Long term value investing

[Jesus]

Quote from The Big D:

I don't need to defend "my" theories because they're not mine - they're Graham's, quoted to you more or less verbatim from multiple sources. If you don't like them, that's really your problem.

I happen to think he's basically right, but he wrote in an era where governance wasn't the problem that it's been for the last 20 or so years, so his perspective is a little outdated. Still, he's light years ahead of your nonsensical subjectivism.

Heres the problem that I have, you previously said two things that I disagree with. And for the most part these next two quotes are the reason why I responded to you. A lot of what you said I actually agree with.

"Since we're mentioning Ben Graham, it should be noted that his definition of the "intrinsic value" of an equity position is the discounted value of the future dividends (or other disbursements). By that definition, the intrinsic value of most modern common stock is nearly or exactly zero. So he would probably have agreed with most of what I've said."

and

"Even after MSFT and GOOG's "home run", they haven't established a dividend schedule that even begins to pay off their investors. GOOG pays nothing. MSFT pays next to nothing. It seems unlikely either ever will...
The only way to have profited on those stocks was to sell and leave someone else holding the non-dividend-paying bag."

The first of your quotes is rediculous. All common stocks are worth zero? Like I've said, owning a stock is owning a business. You are entitled to the assets and future earnings. You do not decide what is done with them, but if you do not trust the managers of the company to not misuse the assets and future earnings, then you should not invest in the stock in the first place. Saying Graham would agree that most stocks are worth zero is ludacris.

The second quote, you refer to google and microsoft as a "non-dividend-paying bag." Just because a company doesn't pay a dividend, for some reason you think its a worthless "bag." It doesn't matter that those two companies are two mega titans of technology with billions in assets and future earnings potential. And then you later say that Ben Graham is behind this thinking!?!?!

Those are my problems and why you're a moron. I'm done telling you that and I'm done defending myself against your crazy claims that Ben Graham would of agreed with everything wrong you just said even though we both know he never has and never would. He would of just shook his head at you and dismissed you as a dumb trader with dumb theories. And thats what I'm gonna finally do. Have a fun time trading you non-dividend-paying bag.

 

[The Big D]

Quote from Jesus:

Heres the problem that I have, you previously said two things that I disagree with. And for the most part these next two quotes are the reason why I responded to you. A lot of what you said I actually agree with.

Again, that's not me - it's Graham. The reason he values disbursements but not income or assets (except as they may eventually create disbursements) is that the security holders have no access to retained income or assets.

A simple example will illustrate his point. Say I have a machine that prints money (legally). It's already printed 1 million, and will print 1 million more a year for perpetuity. I decide to incorporate this business and structure the incorporation as follows: there is one preferred share and one common share. They're the same except the preferred share has 2 votes. I say up front that Printing Inc. does not and never will pay dividends as long as I have voting control. I then offer to sell you the common share. What's it worth?

If you say more than zero, please explain how this common share will be more useful to you as the holder than a blank piece of paper would be. I think we can assume that a blank piece of paper has a value of zero, so clearly any value that the common stock has must be because of some benefit it provides you which the blank paper does not.

 

[taowave]

I think you are a bit confused about how value invesors look at stocks..

For some reason you are fixated on a dividend discount model,while most value investors look at a discounted CASH FLOW model..

To imply that a stock does not have intrinsic value due to not paying a dividend is simply false..

Quote from The Big D:

No, I said they have an intrinsic value of zero. Intrinsic value is a term with a very specific definition, which has been posted twice now from two different sources and if you refuse to use it then I can only conclude you're either being intentionally obstructionist or have problems with reading comprehension.

Intrinsic value is THE underlying concept behind value investing. Until you do your reading and understand it, you can't participate in a conversation about value investing.

 

[taowave]

Big D,
Oneil is a momentum player as opposed to a value investor.Notice that dividends/disbursements have nothing to do with valuation.Dividends have nothing to do with intrinsic value.

The value investor and the Momentum trader must make forcasts on future earnings as both models rely heavily on the "E".If you are buying high PE stocks with PEG's less than one and the company misses earnings or growth tails off,you will be hammered far worse than a value investor who buys with a "margin of safety"..

A value investor can NOT do with dividends what Oneil did with earnings...You dont seem to undersatnd fundamental analysis

Quote from The Big D:

The difference I've been getting at is the difference between earnings and disbursements/dividends. If the two were the same value investing would be a very different ball game.

Regardless of which you're looking at, the market tries to price in the future rather than the past. However, it's not very efficient at it. Classic examples of this inefficiency can be found in the O'Neil books, where he shows how a stock's earnings and earnings growth ramped up BEFORE the price moved much, thereby creating his buy signal.

