shareholders = inconvenience ?

[thegooddon]

Didn't know where to put this exactly, so my safest bet was here, apologies in advance if its in the wrong place.

I had this conversation a while back with a fellow I met online in a stock chat room and it went like this

Me: It doesn’t make sense, why do most public companies prefer not to give out large dividends?

Stranger: its simple really, they want to invest the profits back into the company so they can expand and grow more.

Me: yeah okay, but if I was a shareholder of a company, im investing in the company for the sole purpose of getting money from my investment, I want to see some profits.

Stranger: hmm...One of the main reasons if not at times only reason companies issue stock is to raise capital. You’re just an inconvenience to the company after the stock is bought.

Me: excuse me? Why am I investing then, I have no intention about the “growth” of a company if I am getting nothing out of it financially.

Stranger: Its true you probably won’t get rich out of dividends, so you have to hope the stocks go up.

Me: So the company I supposedly own part of aint giving me much. so I have to pray my stock price increases for me to make any substantial money?

Stranger: That’s right, but if it goes down your screwed

Me: why on earth do I own stocks again?

Stranger: because you want to be rich

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Basically what i got from it was that the only reason most people buy stocks is to sell it in the end for a profit (hopefully) and that most companies hate to pay dividends.

Do you agree? or is there another picture?

[rffrydr]

Ah...the dulcet tones of "quality companies with strong earnings growth owned for the long run." This guy's got religion, and though brought up only a short time ago, sounds a world away:

http://media.bloomberg.com/bb/avfile/News/Surveillance/vVJJw5dQwFJA.mp3
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Today is the Tomorrow you worried about Yesterday!

[nodoodahs]

Why would someone sell a security that was paying them and was issued by a company that was financially strong? Maybe he spots a better opportunity elsewhere. Maybe he needs to liquidate assets for some other reason (retirement liquidations, put a kid into college, or meet a margin call on some losing position). Maybe if the price falls enough, he might see the falling price as a declining value in his option to sell the security for some potential future liquidations and thus decide to sell..

Most people don’t look at business opportunities properly, so don’t feel bad about not seeing it from this POV until now. To compare owning a small business to owning a “point and click” investment, you have to convert the business’ ROE to a hypothetical “point and click” result. While there may be no global market automatic payment for accepting “liquidity risk,” that doesn’t change the fact that liquidity risk is very real and I personally would want to have a much higher potential return for accepting it. Some people never see it that way, and if they wind up buying a business so they can earn 2% on their capital and work 60+ hours a week for a nominal salary as a manager of unskilled laborers, then so be it.

We are riding the same donkey with this statement: “I dont plan to learn everything about everything. But I would like to have a deep understanding of the few things that I depend upon to generate wealth with.”

The last bits, we’re talking about the nature of risk. Academics might say that any single particular security has idiosyncratic risk, and then there’s industry-related risk, and then market risk in a single asset class, and then the danger of cross-asset correlations. My ETF response, above, is how I would deal with it, with my money, in the context of a “buy + hold + rebalance” portfolio, if I were a “buy + hold + rebalance” type of guy. Your idea of selecting a few carefully evaluated securities in each of several categories is another valid type of approach to the problem of risk. There are many approaches.

I probably should have said something like “Obviously I think even better returns are available through more active structured speculation, because that's what I'm engaged in.” Because in my mind, any approach that takes a well-thought-out and pre-planned, like an architect with a blueprint, scheme into the markets deserves to be called “structured speculation.”

Activity level has its own trade-off. You could draw a parallel to the “small business” used above, i.e., if I have to spend six hours day-trading every time the market's open, isn't that a “job?”

I view risk/reward as a means to compare not only a single investment on an absolute basis, but more often, a way to pick between different competing investments.

Leverage carries its own risk. It's like Brylcream, a little dab'll do ya, don't use more than you need to get the job done.

I prefer to think about odds of what a security's price will do in the short- to medium-term, or a security's relative value compared to comparable securities, as a metric for buying/selling, rather than the investment's “intrinsic value.” I think the idea of “what a stock is worth” is a dangerous myth.
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I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[thegooddon]

[thegooddon]

[thegooddon]

Sorry about the late response, my hands were full the last couple of days and I wanted to give your post a good response. Not that I was working up a debate. I am just trying to absorb your information and take time to understand what you wanted to communicate.

[nodoodahs]

Opposite opinions? Or not really, since the second link doesn't even address the idea of risk premia?

http://falkenblog.blogspot.com/2010/11/me-on-risk-return-and-alpha.html
http://scottlocklin.wordpress.com/2010/11/20/investments-for-dummies/

Personally I think Scott (don't know him, never conversed with him on the 'net or in meatspace) is dead wrong here.

Actually, he's right about the advantages of detailed knowledge and control when investing in a business rather than speculating in stocks, but he - and all of his commenters to date - are missing several points.

First, illiquid investments are illiquid. When it goes bad, you can't just hit the bid with a click of the mouse.

Second, these are non-diversified investments so you're exposed to idiosyncratic risk. No small investor in a business can avoid this, because as a percentage of their net worth, a business is a large portion. On the other hand, you can use ETFs or mutual funds to trade and avoid idiosyncratic single-issue risk altogether.

Third, he provides no data that small businesses, ON AVERAGE, give the small investor better long-term returns than they could get, ON AVERAGE, from speculation in the markets.

