by Bob Stokes
Updated: July 24, 2017
The evidence shows that when corporate executives initiate buyback programs of shares, the decisions are usually not born from rational analysis. The share price performance of corporations which invested in their own shares might surprise you.
[Editor's Note: The text version of the story is below.]
"Corporate insider" -- when you hear that term, you probably picture a well-dressed decision-maker who is level-headed and thoroughly informed about his company.
If this executive decides to buy back company shares, you might assume there's a good reason and be tempted to buy the stock too.
But the evidence shows that often, corporate insiders are as much apart of the investing "crowd" as anyone else.
Here's a chart and commentary from Robert Prechter's new book, The Socionomic Theory of Finance:
Corporations buy back lots of stock near market tops and very little near market bottoms. If they did the opposite, they would thrive. They aren't rationally analyzing insider information; they're pre-rationally herding like all the other groups.
The Socionomic Theory of Finance continues with some eye-opening data:
The waste of company cash in such endeavors, which could have gone into any number of better projects, is staggering. According to recent estimates, corporations have lost 126 billion dollars investing in their own shares just from 2013 through 2015, even though the stock market was rising almost the whole time! As the S&P gained over 40%, corporations generated an estimated 15% loss on their buyback investments. That is a huge difference.
This calls to mind a July 14 New York Times article:
From 2006 through 2015, the 18 drug companies in the Standard & Poor's 500 index spent a combined $516 billion on buybacks and dividends. This exceeded by 11 percent the companies' research and development spending of $465 billion during these years.
Also keep in mind that the recent trend among corporations is to use borrowed money to initiate buyback programs.
In our view, this is a sign that financial optimism is approaching a historic extreme.
But after the next inevitable bear market runs its course, you will probably see quotes such as this:
"Clearly, it would be a favorable sign if insiders were actively buying their companies' stocks right now. The lack thereof is not good news."
Those remarks from a ranking university economist were in an article that published on Feb. 16, 2009.
Three weeks later, the stock market bottomed.
Of course, when a company initiates a buyback program, that doesn't mean that specific company's stock price will go down.But the overall 2013-2015 data that was mentioned a moment ago speaks for itself.