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David Jackson

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  • How Yield on Cost Works [View article]
    David, one problem with yield on cost (as you've defined it) is that you're using nominal money, and therefore comparing apples and oranges - yield in today's prices versus cost at earlier prices. That's why, as you say, yield on cost and current yield diverge over time. To measure yield on cost in real terms (as opposed to nominal terms), you should adjust the purchase price of the stock for inflation, then you can see the true performance.

    To give an analogy: Imagine an aristocratic family purchased an estate in 1700 for $400, a massive sum at the time. Generations later, the heirs rent out the estate for $40,000 per year, and want to assess the profitability of purchasing estates for future generations.

    The yield on (nominal) cost -- 1000x the original price! -- would tell them little about the success of the investment, because $400 was a princely sum at the time, but is a tiny sum for a real estate purchase today.

    But in inflation adjusted terms, that $400 might now be equivalent to $4 million (I'm making up the numbers; please excuse my ignorance about inflation data). In which case, the yield on real cost is 10% ($40,000 / $4,000,000).

    Your use of nominal yield on nominal cost highlights the advantage of real assets (companies, real estate etc) which generate income over nominal bonds (ie. not inflation-adjusted bonds). With bonds, you get the principle back in *nominal* terms, and it isn't adjusted for inflation. In contrast, stocks are shares in a company, which is a real asset and should grow in line with inflation (because companies raise prices in line with inflation). So in prolonged periods of high inflation, you'd rather own dividend stocks than nominal bonds.

    But by using nominal money and not adjusting for the holding period, it doesn't help you assess your true investment performance, because the time period and inflation rate is a critical factor. Your yield on cost on a stock bought in 1969 will be phenomenal compared to that of a stock bought in 1990. But if you adjust for inflation, you might find the numbers are very different.
    Oct 14 10:32 AM | 7 Likes Like |Link to Comment
  • Microsoft's Strategy: Borrow Cheap Money, Raise Dividend [View article]
    There are also tax issues: MSFT had the cash outside the U.S. to pay the dividend without the bond issue, but it didn't want to repatriate it for tax reasons.
    Oct 5 05:55 AM | 7 Likes Like |Link to Comment
  • Seeking Alpha: Interesting Sentiment Indicator [View article]
    V. thought provoking article, Jeff. (And thank you for your kind comments about the work we've put in to grow the site.)

    We've recently been discussing the embedded value in contributors' articles, and how we could share that information in a more thorough way.

    The first issue is: What is the value of SA contributors' sentiment? There are two possibilities:
    (1) Like other sentiment indicators such as Barron's money managers' poll, it's a contrarian indicator (if most writers are bearish, there's still money sitting on the side lines).

    (2) Our contributor base represents a small minority of money managers with greater ability to predict correctly -- in which case the sentiment is an accurate (not inverse) indicator.

    Jeanne Klempner, one of our editors, makes a good point: once we've extracted the sentiment data, just test it for correlation against the market, and we'll find out whether it's valuable and in what direction.

    The second issue is assessing the sentiment of an article. Some articles are explicitly bullish or bearish, but many articles aren't: they discuss individual stocks or some aspect of a company or the market, without coming to a "bullish" or "bearish" conclusion. We need to be careful about assigning sentiment to contributors inaccurately.

    I'd be interested to hear more thoughts on this issue.
    May 13 06:27 AM | 7 Likes Like |Link to Comment
  • In Memory of Greg Newton [View article]
    This is tragic news. Many of us were fans of Greg and his writing, and will miss him.
    Apr 3 08:40 AM | 7 Likes Like |Link to Comment
  • Short Sellers And Seeking Alpha [View article]
    Chipster71, here's the complete feed of short ideas:
    Aug 1 10:58 AM | 6 Likes Like |Link to Comment
  • In the two decades through December, the average return of all investors in U.S. stock mutual funds was an annualized 4.25% vs 8.2% for the S&P 500. That translates into a difference of $25,467 for an investment of $10,000. "The dismal truth is that over the long run, the average person is a woeful investor," writes the NYT's Jeff Sommer. [View news story]
    johnbee, the question for most investors is simply whether they would be better off buying and holding an S&P500 index fund, such as (SPY) or (IVV) or even better (RSP). If you'd have done that, you'd have got the performance described in the article without having to do the things you described, such as cherry pick stocks, trade, get into tech stocks early or invest in small caps or venture capital.

    New Low Observer, you're right that S&P's track record in choosing which stocks to add to the S&P500 index hasn't been stellar, particularly in the late 1990s. And yet, and yet... simply buying and holding SPY or a Vanguard S&P500 index mutual fund would have resulted in far better performance for most people than what they actually did.
    Mar 10 12:54 PM | 6 Likes Like |Link to Comment
  • New Highs, New Lows, Yield Greed [View article]
    Davids (vk and fish) - thank you for your replies to my comment. You raise some key points. Perhaps this is a useful framework:

    David Merkel essentially places equity investors into two categories:

    1. Those who look to invest in "solid companies". (He's a savvy investor, so I assume he looks for great stocks, which isn't always the same as great companies due to valuation issues.)

