
    Not sure I follow. What does the US Treasury have to do with private debt issuances? Did you mean that interest rates are manipulated by the Fed?
    - Donald 6y ago
      New Fed programs have been stood up in the last month that directly buy corporate debt.
      - bequanna 6y ago
        That’s a Fed program. Fed != Treasury. What does this have to do with the Treasury?
        abfan1127 6y ago
        I think he mis-spoke by typing the Treasury.
      - AnimalMuppet 6y ago
        I have the impression that onlyrealcuzzo was referring to something longer term than the last month, though.
chrisco255 6y ago
Hard to disentangle monetary policy from political policy. They are strongly interlinked.
- _curious_ 6y ago
  Sure but what does it matter if it's "monetary policy" or "political policy"? They work hand in glove and as @mywittyname aptly states above: "...I feel like the wealthy in this country have developed the perfect scheme for leeching the wealth from this country." The perfect scheme involves a bailout mechanisms without question. And too many Americans are falling for the scheme with hands out for a piece of welfare from the wealthy. They are selling out the future of their country in exchange for a pittance in the process. The scheme doesn't stop, it only exacerbates as long as the bailouts continue...bailouts for wall street, bailouts for mains street, bailouts for every day individuals = all part the scheme by design. I'm in constant awe of how many otherwise intelligent people can't grasp the role that these "bailouts" play in perpetuating the inequality gap. That, or they happen to be on a certain side of things and don't want to know what it's like to be on the other when the gravy-train stops flowing...
  - chrisco255 6y ago
    Oh I agree with all your conclusions. However, I think politicians have leveraged monetary policy to gain political points for decades. Rather than tell people we have to cut programs and we have to live within our means, we've got an endless series of wars and unsustainable social programs that don't work in a world where a large chunk of the population is old (boomers), while the young population have inherited a consumption-based economy that is currently eating itself. Other countries are failing, too. It's not a unique feature of the U.S. We're going to see a lot of nation-states struggle under the weight of their existing programs when the debt-fueled growth stops. People have lost all sense of sustainable fiscal and monetary policy.
    - _curious_ 6y ago
      Spot on
zaroth 6y ago
I’m not sure what your last paragraph has to do with the first three. A main purpose of buying a stock is to receive dividend payments. Buybacks are just a tax efficient dividend. The latest craze to make paying dividends sound evil is just strange.
- colechristensen 6y ago
  Paying dividends is fine if you aren't firing workers or taking bailouts.
  - ballenf 6y ago
    Why is firing workers inconsistent with paying dividends? They kind of feel like two sides of the same coin: a company can't find a better return on its capital so it divests itself of the resource (labor or cash).
    - luckylion 6y ago
      It's not. It's just that these companies shouldn't get handouts. Buy back stocks in the good times, issue new stock when the going gets rough. Right now it's "buy back stocks in the good times, get bailouts then the bad times come".
- brianwawok 6y ago
  One strategy is dividends. Another is to buy a stock at X, sell later at Y and hope Y > X Both are valid. Oddly they are taxed differently.
  - mywittyname 6y ago
    > Oddly they are taxed differently. Most dividends are treated as 'qualified,' meaning that they are taxes as LT cap gains. So in that respect, the tax treatment is the same as selling the appreciated stock at a profit. The big difference is that you're forced to pay taxes on a dividend the year you receive it, while you can theoretically defer capital gains taxes forever in a reinvestment scenario. Practically speaking though, most people own mutual funds that rebalance every year or so (think, S&P500 index fund), and pay out LT Cap Gains quarterly/yearly. So for most investors, there's not a huge difference between the two. Additionally, there are schemes to allow for different tax treatment on dividends, such as capital dividends or stock dividends.
throw0101a 6y ago
> IBM did 140 billion in stock buy backs in the last decade. And? What is the alternative, and is it any better? > IBM has effectively been dead money for the last decade. They’re up 20%, including dividends, versus 315% for the tech index (XLK). IBM currently has a market cap of ~$100 billion, so when people hear they spent $45 billion on buybacks while their share price went down 38%, people get angry. I get it, it’s an easy argument to make. > But a better argument, which Jake made recently is that poorly managed companies like IBM are doing the right thing by returning cash to shareholders. That’s $45 billion into the hands of investors who can then take that money and actually invest it in companies that are, you know, not terrible. Would the anti-buyback crowd be happier if IBM invested that $45 billion and had a negative ROI? And what about the $76 billion they “wasted” on dividends? Why does this return of capital to shareholders escape criticism? More on this in a minute. * https://theirrelevantinvestor.com/2020/04/22/returning-cash-to-shareholders-is-often-better-than-the-alternative/ https://theirrelevantinvestor.com/2020/04/22/returning-cash-...
- gbasin 6y ago
  Bingo. Would you rather have a poorly managed company hold on to their cash and spend it internally, or return it to shareholders?
  - mrlala 6y ago
