User 283977

Reviewing Fortune Magazine's 10 Best Stocks for 2008

Based on the way the article starts out, you might get the mistaken impression that the author is hawking his predictive accuracy. However, it turns out that the author is quite aware of the speculative nature of long term stock/ market predictions and clearly points out that investors should ignore highly speculative predictions made for the purpose of selling magazines and attracting advertisers. He concludes with the advice that investors will do better buying quality stocks on sale and dumping them as company and market conditions change. Good advice.

How Stocks Are Like Bonds

"For one thing, it's the best argument I've ever seen in favour of companies retaining earnings rather than paying them out as dividends"

In companies that offer dividends, senior management is focused on operational efficiencies and returns relative to their competition. Senior management does not manage to their stock price, they manage to their earnings. In that situation, the stock price takes care of itself. In companies that offer no dividends when they could offer dividends, senior managements attention is often focused on stock price. The danger with this approach is that senior management looses sight of their companies business fundamentals in favour of buying/ selling and deal making. Something that could be called a Gekko (from the movie Wall Street) approach.

Buffett's Berkshire Hathaway is a holding company that basically provides capital infusions in exchange for stock sold at a discount. Berkshire Hathaway's risk potential is a lot lower than an individual investors risk potential because they are buying at a discounted price. If things start to go wrong, they can get out at a much lower price than you can while still earning a profit. Berkshire Hathaway's approach, the Gekko approach, is not about building and selling products and services, its about the creation/ capture of wealth through speculative trading/ deals.

I argue that retaining earnings rather than paying them out as dividends would encourage a Gekko approach to company management, and such an approach would wildly increase the speculative potential of stock investing for the average investor. We have just had a spectacular example of the dangers of such an undisciplined investment approach. If you want to speculate, buy Berkshire Hathaway. For companies that provide real products and services,
initiate requirements where dividend returns on the basis of earned income are a mandatory requirement. This should better orient senior management to concentrate on business fundamentals as opposed to stock prices. It would also reduce situations where companies are sitting on billions of dollars of stock owners money with out paying them any return on THEIR money. If a company needs capitalization for a deal, sell more stock.

I don't see a big difference between people that sell Brooklyn bridges and people that sell derivative products with no way of determining true valuation without resorting to what some unregulated rating company, with suspect motivation says they are worth. Society provides protection against Brooklyn bridge con men, but seems willing to accept investment bankers selling hot air who's valuation is based on fantasy. Unregulated security markets operating under the mantra of free markets appears to be more damaging to society than Brooklyn bridge con met, yet we legally pursue Brooklyn bridge men while letting Wall Streets pirates get away with it.