INVESTING in a company simply because it has been buying and cancelling its own shares has not been a very profitable policy. To date, 1992's top 10 buy-back stocks have underperformed the Hang Seng Index by an average of 45 per cent, and last year's have performed no better than the index. Although buy-back stocks have generally proven to be lacklustre long-term performers, there is always the exception. Wheelock and Co, Elec & Eltek International Holdings and Chinese Estates Holdings were big gainers in the previous two years. In the table are the 10 most heavily bought-back stocks since the beginning of last month, seven of which have underperformed the market this year. Last month, companies spent $308 million buying their own shares, more than in any month since June last year and more than six times the amount spent in August this year. The number of companies buying their own shares has soared as well. Last month saw 37 companies buy back shares, the highest monthly total ever, and more than double the monthly average over the past 12 months. The chart, which compares the value of share buy-backs with the monthly level of the index, demonstrates that companies buy more of their own shares when the market is going down, and less when the market is on the rise. This clearly makes sense, but the overall trend is reactionary, and is not a good indicator of where the market is headed. So what does all this mean? Essentially there are two views. Academics would argue that the sharp increase in the number of share buy-backs now taking place is the result of the management of many companies believing the share price of their respective companies to be undervalued and viewing share buy-backs as a means of enhancing shareholder value. Cynics, however, would argue that the current round of buy-backs is no more than a desperate attempt by insiders to shore their own net worth by using the company's funds to support the share price. This is on the basis that company buy-backs in many instances have been preceded by quite substantial purchases by the controlling shareholders. Adding grist to the cynics' view is that the process seldom works in reverse, whereby insider purchases are seldom preceded by a share buy-back programme. While in many instances it is difficult to ascertain the real motive that drives a company to buy its own shares, some at least do appear to have a clearly defined strategy. Chinese Estates is a good example (though again a more cynical view could be taken). Chinese Estates is a property investment company that trades at a substantial discount to the underlying value of its assets - about 51 per cent. Given management's view that the price of physical property is on the high side, the company has adopted a policy of buying and cancelling its own shares. It sees this as the equivalent of buying physical property at a 50 per cent discount to net asset value (NAV), which alone does not enhance shareholder value by boosting the company's NAV, but in the short term at least, provides support to the company's share price. Management's faith in this policy is evidenced by the fact that since 1992, Chinese Estates has bought and cancelled 370 million shares at a cost of $1.65 billion.