Investing Catechism

[piezoe]

I'm with you Nitro. You obviously know the answer to the "question" stated in your original post. The answer, of course, is yes.

The only stocks true investors should hold are dividend paying stocks of companies with good prospects for growing those dividends and equally good prospects for hoodwinking traders into bidding them up with rising nominal earnings so capital appreciation will have some hope of keeping even with inflation and the reinvested dividends, through compounding, will put you ahead.

It is rare to meet a person, even those who make their living from the giant casino known as the stock market, that truly understands the predator nature of markets. When I do meet them, I know that I have met someone with an uncommonly deep understanding of the market. I suspect you are such a person.

 

[nitro]

Quote from piezoe:

I'm with you Nitro. You obviously know the answer to the "question" stated in your original post. The answer, of course, is yes.

The only stocks true investors should hold are dividend paying stocks of companies with good prospects for growing those dividends and equally good prospects for hoodwinking traders into bidding them up with rising nominal earnings so capital appreciation will have some hope of keeping even with inflation and the reinvested dividends through compounding will put you ahead.

I have nothing more to add.

 

[nitro]

Ok,

I have one more thing to add.

This whole thing of bonus compensation and executuve pay and for talent retention. Want to solve it simply? CEOs etc get a base salary, a good salary at that. The bonuses however gets payed through the same dividend that you or I get if we are shareholders.

Employees are issued stock, not to sell, but to reap the dividend. When they retire, quit get fired whatever, they have to give back the equity and no money changes hand. So the equity they hold from the company is on loan strictly to reap the benefits of the dividend. So the company has to go out to the market and buy the common in order to issue stock on loan to it's employees for this purpose.

If the board votes to raise the dividend because the earnings are lasting, the CEO etc get payed nicely. If not, then guess what, the earnings are not likely to last, and the CEO and other bonus based employees gets payed based on the current dividend. Since they hold the common, even more incentive to keep the price higher through higher dividends and bigger earnings.

This aligns EVERYONEs interest, and it does so in fantastically simple terms.

So GS wants to pay out $17B in bonuses? They have to pay it out through the dividends. They win, I win. Otherwise, why the F*** do I give a shit what GS makes or not? Why would I ever buy the stock? Or AAPL, or a whole bunch of other stocks that pay dog shit for a dividend? Am I somehow richer just through association with these companies because I own the common? Only in a ponzy scheme.

SHOW ME THE BEEF

 

[BigFunky]

For some reason everyone seems to be ignoring that fact the a share is still a part ownership of the company, which itself has vaule not only from the assets that form it, but the profits it makes, regardless of whether a dividend is paid.

For example, if a company makes a $1 billion profit a year, and pays no dividend, what is the value of the company? If the total vale of the company was less than what was considered fair based on the profit, then the whole company would be bought simply for the profits it produces as a proportion of cost.

I do agree that in many circumstances, a portfolio of mature stocks that pay regular dividends would be best. But surely it would be unfair to claim a 'true investor' would not buy growth stocks. That's what makes investors like Warren Buffet into billionaires - unlesss you describe them as entrepreneurs rather than investors?

 

[nitro]

Quote from BigFunky:

For some reason everyone seems to be ignoring that fact the a share is still a part ownership of the company, which itself has vaule not only from the assets that form it, but the profits it makes, regardless of whether a dividend is paid.

Where is the value? Show me what I can do with that certificate? I own what exactly? All I own is the right to sell it to someone else that is stupid enough to believe he owns something other than a piece of paper. If that share however translated into a dividend, well NOOOOOOOOW.

For example, if a company makes a $1 billion profit a year, and pays no dividend, what is the value of the company? If the total vale of the company was less than what was considered fair based on the profit, then the whole company would be bought simply for the profits it produces as a proportion of cost.

Let's say it makes all the money ever made in the world, what difference does that make to you? ZERO. You have no legal or other right to it. Only on liquidation is it broken down into book value.

I do agree that in many circumstances, a portfolio of mature stocks that pay regular dividends would be best. But surely it would be unfair to claim a 'true investor' would not buy growth stocks. That's what makes investors like Warren Buffet into billionaires - unlesss you describe them as entrepreneurs rather than investors?

The reason the market goes higher is not because there is intrinsic value to an investor ONCE a company goes public. It is through a magical little thing called, drum roll, the 401K. Money comes into the market and gets put into play, PERIOD. No ifs ands ors buts whys who when where.

Otherwise, all the indices would trade very close to book value, and hence would most stocks follow.

Warren Buffet quit investing for years because stock prices didn't reflect value. He later "missed out" on the biggest tech boom in history. You are making my point, you realize.

 

[BigFunky]

Your original question was regarding why anyone should buy shares that don't pay a dividend - in other words why would the value of the shares increase if they aren't practically useful and don't pay anything.

