But here is the problem… With interest rates as low as they are, companies borrow money and then use it to buy back their own stock. By taking shares off the market they lower the denominator in the “earnings per share” calculation, making the company look more profitable than it really is on a per-share basis.

By lowering the supply of shares available to the market, they also create an artificial scarcity which artificially increases the share price.

So if you look at price trends in a particular stock, it might look like the company is “growing” because the share price is increasing. But if you look for how much corporate debt is outstanding and how much of that debt was/is used to buy back the company stock, you might realize that what looks like “growth” on the surface actually depends on ever-lower interest rates.

Take what you’re writing about here (compound interest) and apply it to that reality. What happens when interest rates rise and the company can no longer roll those bonds over at the same or lower rates?

Seeing as the “growth” of their share price is really an artifact of access to cheap credit and not the result of increased productivity or competitiveness, once the cheap money which is propping up the share price is gone… so goes the share price…

Know what you are buying… Is it a company with a strong place in its market, a sound business plan, and a strong management team? Or is it a stock buyback price manipulation scheme?

Written by

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store