Smarty_Pants

Towards a New Valuation Model

"The efficient-market hypothesis states that it is impossible to consistently outperform the market by using any information that the market already knows, except through luck." - Wikipedia

The above statement reflects one of the inherent goals of money managers, to 'outperform the market'. Sadly, this is a goal which only makes sense in a world where capital gains = winning.

Way 'back in the day' people used to invest with the intent to earn dividends on the investment (ie. use savings to produce long term income). This method does not rely on ever increasing prices for getting ahead.

So long as the company is consistently profitable and the dividend doesn't fall, the model works ad infinitum. In fact, lower stock prices provide larger returns, all other things remaining equal, so periodic purchases (ala dollar cost averaging) will tend to increase the yield over time for modest variations in prices.

The biggest problem "investors" face is that they have forgotten that you can invest to earn dividends and believe that only captial gains matter.

When prices decline to the point where dividends again return 5% to 7% annually from a stable and profitable business then money managers will have a much better time satisfying their clients.