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Here is an interesting notion that might be backtestable:

https://boards.fool.com/buy-backs-34177071.aspx

Neil
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Buffett love's superior capital allocation, not buybacks specifically. Capital allocation discipline, allocating money to asset purchases, stock buybacks, debt paydown, dividends, etc. according to highest risk adjusted cash flow ROI, is the main value he adds or requires to already be there when he buys a company.
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Buy backs and especially high conviction ( > 5% or more) has been noted and backtested and
written up by several sources on seeking alpha. Here is one I like by Patrick O/Shaughnessy.
https://mebfaber.com/wp-content/uploads/2016/06/Commentary_H...

RAM
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Buy backs and especially high conviction (5% or more) has been noted and backtested and written up by several sources on Seeking Alpha. Here is one I like by Patrick O/Shaughnessy.

Jamie's backtester shows that the Shrinkage screen -- which uses a 5% buyback cutoff -- has a CAGR of 13% versus 9% for the S&P since 2003. All post-discovery, it should be noted.

DB2
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I've noticed that a great predictor of Mercedes purchases buying is purchases of sun tan lotion.
It must be causal link!

Well, no, unfortunately on a global scale pale people are a lot richer on average than those less pale, and those less pale have a reduced requirement for sun tan lotion.
Richer people are more likely to buy a Mercedes than poorer people.
So the predictor is really just all about who has the money, not correlations among their varied habits.

Consider two lines of thought:

(1)
Buybacks done near the fair value of shares do not change the value of remaining shares one way or the other.
Most stocks track their fair value over long periods of time.
(Kodak stock failed because Kodak failed, not because of a chart pattern).
Most buybacks are done near, at or even above fair value.
The "near" and "at" categories have no measurable effect on the value of a share, and the "above" category actually destroys value per share.
All those categories of event can therefore be assumed with high confidence to have no beneficial effect on long run stock total returns.
Sure, a few firms manage to buy their own stock at a meaningful discount to any reasonable estimate of fair value, but it's rare enough that you can ignore it in a broad analysis like this.
Short version: on average stock buybacks increase neither short term share price nor long run stock returns.

(2)
Buybacks are a type of capital allocation.
To allocate capital to this (or anything else), you have to have new capital to allocate.
That's done by firms with lots of cash coming in the door, on average over time. We can ignore bouts of dumb borrowing, which is an unsustainable short term thing.
Firms with lots of cash to allocate are probably businesses that are doing very well.
That's simply because firms that aren't doing well don't generally have the cash to spare for big buybacks (or dividends...same discussion).

Putting those thoughts together,it's far more likely likely that the effects seen in buybacks correlating with better returns are simply because buybacks correlate with businesses that are doing well.
So, really, a better explanation is this: on average you do better buying stock in firms whose underlying business is doing well.
Not exactly an earth shattering revelation.

There are still lots of good things to say about stock buybacks.
Mostly, they are far better than other, dumber capital allocation decisions which are so common.

Jim
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