There’s a big misconception I’ve noticed among the public, and it’s getting worse.
For some reason, people forget CEOs work for shareholders.
The job of a CEO is to increase shareholder value. Period.
The CEO does not work for employees. The CEO is not there to “help make the world a better place.”
The CEO has one job. And that job is to make money for shareholders.
That’s it.
You might not like it. I know many people out there don’t.
But you can invest based on how you think the world should work.
Or you can invest based on how the world actually works.
Facts Only
A recent chart published by Deutsche Bank showing the S&P 500 buybacks on pace to possibly hit $1 trillion this year has some people up in arms.
These are publicly traded companies in the S&P 500 spending cash on their balance sheets to buy their own stock.
Some people don’t like this. They think the money should be spent creating new jobs or expanding R&D.
And, in America, we all have the right to express these opinions.
We can even write letters to boards of directors, if we so choose.
At the end of the day, companies are going to do whatever they believe they need to do in order to increase shareholder value.
Buying back stock and reducing the number of shares available to the public is one way to potentially accomplish that.
“But JC, making employees happy is how you increase shareholder value.”
Well, that could be one way to do it.
To be sure, there are many, many ways to increase shareholder value – ways that have little or nothing to do with employees.
Ask Warren Buffett
Warren Buffett has used this buyback strategy quite a bit over the years.
In 2020-21 Berkshire Hathaway (BRK.A) spent $50 billion buying back its own stock.
Berkshire has more than doubled in value since then, its market cap recently crossing the $1 trillion mark.
Nice trade, Uncle Warren!
People have a hard time wrapping their heads around the fact that the job of a publicly traded company is to increase shareholder value.
They forget this is capitalism. And they’re all wrong.
Don’t forget how this works.
It’s all about the shareholders.
Stay sharp,
JC Parets, CMT
Founder, TrendLabs