The ins and outs of share buybacks

IS it a hopeful sign for the stock market when executives and directors step up purchases of their companies' shares? It depends on whether they're trying to enrich themselves or their shareholders, and not in the way you might expect.

Corporate insiders have impeccable timing when buying stock for their own accounts. When the ratio of insider buying to selling is higher than normal at many companies at the same time, it tends to be near a market low.

That was the case in late 2008 and early 2009, towards the end of the last bear market. The ratio was at historically high levels for months, just before stocks tripled, according to Vickers Weekly Insider, a service that tracks such trading.

But when bosses authorise buybacks - buying stock on behalf of their companies, not themselves - they show nothing like the same foresight. The US$617 billion that companies in the Standard & Poor's 500 index spent on buybacks in the 12 months up to January 2008 was the highest amount in the nine years for which the research firm FactSet has compiled such d…