    >Bingo. Would you rather have a poorly managed company hold on to their cash and spend it internally, or return it to shareholders? I think it's a bunch of bs the way you are wording this. I know these are not your words alone, it's what people say.. but it's so misleading! You say "return it to shareholders". Well, no. A dividend is returning to shareholders.. that's what a dividend is. A stock repurchase is basically nothing more than the company buying back stock, and giving holders the option to sell theirs to the company.. The investor can sell the damn stock any time they want... this is NOT "returning it to shareholders". It is a completely convoluted way to arbitrarily do a bunch of fancy things to both use cash, get stock, prop up the price even more since there is a buy pressure..
    - 6y ago
new_time 6y ago
However this saves us from inflation, since the money circulates among the wealthy and corporations rather than among the common person.
- magicsmoke 6y ago
  It also puts assets with positive rates of return out of the hands of the common person. Kind of like how an overheated housing market makes it so you'll never own a home and are stuck paying rent forever. If you ever wanted to own a piece of America's economy and get dividends in the future, now it's priced out of reach. This inflation in investment assets further cements the division between those that have to work 9-5 for a living, and those that have enough investments to live off their returns and not worry about becoming destitute. Jumping that gap between renter and owner is harder than ever.
  - new_time 6y ago
    Precisely right. That's why printing cash (whether in the form of UBI or any other cash printing social program) is not a sustainable solution for lifting people out of poverty or building a healthy economy. There are always negative long term effects that end up hurting the poor and middle classes even more. Even if there's not inflation of consumer goods, there's inflation of investment grade assets.
- abfan1127 6y ago
  it doesn't save us from inflation, it just changes the path it takes. Rich people buy stuff too, which employee us peasants. But by the time us peasants see the money, its already inflated so we don't get the benefits.
- smolder 6y ago
  I don't think this is a sound argument for further enriching the rich and leaving the common person to struggle. An oligarchy is not a desirable model any more than a monarchy is.
cryptica 6y ago
I watched an interview on YouTube with Stephen A. Schwarzman from 'The Blackstone Group' which was really eye opening. There is a part where he explains how to multiply ROI on any investment using bank loans https://www.youtube.com/watch?v=7kThTbLUQdU https://www.youtube.com/watch?v=7kThTbLUQdU When you take into account that the credit is printed by banks out of thin air (and more so given the latest 0% reserve requirement), it's not difficult to see why the ROI surplus derived from this 'magic trick' (as Schwarzmam refers to it) is basically free money. Corporations and financial firms with a lot of capital have access to huge loans on favorable terms; this puts them on a different playing field than small companies which don't have much capital and can't use this 'magic trick' to multiply their earnings in the same way. Earning 30% ROI is simply not possible for most individuals and small businesses. I suspect this is the same trick which Renaissance Technologies uses for their 'Medallion fund' to hit 66% ROI per year on average... Maybe they're able to take loans against collateral owned by their other mainstream funds. If I have $1K in cash and I can find a bank to loan me an additional $5K... If I invest that in an asset which returns just 10% per year, given the 0% interest rate environment, I can make $600 per year in pure profit on my investment... Which is 60% ROI! Anyone can be a legendary investor... You just need to find a bank which can give you 5x leverage. These leveraged loans which yield free surplus ROI are impossible for small businesses to access. This is why they're fundamentally unfair. The efficiency advantages of economies of scale are greatly exaggerated. The real advantage is mostly financial. And remember, that 'leverage' credit was printed out of thin air by the bank... So any extra profit which can be derived from it by an individual or company is by definition also 'printed out of thin air'... Especially when you know you're going to get bailed out every 10 years when things go wrong - There is no risk.
- basch 6y ago
  If you want to take the risk of losing a multiple of sectors losses, its incredibly easy to invest in leveraged etfs. They take out loans at 2x their value, and buy 2 more shares of everything inside. So they sit on 3x stock and 2x debt. http://www.direxion.com/leveraged-inverse-etfs http://www.direxion.com/leveraged-inverse-etfs https://www.proshares.com/3xetfs/ https://www.proshares.com/3xetfs/ https://www.investopedia.com/articles/investing/020816/top-10-most-traded-leveraged-etfs-uvxy-sds.asp https://www.investopedia.com/articles/investing/020816/top-1... Look at something like TQQQ, which is 50% FAAAMIN stocks 3x. Was a 488% return in the last 5 years till the crash, now its at 330%. Regular QQQ is only up 192%.
xadhominemx 6y ago
Yes.... they have a small market cap because they are returning cash to shareholders. That is literally the idea of a buyback - to shrink the market cap.
- david-gpu 6y ago
  Wouldn't a stock buyback reduce the number of outstanding shares, but keep market capitalization roughly constant? The company has less cash, but it has bought an asset of equal value with it (the shares).
  - postingawayonhn 6y ago
    Companies aren't allowed to hold shares in themselves. Once the shares are purchased the company cancels them.
deleted 6y ago
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deleted 6y ago
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pjdemers 6y ago
21st century IBM is effectively a labor arbitrage firm. They buy labor in low cost countries and sell it in high cost countries. They are not the platform tech company they were in the 60s to the 80s. Labor arbitrage can be a good business, but there is much more competition than in platform technology. The competition constrains both profits and growth.

