Buying a stock in the public markets is not a lifelong commitment. You can get off the bus at any moment when you don’t like the ride, generally very cheaply.
The people on the bus at any moment are, by and large, the folks in society who most wanted to be there.
The people on the bus at any moment are, by and large, the folks in society who most wanted to be there.
A stock buyback says “Are you sure you still want to be here? We like where this bus is going. Plausibly you don’t. Want out?”
People leaving the bus increases the returns, and the risk, to those who said “Oh no, give up this seat for that money? Hard pass.”
People leaving the bus increases the returns, and the risk, to those who said “Oh no, give up this seat for that money? Hard pass.”
This has a sort of homespun aww shucks feel to it, but it is descriptively accurate and aimed at the homespun aww shucks notion that you’d really want to buy stocks for nice consistent dividends, like a bond with a little bit of upside, but not too much, not enough to ever sell.
Speaking of aww shucks logic: yes, moving cash reserves off the balance sheet to shareholders does magnify exposure of remaining shareholders to the business’ future prospects, including in bad times.
That was a major point of the exercise.
That was a major point of the exercise.
If you don’t want increased exposure to FooCorp, when FooCorp says “Anybody want out?”, you say yes.
Or you use any of the other zillion opportunities in public equities.
Or you use any of the other zillion opportunities in public equities.
“But what if you’re too inattentive or unsophisticated to make that decision？”
Then does the financial industry have a product for you! It has very many, actually, but the one you actually want is an index fund. The equity exposure you want with no decision making necessary.
Then does the financial industry have a product for you! It has very many, actually, but the one you actually want is an index fund. The equity exposure you want with no decision making necessary.
(Do people not have an intuitive sense of this math? Consider a software company with enterprise value of $200 and $100 of cash on balance sheet. It has $100 of “business” in it. If business gets 20% better, company gets only 10% more valuable, because the cash drags on it.)