Now O'Neil's methodology is trading rather than value investing since he gets paid by trying to sell at the top of the run-up, but he illustrates the point that the market isn't really that efficient at pricing in the future. A value investor could do the same thing with dividends that O'Neil did with earnings.

 

[The Big D]

Quote from taowave:

Dividends have nothing to do with intrinsic value.

Just another guy who has failed to read and understand the provided links and references.

This is getting very tedious and has no value.

 

[taowave]

That is a ridiculous theoretical example which has nothing to do with the merits of a dividend discount model vs disounted cash flow..

Are you actually trying to say the owner of the preferred shares wouldnt buy back the common??

Whats your point??

Quote from The Big D:

Again, that's not me - it's Graham. The reason he values disbursements but not income or assets (except as they may eventually create disbursements) is that the security holders have no access to retained income or assets.

A simple example will illustrate his point. Say I have a machine that prints money (legally). It's already printed 1 million, and will print 1 million more a year for perpetuity. I decide to incorporate this business and structure the incorporation as follows: there is one preferred share and one common share. They're the same except the preferred share has 2 votes. I say up front that Printing Inc. does not and never will pay dividends as long as I have voting control. I then offer to sell you the common share. What's it worth?

If you say more than zero, please explain how this common share will be more useful to you as the holder than a blank piece of paper would be. I think we can assume that a blank piece of paper has a value of zero, so clearly any value that the common stock has must be because of some benefit it provides you which the blank paper does not.

 

[makloda]

Quote from makloda:

* other managers of interest: Daniel Loeb, David Einhorn, Seth Klarman

http://www.hedgefundletters.com/category/baupost-group/

Klarman's letters, from 1995. An interesting read.

 

[The Big D]

Quote from taowave:

That is a ridiculous theoretical example which has nothing to do with the merits of a dividend discount model vs disounted cash flow..

Are you actually trying to say the owner of the preferred shares wouldnt buy back the common??

Whats your point??

Why would he buy back the common? He never intends to pay a dividend. If he wants money out of the company, he'll make himself CEO and pay himself a salary or otherwise use his voting control to extract the $$$. There's way too many legal (or at least not sufficiently illegal) ways to do that as it now stands.

The point of this example is that, while simplified, it has EXACTLY the same features as many modern common stock situations. The perfect analog would be GOOG:

- Prefered stock with extra votes held by the founders prevents the plebes from ever getting voting control... CHECK.

- No dividends ever paid... CHECK.

- No plans to ever pay a dividend... CHECK.

- Founders being paid salary so they can extract money from the firm even as the common shareholders get nothing... CHECK.

Point being, my example is just what goes on at numerous nominally "public" companies on a daily basis. It's somewhat simplified in terms of what the company's operations are and that there are only two shares, but the key features that make the common share worthless were not simplified and apply directly to numerous real-world securities.

 

[Jesus]

Toawave,

Your efforts to try to pursuade big D to believe the facts will turn out to be a waste of time. Big D is a closed minded short term trader who doesn't understand value investing or fundamental analysis or how and what it means to own stock in a company. Most short term traders don't understand this, but the difference in them and him is that Big D thinks he understands investing. I have seen this before on this site plenty. He will cling to his incorrect theories and will continue to misinterpret the facts and the teachings of great investors and pioneers in fundamental/value/stock investing. He will quote these men out of context and will misinterpret the quotes to fit his ideas.

So give up. You nor I do not need to make this guy open his eyes and realize the facts about investing. Let him just keep believing what he wants to and go on with your day.

 

[taowave]

GOOG is a terrible example...

By your definition it is worthless,yet MR market values it at $587.That is a very large discrepencie.How should I side with,the voice of 1 man or the voice of supply and demand?

Just out of curiousity,have you been short GOOG since $290,a somewhat conservative estimate of "intrinsic"?

Quote from The Big D:

Why would he buy back the common? He never intends to pay a dividend. If he wants money out of the company, he'll make himself CEO and pay himself a salary or otherwise use his voting control to extract the $$$. There's way too many legal (or at least not sufficiently illegal) ways to do that as it now stands.

The point of this example is that, while simplified, it has EXACTLY the same features as many modern common stock situations. The perfect analog would be GOOG:

- Prefered stock with extra votes held by the founders prevents the plebes from ever getting voting control... CHECK.

- No dividends ever paid... CHECK.

- No plans to ever pay a dividend... CHECK.

- Founders being paid salary so they can extract money from the firm even as the common shareholders get nothing... CHECK.

Point being, my example is just what goes on at numerous nominally "public" companies on a daily basis. It's somewhat simplified in terms of what the company's operations are and that there are only two shares, but the key features that make the common share worthless were not simplified and apply directly to numerous real-world securities.