I suggest the answer is simply because when the profit of the company increases the value of the company inevitably increases - if it's trading below its fair vaule, then someone could buy the whole comapny and make a profit - indeed they should buy it and make a profit. That's why you shouldn't ignore the fact that your shares don't exist in isolation - if the market can price them higher, then it will.

So there is a reason to buy growth shares - whether you as an individual owner can extract the value out is irrelevant, as long as it would possible for the market to do so, the value will be reflected accordingly (so it does put money in your pocket, but only after you sell them). Gold on the other hand, makes no sense at all.

- though I'm quite confident you already appreciate all this and are simply seeking some debate on the matter.

edit: An analogy - If I owned a brand new Boeing 787 dreamliner, what would it be worth to me? I can't fly it as I'm not a pilot, I can't even afford to fuel it, or hire a pilot, and I can't afford to maintain it. Effectively it's not practically useful to me because I can't do anything with it. All I could do is sell it to obtain its fair value (its fair value to someone who could use it), or I could lease it out and make a profit.

But what if I only owned 1% of said 787 dreamliner. I have no power or authority to lease it out to make a profit. What if the other 99% didn't want to lease it out, thus it was making no profit at all. I now own something that makes no money for me - is it worth nothing?

Does something valuable, when divided by 100 become worthless? I suspect not - it does have intrinsic value (to somebody else) whether or not I can extract that value. I submit that if the whole has vaule then part must also have value - perhaps only if it is possible to obtain the whole.

 

[nitro]

Quote from BigFunky:

...
I suggest the answer is simply because when the profit of the company increases the value of the company inevitably increases - if it's trading below its fair vaule, then someone could buy the whole comapny and make a profit - indeed they should buy it and make a profit. That's why you shouldn't ignore the fact that your shares don't exist in isolation - if the market can price them higher, then it will.

The value of the company increases FOR WHOM? Who is "someone" - is that you? If someone does buy that company, how do you make money? So you are telling me that the companies you invest in you ultimately hope they will be bought out and hence you will get a premium from when you bought it? Well, you better be reeeeeal good, because this occurs some fraction of 1% of the time. Who is buying AAPL or MSFT any time soon, or the scores of hundreds or thousands of other stocks that have zero chance of takeover? That does not make a theory of markets. That just says that some stocks are valued as takeover targets, which btw, is reasonable way to invest. I am talking about 95% of stocks for which this has almost no chance of occuring, and they pay shit for owning them, e.g., GS, AAPL, and a list that would take me hours to type.

So there is a reason to buy growth shares - whether you as an individual owner can extract the value out is irrelevant, as long as it would possible for the market to do so, the value will be reflected accordingly (so it does put money in your pocket, but only after you sell them). Gold on the other hand, makes no sense at all.

So it is irrelevant that I can extract money from a stock that I am long? How do you propose I make money? People that talk about the market as some unexplained phenomena are amateurs. The "market" is nothing but people like you and me, either investing/trading their own money or someone else's.

edit: An analogy - If I owned a brand new Boeing 787 dreamliner, what would it be worth to me? I can't fly it as I'm not a pilot, I can't even afford to fuel it, or hire a pilot, and I can't afford to maintain it. Effectively it's not practically useful to me because I can't do anything with it. All I could do is sell it to obtain its fair value (its fair value to someone who could use it), or I could lease it out and make a profit.

So you are comparing a Boeing 787 with a piece of paper? Fine.

Ok, a 787 I can lease to American Airlines for say $10M a year. So if I buy it for say $100M, I can see a revenue cash flow from it's lease. But why get so complicated? Let's talk real estate. I haven't got a clue how to do plumbing, or carpentry, or electricity, but I can buy a building. I can then rent the units and I have cash flow. I may then one day sell it for a higher price than I bought it. Do you see the difference? If a stock pays no dividends or shit dividends, that is like buying a building that I can't rent out! All I can hope to do is sell it to somone else for a higher price, and hope he doesn't care that it doesn't generate income. In other words, a ponzy scheme. But hey, as long as a new sucker steps up to the plate because "stocks are valued based on their earnings", it happens and will continue to happen all the time.

Earnings will mean something to me if I see that a corporation uses those earnings to pay a dividend and raise it with some frequecy. Everything else is smoke and mirrors. That the market goes higher inspite of this has nothing to do with what you think it does. It goes higher because of the 401K phenomena. It is a travesty that money that gets send to mutual funds has to be put into play in the stock market.

But what if I only owned 1% of said 787 dreamliner. I have no power or authority to lease it out to make a profit. What if the other 99% didn't want to lease it out, thus it was making no profit at all. I now own something that makes no money for me - is it worth nothing?

Does something valuable, when divided by 100 become worthless? I suspect not - it does have intrinsic value (to somebody else) whether or not I can extract that value. I submit that if the whole has vaule then part must also have value - perhaps only if it is possible to obtain the whole.

See above.

 

[saliva]

Quote from nitro:

Please explain something to me. Today as an example, AMZN is up 25% because earnings obliterated analyst estimates.

