Episode summary
Why Goldman Sachs Had to 'Legitimize' Share Buybacks 50 Years Ago
The Meb Faber Show
· · 6 min · Hosts: Meb Faber · Guests: Charley Ellis
Summary
Charley Ellis argues that share repurchases were a sensible response to postwar balance-sheet excesses, not a modern financial fad. He traces the idea to American companies after the Second World War, when heavy wartime borrowing was followed by years of debt reduction from roughly 1946 to 1965, leaving many firms under-levered for equity holders. His pitch in The Repurchase of Common Stock was that companies should borrow and buy back shares to restore a better capital structure and improve long-term returns.
He says the idea was so unfamiliar that Goldman Sachs used the book as a “legitimizer,” mailing it to 1,000 corporations before buybacks became mainstream. Ellis is pleased that the concept has since become standard practice, with repurchases now exceeding a trillion dollars a year and spreading internationally to the UK, Japan, Korea, and China.
On corporate cash management, Ellis says most management teams are thoughtful and shareholder-oriented, with boards often driving a disciplined, formulaic process. He prefers share buybacks to dividends, though he acknowledges that many investors and institutions still prefer the immediate cash flow of dividends and view them more favorably than stock-price accretion, especially after tax.
Key takeaways
- Charley Ellis says his case for buybacks came from postwar under-leverage, not from a trading gimmick or market timing theory.
- Ellis says Goldman Sachs mailed The Repurchase of Common Stock to 1,000 corporations as a legitimizer for share repurchases.
- He says buybacks have grown into a normal, sensible management tool and now exceed a trillion dollars a year.
- Ellis argues boards, more than day-to-day management, usually govern buyback policy in a disciplined way.
- He personally prefers buybacks over dividends, but says many investors still emotionally favor dividend income.
Notable quotes
“my pitch was, "You really ought to borrow money and repurchase shares to get her back to the right balance, to get long-term returns for investors”
“they sent copies of the book as a legitimizer out to 1,000 corporations”
“since then, it's been a boom. Share repurchasing goes over a trillion dollars today”
“A company management is really quite sharp, thoughtful, and focused on the long term most of the time”
“in the long run accretion of the value of the stocks are much more important, particularly after tax”
How the episode opens
You've written so many books. I read most of them. And so we got to go back to the way back machine and talk about one of them. And I'm guessing you think we're going to talk about Loser's Game, but we're not. We're going to talk about a different book I have, listeners, which was published, man, this has got to be 50 years ago. The repurchase of common stock. Do you remember writing this?
I do. I, you know, I'd just come out of Harvard Business School and I was three, four years out and I had this brain thrust. You know, American companies during the Second World War could not raise capital with equity offerings easily.
So, they borrowed money and they borrowed money and they borrowed money because a lot of their business was government contracts. That was a reasonably safe and sensible thing to be doing. But they had an enormous amount of debt.
And they said, "We've got to pay that debt down. So, from roughly 1946 to 1965, they paid debt down, paid debt down, paid debt down. You get policies going and it's very hard to stop them.
And they'd paid the debt down so much that way under-leveraged, inappropriate for the equity investors, was the balance sheet. And my pitch was, "You really ought to borrow money and repurchase shares to get her back to the right balance, to get long-term returns for investors. Nobody'd done anything like that for so long, it was considered groundbreaking at the time and a real innovation.
And fortunately, nobody knew that I'd just graduated from school, so they wouldn't have otherwise they would have dismissed it. But it caught on. And one of the reasons it caught on is that a fellow at Syracuse University wrote to me and said, "I've done some work in this area.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- share buybacks
- corporate repurchases
- financial history
- investor research
Companies and tickers mentioned
- GS
- Goldman Sachs
Watch the episode
Watch “Why Goldman Sachs Had to 'Legitimize' Share Buybacks 50 Years Ago” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
More from The Meb Faber Show
-
How to Get Out of a Bubble Without Selling Too Early: Jeff deGraaf Explains -
The AI Narrative Is Hiding a Much Bigger Problem -
Vincent Deluard: Why the Stock Market Is More Fragile Than You Think -
It's a Bubble. So Why Is Citi's Dirk Willer Buying? -
36% of Your Portfolio Just Disappeared In the Last 30 Years (Andrew Ang Explains How) -
The Asset That Could Be the Market’s Biggest Mispricing
The Meb Faber Show, this episode and its artwork belong to The Idea Farm. Octagon is not affiliated with the show; this page is an independent summary.