    2. Those who select stocks on the basis of their dividend yield, which he calls "reaching for yield" or being "yield greedy". (sjspinali -- I don't think he meant the term pejoratively in a moral sense.)

    But there's a third category of investors which he doesn't mention: investors who look for solid companies, but also add the filter that those companies must pay dividends.

    There are three reasons this type of investor might insist on dividends:

    1. In Richard Shaw's words: "We do have a fundamental belief (actually absolute requirement) that our positions share profits with us in cash." Or in Chowder's words above: "If a company doesn't pay a dividend, they aren't supporting my objective."

    2. Dividends, and particularly rising dividends over time, are an excellent stock selection tool. In this respect, dividend growth investing is a sub-set of GARP (growth at a reasonable price) investing - you're looking for a combination of growth + value, which you find by looking at the projected dividend yield you'll receive in future, compared to your cost basis.

    3. Paying dividends might be a filter for shareholder friendly companies, and requiring dividends might be an effective filter to eliminate companies which either manipulate their reported numbers or, for example, make dilutive acquisitions and buybacks that destroy long term shareholder value.

    Dividend growth investing requires the combination of "solid companies" and dividend yield. It's a subset of GARP which also generates income for the investor and is an important behavioral filter for shareholder-friendly management. I sense that both of you and Chowder took issue with David Merkel's article because he tries to force dividend growth investors into the bucket of "reaching for yield" without caring about the "economic success of the company". But that's clearly not true of dividend growth investing.
    Jul 13 10:24 AM | 6 Likes Like |Link to Comment
  • Armour Residential: Don't Sell This Dividend King [View article]
    Two questions:

    1. "ARMOUR Residential is among the highest dividend yielders at a whopping 17%. The industry average is still only around 3%, making this REIT one to own." Surely an abnormally high yield is a red flag? See

    2. Your last line is unusually strong: "I urge investors to consider taking a position in ARMOUR now." Why then do you disclose that you don't own ARR or plan to own it?
    Jul 12 05:14 PM | 6 Likes Like |Link to Comment
  • The Why Behind The How: The Quality Of Comments On Seeking Alpha Articles [View instapost]
    James and everyone else here,

    Thanks for the great comments. We have internal debates about these issues, and the following point James made particularly resonated for me because it was a position I took for a while:

    "My personal recommendation is that SA give authors "right of first refusal" on all comments. I believe authors should be the first line of moderation. The interests of author's and SA are aligned in this regard. Authors know that encouraging lively debate will drive PVs. Overly censoring comments will tend to drive down PVs."

    I moved away from that position for two reasons:

    (1) Some authors rarely check the comments on their articles, so they can't be relied on to moderate comments. So we'd have to have a mixture of author-moderation and editor-moderation. But having a mixture is logistically complex, for example leading to cases where SA moderators "step on the toes" of authors who do moderate the comments on their articles.

    (2) Commenters care a lot about consistency and predictability. The most frequent complaint we get about comment moderation is that we're inconsistent -- "If you deleted my comment, why didn't you delete his?!!!" (This then leads to conspiracy theories that we delete comments of a particular political orientation, because many of the comments we have to delete are political slogan slinging that become abusive.) Allowing authors to delete comments would lead to massive inconsistency in the eyes of users, and I think that's a problem.

    Instead, we're thinking about something similar which could avoid these problems: Allow authors to nominate the best comments on their articles, and highlight those comments. This would be similar to the way the New York Times has a separate tab for NYT Picks - but instead of comments being picked by SA editors, they'd be picked by the article author. If the author didn't pick any comments, the tab wouldn't show.

    For the comments which the author picks, we wouldn't show replies - there would be a "replies" link below the comment which would skip you to the main tab to see the whole conversation.

    What do you think?
    Thanks again to everyone for your input and help on these issues,
    Apr 15 02:03 AM | 6 Likes Like |Link to Comment
  • Debating the merits of the eurobond are like debating the merits of perpetual motion, in that neither are going to happen, Mike Shedlock says. The real discussion should be how best to break up the eurozone.  [View news story]
    A European fiscal integration joke:

    Some years ago a small rural town in Italy twinned with a similar town in Greece.

    The Mayor of the Greek town visited the Italian town.
    When he saw the palatial mansion belonging to the Italian mayor he wondered how he could afford such a house.
    The Italian said; "You see that bridge over there? The EU gave us a grant to build a two-lane bridge, but by building a single lane bridge with traffic lights at either end this house could be built".

