I just read an article about how the whole swathe of the US political spectrum are questioning and even thinking of banning corporate share buybacks.
To me, this comes as a surprise because the economics of a share buyback are simple, a business that has surplus cash has a few options on what it can do with the cash – invest further into the business, dividend to its shareholders or conduct a share buyback program.
Executives would of course prefer to invest in additional capacity and people and grow the business (and hence their turf) further. But if the return on capital by investing is insufficient, it makes sense to return the cash to shareholders via dividends or stock buybacks, depending on which is the tax efficient manner for that jurisdiction.
The fact that this simple mechanism is being the scapegoat for the inequality in society or bad corporate behaviour speaks volumes as to the quality of the debate, or rather thereof, and the almost-mob behaviour that is currently spreading in society, at the very least in certain countries like the US.
FIRE
The FIRE movement is predicated on the assumptions that corporations in which they have invested in will continue to produce similar returns as in the past, and there will not be any major changes to expenses (aside from inflation) or tweaking of the tax system.
If for example, legislators roll out rules which are detrimental to the functioning of the economy, whether in one country or globally, the returns from investing will be lower. If there is a further introduction of new and higher taxes that affect not just billionaires but the more “middle class” (**) folks like you and I, every smaller dollar that flows to us as shareholders will be chipped even further.
(**) Even terming a person who has achieved FI as middle class is likely to raise eyebrows nowadays. Readers may think, “yeah but it’s true that those who retire with S$1m (for eg) is rich and deserve higher taxes”. What about S$500k, or S$200k? Having S$200k in savings probably covers a decent portion of readers, but I doubt that is the average for the man on the street based on reports on average CPF balances or surveys on average rainy day savings. S$200k to you might seem achievable to anyone who puts in their effort, but to a person on low wages looking at a 20 year home loan, unpaid bills all around, and nothing left in the bank, it sure starts to seem like a “whole lot of unnecessary cash for a normal person” and should be shared.
Fair? Even if you scrimped, saved and invested your savings to the best of your ability (while risking capital losses) to grow it to S$200k? Just because something seems unfair, doesn’t mean that such a scenario cannot happen in the future.
We appear to be in a transitionary period where there will be growing pains and upheaveals in society, but eventually I think (hope?) a system will have to develop where society can take care of those in need as it should, and yet allows the ambitious ones to thrive and grow the pie for everyone. What should that system be? I don’t know, it could incorporate features like a universal basic income or maybe tech will advance so that we can live a life of leisure served by robots…that’s the dream at least. 😀
In the meantime, what can aspiring FI’ers do to plan for such a scenario?
I’ve got no crystal ball, but to me the key words are:
(1) diversify your investments,
(2) be flexible and adaptable with expenses and lifestyle choices, and
(3) retain a set of skills needed by society in case one day you do need to rejoin the workforce.
I would like to hear any thoughts you might have on other ways to safeguard your FI and retirement. Do feel free to comment.
Last point on buybacks. Yes, of course there are instances where company executives implement buybacks for the wrong reasons like as artificial support for share prices, or conduct overpriced buybacks which destroy values, or funding such buybacks with cheap QE debt which wasn’t the point of the whole exercise, but surely the solution is not simply banning buybacks altogether? If people are using a tool wrongly, find a way to make them use it properly then…don’t just ban the tool.
A company used to be encouraged to return money to shareholders when it couldn't reinvest in itself for a good return. The money doesn't vanish, it gets reinvested in higher growth businesses that boost the economy and jobs. Is that bad? https://t.co/sxfcmve0DA
— Lloyd Blankfein (@lloydblankfein) February 5, 2019