Which is Eric's point. You DON'T, on average, see better returns from single small businesses, so there IS NO risk premium, at least, as a characteristic of the risk per se. Moral to me, if you see a risk without a premium - as most of them are - don't take it.
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I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[rffrydr]

I think I got it: you started out as forex spec. That's no place to start.

Burned by the "specialists"? That's the definition of "insided job." Most of these bucket-shops don't even put in your order. They know that at 1-2% margin you're only a few random "pips" from ruin. They run it against their own accounts and save the commission. And then it's on to the next guy. Roll those fees. The one-in-a-hundred able to catch and hang to a trend will make it all look fair and good. But it ain't gonna happen for you. That it mirrors america's Horatio Alger myth just makes it all the more seductive. This dream was overlaid on housing too. And now you know how that turned out.

Leverage, man. That's what you're scared of. And you should be. You can find all flavors in the stock market. But, y'know, this last couple of years it's been possible to find stocks trading close to cash-on-hand. No leverage there. Is Coke worth more than cashandcarry? Of course. Now you get to decide how much. Well then there's the risk that cash in the bank is dollars in a ponzihut. So you buy a goldmine. Good anywhere on earth, right? But then it turns out to be "hedged" and gets a margin call against production five years out.....

The encyclopedia says a stock price is a discount to the sum of its dividends over its lifetime.

"You pays your money and you takes your chances."

Just buy PHK next rates spike-- like the shot down to $12 this last week. Take your 10% and leave the driving to Billy Gross. Go read Richard Ney and be happy.
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Today is the Tomorrow you worried about Yesterday!

[nodoodahs]

I apologize in advance for the length of this post.

There's no guarantee that an increased dividend yield for the overall market would provide a better return on holding market stocks, and although there's some research that suggests companies which grow their dividends over time tend to perform better, it's a tenuous connection at best and probably not among the most powerful “fundamental analysis” signals one could use. I'd put the idea of “stocks paying dividends” in the same box I've put other useless “long-haired college-boy ideas” into.

Sometimes the obvious needs to be said explicitly. It cuts through the cognitive dissonance better that way.

You say “neither do I” as if we agree on not wanting to hold stocks, which is not quite the point I was trying to make. I asked if you wanted to own them and professed ignorance of whether you did or not. Although I started my journey with the idea of being a “value investor” in U.S. stocks, I'm currently indifferent to stocks per se and try to pick my tools based on usefulness to my account at present.

[thegooddon]

[nodoodahs]

What Buffett says and what he does are two very different things. He’s a showman extraordinaire. While he has said that his “preferred holding time is forever” his actual holding time is much shorter than that. Guru Focus or Meb Faber’s Alpha Clone site or Validea (if it’s still around) will be good sources for you to decode that if you’re interested.

Dividend yields have been coming down for decades. Check this out.
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/spearn.htm
Even more interesting if you compare them to Treasury yields.
http://research.stlouisfed.org/fred2/categories/115

There are perverse incentives in dividend policy. Tax code changes, insurers generally have to increase surplus to pay a dividend (and pay less than the amount of increase), etc. Some corporate types were invented in order to pay dividends (REITs, MLPs, whatever they called those oil trusts in Canada, etc.). Some types of corporations tend to have more yield, like utilities. Tax reasons appear to be one of the primary financial arguments for companies spending money on buybacks Vs. dividends in today’s world.

You could make a preference argument that companies prefer not to give dividends because that’s what they think their shareholders expect, i.e. if they thought shareholders wanted dividends then they’d pay them.

Long story short, I agree that most buyers of stocks buy in order to potentially profit from selling and that most companies prefer to not pay dividends if they can help it.

However, I disagree with some of the premises behind your earlier questions and some of your fellow’s answers.

Preference against dividends – see my points above.

Buying shares of stock on an exchange is most certainly NOT investing in the company. Buying enough (of the right class of shares) to have power in the boardroom is. Buying private equity is. Buying a company outright is. Buying preferred stock might be. But buying common shares, not so much. You want to see the profits, you need economic ownership.

What you are doing when you buy common shares is speculating. Get a helmet and deal with it.

Prayer, while useful for personal development (see the thread on meditation, which is related IMO), is not a viable trading strategy.

Do you want to own stocks? I don’t know.

I do know that historically being in short-term Treasuries will do nothing but keep pace with the dollar’s loss of purchasing power. If I am to compound my holdings faster than the cost of living goes up, I need to participate in the financial markets. Whether that’s higher-duration bonds, lower credit quality bonds, U.S. stocks, foreign stocks, commodities like gold or oil, real estate, options, etc., is a good question. I’ve answered that by saying there’s a time and purpose for each of them and my mission is speculation across as many classes as possible in order to compound as quickly as prudently possible in order to profit. In other words, I don’t want to necessarily “own stocks” but want to speculate, and stocks are one tool in the box.
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I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[thegooddon]

[rffrydr]

Buffett says he buys for "forever." Check out the price on those original Berkshire shares.

I think we have an indicator here of public pessimism this last five months of net withdrawals. Yet is there a spark to this gloom? Sounds like a dividend guy is wondering if there is something he's missing. That's right dividend guy...your gut is leading your mind. Your principles are holding you down.

BTW I'm saying you're wrong: there was a time not too long ago and many times before that when a stock wasn't worth the paper it's printed on. Makes for a tall wall of worry.
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Today is the Tomorrow you worried about Yesterday!