    The following year the Italian visited the Greek town.
    He was simply amazed at the Greek Mayor's house, gold taps, marble floors, it was marvelous. When he asked how this could be afforded the Greek said; "You see that bridge over there?"

    The Italian replied; "No."
    Nov 25 04:05 AM | 6 Likes Like |Link to Comment
  • QuickChat #199, August 31, 2011 [View instapost]
    FPA, you have a natural partnership opportunity with Aceheart - he identifies people who "need to be hit over the head", while you're offering to "give it" to me "right between the eyes."

    More seriously, you seem to be sensing a conspiracy that doesn't exist.

    My goal is to listen to ideas and engage in discussion so we can build the best possible website for investors. I don't have any problem reversing a decision we made if we realize it isn't right, and some of the comments here certainly raise some valid issues.

    I just hope I get through the process with all my body parts in tact :-)
    Sep 2 07:36 AM | 6 Likes Like |Link to Comment
  • QuickChat #199, August 31, 2011 [View instapost]

    Some contributors are far more active in writing comments than articles. And surely contributors who engage with the comments on their articles should be allowed to be rewarded for that by readers?
    Sep 2 07:21 AM | 6 Likes Like |Link to Comment
  • What the Thumbs Up with That? [View instapost]
    Hi DM,

    The issue of article quality has been a topic of intense interest recently within the SA team. Instead of replying now, I'm going to send Eli (our Editor in Chief) the link to your comment, so he can see it and (hopefully) leave his thoughts on this.

    Sep 1 07:48 PM | 6 Likes Like |Link to Comment
  • QuickChat #199, August 31, 2011 [View instapost]
    acehart and the QuickChatters (sounds like a band, no?),

    We made two changes to our comment system a short while back:

    1. Owners of instablogs (like QuickChat) can delete comments on their own instablog.

    2. Commenter leaderboards are determined by the number of "likes" received only on comments on SA articles. Previously, "likes" to comments on instablogs also counted.

    So when you don't see your aggregate score rise, it's probably due to the fact that the "likes" you are getting are to your comments on an instablog (such as this QuickChat).

    The reasoning behind the changes was as follows.

    - Comments on instablogs can be different in nature than comments on articles. For example, QuickChat is more like a discussion board than a set of responses to an article. So having a single rating system mixes apples and oranges.
    - The comment leaderboards are to help readers know which commenters on SA articles are most helpful to other SA readers. But by counting likes to instablog comments, someone could become a top commenter without ever having contact with the wider SA readership by leaving comments on articles.
    - If we allowed instablog owners to delete comments while counting instablog "likes" to the total commenter scores, we'd be empowering instablog owners to manipulate the commenter rankings. ("How can I rank if you keep deleting my comments?")
    - Instablogs like QuickChat are like a family, and a reference from a family member should count for less than a reference from someone else.
    - Members of tight-knit communities like QuickChat want to show appreciation for each other more so than in less tight-knit communities on articles, and that skews the comment rankings towards members of QuickChat and other mini-communities.

    So why did we leave the "like" button on comments on instablogs? Because it's still valuable to show a commenter and other readers whether you liked their comment, even if the "like" doesn't count to their ranking.

    Sep 1 09:10 AM | 6 Likes Like |Link to Comment
  • Buying Equities: Rethinking the ETF Frenzy [View article]

    1. Why would you compare a collection of large cap, mid cap and small cap mutual funds to a large cap index -- the S&P 500? You need to compare each fund to its correct benchmark index. So, for example, if you are evaluating a small cap mutual fund, compare its performance to the S&P small cap 600 index or the Russell 2000 index. Note also that you were evaluating the performance of domestic growth funds, so you should have been comparing them to the relevant growth index for their market cap.

    2. Looking at the past 3 year performance of the mutual funds available in 2007 fails to adjust for survivorship bias. Mutual fund companies shut down or merge badly performing funds, so examining the performance of the survivors in 2007 fails to take account of those that were shut down because of their lousy performance. You'd need to look at all the funds in 2007 and see how they had performed vs. the indexes by 2010. You'd find that many of them no longer existed.

    3. You're right to point out that ETFs are weaker alternatives when they have high expense ratios and there's a problem with the index they track. Single country fund ETFs, such as the Brazil and India funds, have relatively high expense ratios, and I can well imagine that there may be serious problems with the index of everything traded on the Chinese exchanges.

    4. For most investors, the key issue isn't whether some mutual funds outperform their indexes each year. It's whether you as an investor can identify those funds in advance. If, on average, 20% of mutual funds outperform their indexes, but that 20% is basically random, and over longer periods (say 10 years) almost no mutual funds outperform their indexes, then it's extremely difficult for an investor to do best by picking mutual funds.

    Much of the data on these issues is in the ETF Investment Guide - one page summary here:
    Dec 29 02:01 PM | 6 Likes Like |Link to Comment