 Good day, fellow investors. Today we'll discuss buybacks, blue chips, and take the example of general electric which has been plagued in the last year and the stock price fell 30% because, in my opinion, of its buybacks. And there we'll explain where to look for how much a stock is spending on buybacks and how wise they are so that you can see if your blue chip that you own is a smart investment or not, or will end up like general electric. Now, it's easy to be a general after the battle. So in the description below there is a link to an article I wrote in December 2016 when general electric stock was above 30, discussing how buybacks will destroy general electric. So I'm not now beating general electric up when it's down. I was one of the first doing that when it was up. Please click on the link below to be sure of it. So what's going on? General electric year to date down 40% for a blue chip stock, for a dividend stock, for a symbol of the American economy. That's not how things should go. The main point is general electric, the management shifted from growing the business, developing the assets to selling all assets, everything. Let's divest synchrony. Let's sell the autonomous part to ABB. Let's sell everything. Let's get the money and let's spend the money on buybacks in order to push the stock price higher, higher and higher. And that strategy works only in the short term because after a few years, normal business cycles, earnings fall down and there is nothing, there are no assets, there is no value to recreate the earnings and that's why the stock gets hammered. Additionally, it's very important that if a company does buybacks, it does buybacks at a price that's lower the book value. If you buyback stocks at a price higher than the book value, you're simply paying much more for something that you can create inside your business for a much lower price. A year ago, general electric was buying back stocks at a price to book value above free. This means that they were paying $3 for something that they could create in their own house for $1. And that's a clear example of how shareholder value is destroyed because the difference of $2 is going to the one that is selling the stock to general electric in this case. Unfortunately, the management didn't learn anything new. They're targeting another $20 billion of divestments. They're making their asset base smaller and smaller in order to reduce their earnings and make of GE a small company that will probably go bankrupt if they continue like this. In 2016, general electric spent $21 billion on stock buybacks. However, it didn't help at all. The stock price is now much lower than it was in 2016 and even in the last three years, the stock price has really underperformed. So general electric is just one example. Let's see the aggregate of what's going on when companies induce in buybacks. A research by Robert Iris and Michael Olenik from INSED shows that companies that do buybacks, the more companies do buybacks, the lower is the 5-year market cap capitalization growth. In this example, we have companies that have really indulged in buybacks, buying huge percentages of their market cap in order to lower the number of shares or standing to increase earnings. However, the market capitalization growth over 5 years, thus over the long term, has been terrible. Just Sears, Fossil, JCPenney and other retailers, they thought that their stock is cheap. Consequently, companies that don't focus on buybacks but on growth achieve much better long term stock performances. Facebook is just buying back a bit of stock to give to employees. Market returns are huge. Berkshire is just buying back stocks when the price to book value is below 1.2. Because Buffett understands the creation of value through buybacks and the destruction of value through buybacks. Most SAP 500 management doesn't understand that. Here is the summary. Average 5-year market cap growth by buyback percentage. So the higher is the buyback percentage, the market cap growth is the lowest. The smaller the buyback percentage, the market cap growth is the highest. So to conclude, what do we have to do? We have to look at our companies and then you go to the cash flow statement and then you have net disposition, purchases, buybacks of stocks, however it's said. And you can see here how General Electric bought back 21.5 billion of stock in 2016, 2015 just 1 billion and 2014 when the stock was cheaper also just by 1 billion. So they like to buy stocks when they are expensive. The second thing to do is how much is the company buying back compared to market cap to the earnings? Are they spending more than they earn on buybacks? And then look at the price to book value. If the price to book value is high, then they are doing this service to investors, this service to shareholders and this service to you if you're a long-term investor. There is a catch. If you're a short-term investor and a company announces buybacks and huge amounts of buybacks don't fight the trend. In 2016 the share of General Electric was pretty strong because the company kept buying. So think short-term if a company is announcing buybacks, get into the trend if you like the company, however in the long-term be careful in the long-term shareholder value is usually destroyed if the purchases are made at above book value. Thank you for watching. Share a company that you own that is doing a lot of buybacks so that we can see whether it's smart or not. I'll see you in the next video.