Michael Berry, Darren, Tom Dickson discussed on The Indicator from Planet Money


Don't touch it. You ate the whole thing. Well not just that with me. Oh so this is the episode where cardiff cardiff steals the snacks. Yes delicious okay listener questions for mary. Let's go hello this. Is tom dickson from eagan. Minnesota your finance fridays. He's got me wondering about a question why are public companies so fixated on their share prices are they actually out in the marketplace selling additional shares to generate cash so we should actually break down the question a little bit so public companies. These are companies that trade on stock exchanges so you can buy their shares and when a company's shares go up. It's obviously good if you own those shares but also it might tempt the company to issue new shares. They can get a lot of money from it right right so that's the fundamental purpose here is a company company wants to sell news slices of ownership in itself so it can go fund doing something awesome like buying another company or pouring money into research and development building a new plant any any of these things that requires money they can go out and sell more shares and new shares that did not exist before correct so they had a pool of <unk> shares outstanding and there's going to add more to the pool which means if you're an existing shareholder. You're kind of on the losing end of this because suddenly the party that you attended. It was just like a hundred. Have you got a lot more crowded yeah so now you have to split your ownership of the company with more people which means your little slice of the ownership is worth a little bit less basic economics. Thanks there's more supply okay and tom's question was about the idea that once a company's shares go up that company will be more likely to issue more shares because it can raise money. How often does that happen. These follow on share offerings so last year american companies raised one hundred and forty three billion dollars in these types of follow on offering a lot which is kind of insane because especially you compare that with initial public offerings where a company isn't publicly go public and that only raised fifty four billion dollars last year. It was actually a lot more and hardly anybody talks about it. I think we just get so excited about i._p._o.'s because it's like a it's like fresh meat. Hey i don't know those those figures are according to p. w._c. Great answer mary. Thank you so much. I did a lot of work on that diligence. Next question is from listener chris. This is chris from santa clara california. Do you think the people in finance are inclined to fall victim to a self serving bias leaves them to think their success is due to their own on hard work when there's more due to external factors like luck. What do you think yes yes. They are inclined to fall to self serving bias where they attribute their success to their brilliant genius and hard work and not to other things like circumstances or look. I think there are a lot of people that don't see perhaps all of the very very many things that went into their own successes and that's a normal human thing. I think we all do that yeah. Of course this happens to people in the financial sector just because they are people this is something that happens to all of us. We tend to like look at people out in the world and we say well their success is a result of like lock and all these other things but for us we like to believe it's our own talent and genius right and there's this debate in the market as to whether confidence can actually help or hurt you because sometimes you do have to really fully believe in yourself and the trait that you're putting on in the market when no one else will sometimes you have a time you buy a stock and everybody hates. It and it's going down. You know this thing's going to go up right and you can be wrong for a long time. Hi and you might be losing money for a long time like for example there was this hedge fund manager michael berry who before the financial crisis knew that housing was doomed and this is actually all in michael lewis's book the big <unk> short <hes> he was super sure he knew it he put on all these bets but he was really early and housing kept going up and he was like just sitting there short just betting against it waiting down right. It looks really bad for a long time and it's not clear at that point you know the thing hasn't happened yet so he could just be wrong and have lost a ton of money of course as we no no. No the housing market did indeed fall made a ton of money. He was proven super correct but that confidence served him really really well to get through the kind of tough period where the market was going against him right but not everybody's michael berry to be clear for every real michael berry actual hetero manager with an insight actual traitor who knows something and just really confident in god it it thoroughly ninety nine to a million people who really think they got it but don't actually because quite a range i find very few people who are michael berry a lotta. A lot of people put on bats and everybody goes against them and there's a good reason and get some those people just gonna end up losing their money right there just wrong. It turns out okay. Next question comes from listener darren who did not send us his audio file so producer. Rachel cohn is gonna read it in her best darren voice. I guess why not i. It's it's me darren. I wanna know how shareholders benefit from share buybacks. Why would shareholders prefer an action that could increase stock prices but is not guaranteed to a dividend that is real cash in a shareholders hand. Thank you okay first of all. We should explain what a share buyback actually is mary. Oh that's one company buys back some of its shares and the way this works is at a company might have a bunch of cash right and they're not sure what to do with it. I'm not sure what to do with the and they see that in the market. The shares of that company are underpriced. They think the managers of the company are like wait a minute why are shares trading waiting for so cheap we should use the company's own cash to buy back those shares that's right and so they go into the market and they just kind of zip up their own shares which has the effect of reducing kind of overall number of outstanding shares which means that the ones out there that are left are worth mortgage. You're still kind of owning that same slice of the company because is you end up owning like a bigger piece of the company. If you keep your shares after those other shares are hoover up correct okay so if you own shares of a company and the company does a share <unk> buyback the value of your shares will go up so yeah the mary the second part of listener darren's question is why if you are a shareholder. Would you prefer that a company do a share sure buyback instead of just offering dividend which is when a company essentially just gives cash directly to shareholders so to be clear. The idea here is that this company has is all this extra cash but rather than buying shares back why not just give out that cash so effectively in some ways it ends up being the same thing whereas dividend do you have the stock and then you have some cash but with a buyback you have the stock that just became more valuable. There is a tax difference as the shareholder receiving a dividend. That's just cash anytime. You just get cash like that. That gets taxed so that same year you get the dividend you gotta pay taxes money coming into your pocket. The government wants them in the case of share buybacks. Though oh the stock just went up and you can kinda just hang on and not have to sell it and you only have to pay taxes on that now higher stock when you actually sell it okay so you can and basically hold onto it and avoid paying taxes for a while yes although you are taking the chance that the stock might plummet at some point so it's a little bit less in your pocket yeah. It's more risky mhm mary. Thanks so much for having a pleasure i._o._u. Peppermint patty go. I'm gonna go by you that right. Now this episode of the indicator it was produced by richard cohn fact check by emily lang and edited by patty kirsch indicators of production of n._p._r. Um.

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