mywittyname 6y ago

A stock buyback is theoretically the same as a dividend, in that it should reduce market cap by roughly the amount of the buyback. I do agree with your sentiment though. I feel like the wealthy in this country have developed the perfect scheme for leeching the wealth from this country. We will only know how bad it was after the postmortem, at which point, we will be (figuratively) dead.

LordFast 6y ago
Is it too jaded to say that it most likely has always been, for all time? And that we are simply more aware of it these days?
- Loughla 6y ago
  I think it's more subtle now, though, and harder to be aware of. Back in the day, robber-barons simply exploited the working class through substandard working conditions, and outright theft of money or property [citation needed]. Now, though, you need a deep understanding of global monetary policy, tax law, and labor laws to be able to connect the dots. So I would argue that now is different from earlier times in history, because those who are exploiting the system have finally figured out how to a) hide it well enough, and b) co-op members of the classes being exploited to fight for those doing the exploiting through misdirection and propaganda.
  - sixQuarks 6y ago
    That's the craziest part of all of this. The exploited actively support the politicians who cause maximum exploitation and vilify those who would actually help them. It's insane.
    - basch 6y ago
      Isn't that why they are politicians though? Because they were able to promise one thing to the masses and deliver another to their funders? If they were bad at that, they wouldnt get propped up.
    - Loughla 6y ago
      Honestly, it just doesn't make sense. And my experience, when you sit down with, and I'm going to say extremely conservative people because they are the ones I would put in this category, and explain it to them using facts, they just dig in their heels and ignore you. Humans. What weird things. Source: I talk politics with family all the time; I'm vilified as the weirdo, brainwashed, college liberal in a family of conservatives.
quickthrowman 6y ago
Only it isn’t the same. Dividends are taxable, capital gains are only taxable upon closing a position.
- umeshunni 6y ago
  Ok, so it's even better than a dividend. That would explain why it's used.
- mywittyname 6y ago
  Yes. The reason I say theoretically is because, from a business perspective, they aren't different. Whether you buy your own stock or distribute a dividend shouldn't matter from a market cap perspective. It's still cash the company used to have, but no longer does and the market cap will reflect both equally. Now some investors prefer buybacks for tax reasons, others may not. It depends entirely upon how they invest. If you're a buy-and-hold, then it's favorable due to lack of taxes, but if you rebalance a lot (which most mutual funds do), then it doesn't matter.
mrlala 6y ago
>A stock buyback is theoretically the same as a dividend I don't think that is true at all. A dividend is literally "We are paying out some amount of cash. If our stock price is $40 and we give $5 to each shareholder the shares should immediately go down to $35". Although since the stock price should be a NPV of the company's cash flow, they technically have even less working capital to create returns over the years, so I think the price should go down by even more than $5.. but that's a different discussion... In a stock buyback.. let's say the price is $40 and they buy the equivalent of $5 back from the market. Well.. yes they gave away $5 but they also gained $5 of value because they are now holding the shares. It's a net zero transaction if their stock price doesn't change from it. Which.. it shouldn't unless you think it's a signal of something. Yes there's a bit more details, but value is not "given away" in the same sense. In the dividend example, the company gave away money. In a stock repurchase, they gave away money in return for shares of (almost) equal value.
- colinmhayes 6y ago
  When companies do buybacks they don't control the shares they buyback, the shares disappear. The market cap of the company decreases because they know have less assets but the stock price doesn't because the cap is split over less shares. Either way, the market cap theoretically decreases by the amount paid out.

