I've never bought, owned, or traded stocks before. Before college, the only exposure I had to the stock market was stock market games in elementary school. The teacher would break up the class into groups of three and each group would pretend to have a certain amount of money and we would pretend to buy stocks. We would track the progress of the stocks over the course of a few weeks.
Later in college, I took a capstone business strategy course in my last semester. The biggest part of the game was playing a business strategy game where the class would split into groups and we would take control of a simulated shoe company. We could log into the game and mess with all kinds of variables like the quality of materials used in the shoes, how many models of shoes were produced, where the manufacturing plants were located, how much to pay the employees, and several others.
As part of the grade, we had a set of investor expectations that we had to meet in order to get an A. One of the expectations was meeting or exceeding the benchmark earnings per share. Earnings per share is just the net income divided by the total amount of shares outstanding.
At first look, a higher earnings per share would indicate a high net income and a strong company. Since the simulated industry was very competitive, my classmates and myself quickly realized that we could also boost that ratio by simply buying our stock back. In other words, if our company performed poorly, we could just buy back our stock in order to make our company look like it was doing better than it was.
I like to check up on ZeroHedge quite often and I see reoccurring articles that stock buy backs are at an all time high and will continue to climb. This gives me the impression that stocks are very overvalued. Companies could be performing rather dismally and look pretty good on the market.
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