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Thursday, May 30, 2013

Why Is Warren Buffett Dumping Stocks?

Why is famed investor Warren Buffett dumping stocks? Could it be that they are overbought and overvalued? Indeed they are. The problem with stocks is earnings. Earnings are still rising despite the fact that revenues are actually falling! That should be a red flag to everyone, but apparently investors are of a different mind. To them, falling revenue is nothing to be concerned about and only rising earnings should play into the decision of whether stock prices are too high right now.

But, the secret Wall Street doesn't want you to know is that earnings are rising because companies are buying back their own shares with excess cash. Yes, that's right. Companies aren't investing in the future with retained earnings. They are buying back their own shares which causes reported earnings to rise even when actual earnings are falling. Think about it. Companies can't grow either revenue or earnings, so they are resorting to artificial props for their share prices. Why would a corporation pull such a trick? Easy, it means the officers of the corporation, who generally receive bonuses for pushing their stock prices higher (either through stock options granted at lower prices or by direct bonuses based upon sharemarket performance), raise their income substantially by using this simple trick of buying back shares.

If you're in the game of investing and don't know who the sucker is, you are it.