jonfw 6y ago

You're not giving the whole picture if you don't mention that IBM's market cap has seen very significant decline over that time period. IBM has been producing insane cash-flow over this period and their strategy was to pay out dividends/buybacks rather than to invest in new markets Is IBM even getting bailout money? What does IBM have to do with the bailouts?

onlyrealcuzzo 6y ago
Part of what allows a company to have insane cashflow is issuing corporate bonds at artificially low prices because the Treasury is manipulated by the Fed.
- bequanna 6y ago
  Not sure I follow. What does the US Treasury have to do with private debt issuances? Did you mean that interest rates are manipulated by the Fed?
  - Donald 6y ago
    New Fed programs have been stood up in the last month that directly buy corporate debt.
    - bequanna 6y ago
      That’s a Fed program. Fed != Treasury. What does this have to do with the Treasury?
      - abfan1127 6y ago
        I think he mis-spoke by typing the Treasury.
    - AnimalMuppet 6y ago
      I have the impression that onlyrealcuzzo was referring to something longer term than the last month, though.

chrisco255 6y ago

Hard to disentangle monetary policy from political policy. They are strongly interlinked.

_curious_ 6y ago
Sure but what does it matter if it's "monetary policy" or "political policy"? They work hand in glove and as @mywittyname aptly states above: "...I feel like the wealthy in this country have developed the perfect scheme for leeching the wealth from this country." The perfect scheme involves a bailout mechanisms without question. And too many Americans are falling for the scheme with hands out for a piece of welfare from the wealthy. They are selling out the future of their country in exchange for a pittance in the process. The scheme doesn't stop, it only exacerbates as long as the bailouts continue...bailouts for wall street, bailouts for mains street, bailouts for every day individuals = all part the scheme by design. I'm in constant awe of how many otherwise intelligent people can't grasp the role that these "bailouts" play in perpetuating the inequality gap. That, or they happen to be on a certain side of things and don't want to know what it's like to be on the other when the gravy-train stops flowing...
- chrisco255 6y ago
  Oh I agree with all your conclusions. However, I think politicians have leveraged monetary policy to gain political points for decades. Rather than tell people we have to cut programs and we have to live within our means, we've got an endless series of wars and unsustainable social programs that don't work in a world where a large chunk of the population is old (boomers), while the young population have inherited a consumption-based economy that is currently eating itself. Other countries are failing, too. It's not a unique feature of the U.S. We're going to see a lot of nation-states struggle under the weight of their existing programs when the debt-fueled growth stops. People have lost all sense of sustainable fiscal and monetary policy.
  - _curious_ 6y ago
    Spot on

zaroth 6y ago

I’m not sure what your last paragraph has to do with the first three. A main purpose of buying a stock is to receive dividend payments. Buybacks are just a tax efficient dividend. The latest craze to make paying dividends sound evil is just strange.

