For the past 33 years, companies have been able to repurchase shares of their own stock without having to worry about stock manipulation charges from the SEC.
Buybacks sound innocent enough, but as many of you know, the effect is insidious. Buybacks inflate paper profits without producing anything of tangible value – which means earnings will be inflated and misleading to investors.
In fact, buybacks are a large part of the “financial engineering” going on in U.S. markets right now. With all the cheap money in today’s markets, some companies are even going into serious debt repurchasing their own shares and driving up their stock price.
And they aren’t slowing down any time soon…
More than $6.9 trillion has gone into stock buybacks since 2004, according to data compiled by Mustafa Erdem Sakinç of The Academic-Industry Research Network. And according to Goldman Sachs, stock buybacks will surge by 18% this year, exceeding $600 billion and accounting for nearly 30% of total cash spending. So far, those estimates are looking conservative – according to Biriyni and Associates, corporations have already bought back $338 billion worth of their stock in the first half of 2015.
In the following video, I’ll explain exactly how company stock buybacks work – and how investors can make money in the buyback game.