What I don't understand is, who cares from an investor point of view? Break it down for me: how does the fact that AMZN made all that money, relate into money in my own pocket as an investor? People will say, well, the company has more money, so it can acquire other companies which will lead to even more revenues, and it can buy more books, update it's computers, hire more programmers, etc etc etc. But how does any of that translate into money in my pocket if I am an investor in AMZN? Unless I share in that profit, why would I ever care? Is the value of the higher earnings only that I know you care because you are an idiot, so I will be an idiot with you and anticipate that you are going to buy the stock, and I buy the stock too, hoping to sell it to an even bigger idiot later? Is it all an illusion?

To me, the only thing that matters as an investor is the dividend because ultimately, unless I work for AMZN, it is the only tangible way I can profit from AMZN doing well. And yet, investors bid up the stock of AMZN as if it was money they were making People say, dividends are double taxed, blah blah blah. That's why companies don't pay more dividends. Well, yeah, but it is real!

I must be missing something.

Oh my god, I can't believe you reached the same damn conclusion as me when I was, ahem, a struggling trader. In theory, the only REAL investors are the ones who participated in the IPO. Everybody else is an idiot. The only possible way to push up the price of any given stock is to bring in more buyers or, as you put it so eloquently, to have bigger idiots line up behind you. This has absolutely nothing to do with the actual revenue that a company generates.

 

[nitro]

Quote from saliva:

Oh my god, I can't believe you reached the same damn conclusion as me when I was, ahem, a struggling trader. In theory, the only REAL investors are the ones who participated in the IPO. Everybody else is an idiot. The only possible way to push up the price of any given stock is to bring in more buyers or, as you put it so eloquently, to have bigger idiots line up behind you. This has absolutely nothing to do with the actual revenue that a company generates.

!!!!!!!!!!!!!!!!!!!!EXACTLY!!!!!!!!!!!!!!!!!!!!!!!!

But, it can all change. Demand a dividend for companies you invest in, and demand an increase of dividends if they are doing well. Otherwise, dump it. Write to congress and tell them that dividends should not be double taxed. This would almost overnight get rid of booms and busts in the stock market.

For Immediate Release

Boston, MA., Jul 16, 2008 – PROCTER & GAMBLE CO (NYSE: PG) has a dividend history dating back to 1891. The Procter & Gamble Company (P&G) is focused on providing branded consumer goods products. The Company markets its products in more than 180 countries. During the fiscal year ended June 30, 2007 (fiscal 2007), the Company was organized into three global business units: Beauty and Health, Household Care and Gillette GBU.

http://dividendinvestor.com/news/dividend-history-procter--gamble-co-nyse-pg.html

 

[Jesus]

Some of you guys obviously have absolutely no idea how the stock market works or what it is. I realize that this is a trading forum, but it doesn't look like some of you guys know a thing about investing. You need to go to economics 101.

Owning a share of stock means you own a piece of a company. If there is 100 million shares outstanding, and you buy one share, then you own a 1/100 millionth of said company. Albiet its a small piece. You are then entintled to 1/100 millionth of the company's equity.T heir assets, their retained earnings, future earnings. You do not have a say in how or what the company does things, because you do not have a majority ownership. You do not get the earnings personally. But the more earnings the more likely the value of the company is going to go up, so your share will be worth more. Management decides what gets done with earnings. So yes the earnings made could be blown on something of no value, but that would be managements fault. If management is blowing earnings on rediculous things, then you should try to sell your share in the company. Otherwise you are at the mercy of whatever they decide to do. If they want to reinvest it in the business, pay a dividend, acquire another company, spend it on Jonas brothers tickets for the employees, whatever.

The share of stock would be worthless if nobody else wanted it, or if the company insisted on devaluing assets and wasting earnings. If every company did this, and all stocks were worthless, then our civilized society would collapse. Our monetary system would be worthless. The only investments you would want to own would be things you could actually physically use. This will not happen any time soon.

The stock market is not some scam devised to screw you over. If you sold a pearl necklace to someone else, does that mean its now worthless because you or the new buyer are not the oyster that puked it out. No, the pearl still has value because our society values it. The company you invest in has value because it has valuable assets and can earn money now and/or in the future. Theoretically everything you own doesn't have value. You don't need clothes, just go to florida and you'll never need a jacket. You don't need a car, just forage for berries instead of driving to work and then paying for food. You don't need electricity. Write congress and tell them you can't run down squirrels and rabbits with a light bulb, so end this electricity madness now.

Also, not all companies should pay dividends. Some of The higher growth, beginning companies need their retained earnings to grow their business and expand. This process makes their business bigger and more profitable. Not investing in some companies because they don't pay a dividend is crazy. Dividend payers have their place but I'd rather have a stock that doubles or triples in value in a few years rather than one that went nowhere but paid a 6% dividend.

Stick to trading until you learn what investing is.