colechristensen 6y ago
Paying dividends is fine if you aren't firing workers or taking bailouts.
- ballenf 6y ago
  Why is firing workers inconsistent with paying dividends? They kind of feel like two sides of the same coin: a company can't find a better return on its capital so it divests itself of the resource (labor or cash).
  - luckylion 6y ago
    It's not. It's just that these companies shouldn't get handouts. Buy back stocks in the good times, issue new stock when the going gets rough. Right now it's "buy back stocks in the good times, get bailouts then the bad times come".
brianwawok 6y ago
One strategy is dividends. Another is to buy a stock at X, sell later at Y and hope Y > X Both are valid. Oddly they are taxed differently.
- mywittyname 6y ago
  > Oddly they are taxed differently. Most dividends are treated as 'qualified,' meaning that they are taxes as LT cap gains. So in that respect, the tax treatment is the same as selling the appreciated stock at a profit. The big difference is that you're forced to pay taxes on a dividend the year you receive it, while you can theoretically defer capital gains taxes forever in a reinvestment scenario. Practically speaking though, most people own mutual funds that rebalance every year or so (think, S&P500 index fund), and pay out LT Cap Gains quarterly/yearly. So for most investors, there's not a huge difference between the two. Additionally, there are schemes to allow for different tax treatment on dividends, such as capital dividends or stock dividends.

throw0101a 6y ago

> IBM did 140 billion in stock buy backs in the last decade. And? What is the alternative, and is it any better? > IBM has effectively been dead money for the last decade. They’re up 20%, including dividends, versus 315% for the tech index (XLK). IBM currently has a market cap of ~$100 billion, so when people hear they spent $45 billion on buybacks while their share price went down 38%, people get angry. I get it, it’s an easy argument to make. > But a better argument, which Jake made recently is that poorly managed companies like IBM are doing the right thing by returning cash to shareholders. That’s $45 billion into the hands of investors who can then take that money and actually invest it in companies that are, you know, not terrible. Would the anti-buyback crowd be happier if IBM invested that $45 billion and had a negative ROI? And what about the $76 billion they “wasted” on dividends? Why does this return of capital to shareholders escape criticism? More on this in a minute. * https://theirrelevantinvestor.com/2020/04/22/returning-cash-to-shareholders-is-often-better-than-the-alternative/ https://theirrelevantinvestor.com/2020/04/22/returning-cash-...

gbasin 6y ago
Bingo. Would you rather have a poorly managed company hold on to their cash and spend it internally, or return it to shareholders?
- mrlala 6y ago
  >Bingo. Would you rather have a poorly managed company hold on to their cash and spend it internally, or return it to shareholders? I think it's a bunch of bs the way you are wording this. I know these are not your words alone, it's what people say.. but it's so misleading! You say "return it to shareholders". Well, no. A dividend is returning to shareholders.. that's what a dividend is. A stock repurchase is basically nothing more than the company buying back stock, and giving holders the option to sell theirs to the company.. The investor can sell the damn stock any time they want... this is NOT "returning it to shareholders". It is a completely convoluted way to arbitrarily do a bunch of fancy things to both use cash, get stock, prop up the price even more since there is a buy pressure..
  - 6y ago

new_time 6y ago

However this saves us from inflation, since the money circulates among the wealthy and corporations rather than among the common person.

