It ought to be a crime

There is a record amount of stock being bought by corporations while at the very same time the people running those corporations are dumping it.  Per Standard & Poor’s, share repurchases increased to $128.2 billion during Q3 2013, up 8.6% from Q2 and up 23.6% from Q3 of 2012.  At the same time the ratio of sales versus purchases by chief executives, directors and senior officers at S&P 500 companies is more than twice the average ratio of 5.4 over the past 10 years, according to data compiled by Bloomberg and the Washington Service.   What that means is that many companies are using the shareholder’s money to prop up their companies’  stock prices while the executives and directors unload it.  There ought to be a law against it.  There isn’t.  It’s perfectly legal although morally reprehensible.  Sarbanes Oxley banned the egregious practice of providing forgivable loans for executives to purchase company stock.  Now the SEC should ban insiders from selling their stock while their company is in the midst of a stock buyback.

When you buy the S&P index you are basically participating in an ruse.  Sure the ruse works well some of the time but then again that’s the nature of all ruses.  They have to work some of the time for some of the people otherwise there would be no suckers left to let in the game.  When you buy a low cost index fund, you are just paying less to get fleeced.   That doesn’t mean you can’t make money.  People make money in Vegas all the time but rest assured the odds are against you.  The only way to protect yourself from these shenanigans is to refuse to buy stock in companies where management is not willing to put their own money into it.

I heard Warren Buffett on TV the other day talking up the Vanguard Index fund ETFs.  Funny, I don’t recall him ever buying an index fund.  I do recall Buffett railing agains the practice of companies that issue boatloads of options and stock and tout their non-GAAP pro forma numbers where this stock issuance isn’t expensed.  That’s not to say that there aren’t plenty of “good” companies in the index.   I may be “fooled” into thinking I can do better than the market, but I’m no fool giving my money to companies that use  shareholder’s profits to buy management’s stock or dole out stock options like lollipops and then obscure the issuance of it from their financials.