magicsmoke 6y ago
It also puts assets with positive rates of return out of the hands of the common person. Kind of like how an overheated housing market makes it so you'll never own a home and are stuck paying rent forever. If you ever wanted to own a piece of America's economy and get dividends in the future, now it's priced out of reach. This inflation in investment assets further cements the division between those that have to work 9-5 for a living, and those that have enough investments to live off their returns and not worry about becoming destitute. Jumping that gap between renter and owner is harder than ever.
- new_time 6y ago
  Precisely right. That's why printing cash (whether in the form of UBI or any other cash printing social program) is not a sustainable solution for lifting people out of poverty or building a healthy economy. There are always negative long term effects that end up hurting the poor and middle classes even more. Even if there's not inflation of consumer goods, there's inflation of investment grade assets.
abfan1127 6y ago
it doesn't save us from inflation, it just changes the path it takes. Rich people buy stuff too, which employee us peasants. But by the time us peasants see the money, its already inflated so we don't get the benefits.
smolder 6y ago
I don't think this is a sound argument for further enriching the rich and leaving the common person to struggle. An oligarchy is not a desirable model any more than a monarchy is.

cryptica 6y ago

I watched an interview on YouTube with Stephen A. Schwarzman from 'The Blackstone Group' which was really eye opening. There is a part where he explains how to multiply ROI on any investment using bank loans https://www.youtube.com/watch?v=7kThTbLUQdU https://www.youtube.com/watch?v=7kThTbLUQdU When you take into account that the credit is printed by banks out of thin air (and more so given the latest 0% reserve requirement), it's not difficult to see why the ROI surplus derived from this 'magic trick' (as Schwarzmam refers to it) is basically free money. Corporations and financial firms with a lot of capital have access to huge loans on favorable terms; this puts them on a different playing field than small companies which don't have much capital and can't use this 'magic trick' to multiply their earnings in the same way. Earning 30% ROI is simply not possible for most individuals and small businesses. I suspect this is the same trick which Renaissance Technologies uses for their 'Medallion fund' to hit 66% ROI per year on average... Maybe they're able to take loans against collateral owned by their other mainstream funds. If I have $1K in cash and I can find a bank to loan me an additional $5K... If I invest that in an asset which returns just 10% per year, given the 0% interest rate environment, I can make $600 per year in pure profit on my investment... Which is 60% ROI! Anyone can be a legendary investor... You just need to find a bank which can give you 5x leverage. These leveraged loans which yield free surplus ROI are impossible for small businesses to access. This is why they're fundamentally unfair. The efficiency advantages of economies of scale are greatly exaggerated. The real advantage is mostly financial. And remember, that 'leverage' credit was printed out of thin air by the bank... So any extra profit which can be derived from it by an individual or company is by definition also 'printed out of thin air'... Especially when you know you're going to get bailed out every 10 years when things go wrong - There is no risk.

basch 6y ago
If you want to take the risk of losing a multiple of sectors losses, its incredibly easy to invest in leveraged etfs. They take out loans at 2x their value, and buy 2 more shares of everything inside. So they sit on 3x stock and 2x debt. http://www.direxion.com/leveraged-inverse-etfs http://www.direxion.com/leveraged-inverse-etfs https://www.proshares.com/3xetfs/ https://www.proshares.com/3xetfs/ https://www.investopedia.com/articles/investing/020816/top-10-most-traded-leveraged-etfs-uvxy-sds.asp https://www.investopedia.com/articles/investing/020816/top-1... Look at something like TQQQ, which is 50% FAAAMIN stocks 3x. Was a 488% return in the last 5 years till the crash, now its at 330%. Regular QQQ is only up 192%.

xadhominemx 6y ago

Yes.... they have a small market cap because they are returning cash to shareholders. That is literally the idea of a buyback - to shrink the market cap.

david-gpu 6y ago
Wouldn't a stock buyback reduce the number of outstanding shares, but keep market capitalization roughly constant? The company has less cash, but it has bought an asset of equal value with it (the shares).
- postingawayonhn 6y ago
  Companies aren't allowed to hold shares in themselves. Once the shares are purchased the company cancels them.

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pjdemers 6y ago

21st century IBM is effectively a labor arbitrage firm. They buy labor in low cost countries and sell it in high cost countries. They are not the platform tech company they were in the 60s to the 80s. Labor arbitrage can be a good business, but there is much more competition than in platform technology. The competition constrains both profits and growth.