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  • Dividends And 'The Magic Pants' [View article]
    You would lose all your money if you had reinvested all of your dividends too :)
    Mar 19 01:32 PM | Likes Like |Link to Comment
  • Dividends And 'The Magic Pants' [View article]

    I'm no expert and I don't speak for Larry. But it seems that you might be mischaracterising his position. Let me try to address two of your points, and maybe you will see that you are not in such great opposition to Larry after all (?!)

    "your opponents believe that a dividend paying stock will attract more buyer interest on the market. the fact that economic theory does not include this type of behavior within its "rational" model is a commentary on the limits of the explanatory power of the economic theory."

    This is a valid observation (that dividends attract buyer interest), but it might not be relevant, if it is already built into the price. What Larry is saying is that value metrics like P/E or P/B, for whatever reason, are not fully priced, and thus represent a persistent value premium that can be exploited. When Larry states that dividends have less explanatory power, he means that screening for P/D is less effective than P/E or P/B, according to the evidence. So if the evidence does not support P/D as a value metric, then it doesn't deserve to be included in the theory (?!)

    "your argument assumes that the share price will always immediately reflect the change in the book value from the paying of the dividend. "

    To my understanding this is not what Larry is purporting. Larry never sought to equate "value" with short-term share price, it was just a simplifying assumption to show how the paying out of dividends might affect the future of the company. However, the LONG-TERM share price, according to the evidence, is predicated upon earnings (P/E) or book value (P/B), which in turn, will be affected by how much a company retains or pays out.
    Mar 19 11:33 AM | Likes Like |Link to Comment
  • Dividends And 'The Magic Pants' [View article]
    Mike (and others):

    There seems to be confusion about terminology here. When Larry uses the term "value" he is NOT describing the short-term market price.

    I agree Mike that people use different ways to "value" a company. But what Larry is saying is that the evidence shows that the best ways, in the long run, is to use metrics such as P/E, P/B and so forth...which many investors already do.
    Mar 19 10:38 AM | 1 Like Like |Link to Comment
  • Dividends And 'The Magic Pants' [View article]
    Ruralist...taking your assumption that stocks trade at earnings ratio...

    Company A earns $2. $1 is paid out in dividends. The other $1 is re-invested into the company. This re-invested $1 would normally be expected to increase the future earnings (decreasing forward P/E) of the company, and the stock price will rise as a result (since we are assuming both stocks trade at a constant P/E ratio).

    Company B earns $2. None is paid out in dividends, and $2 is re-invested. This means that the company is expected to increase its earnings faster than company A. The forward P/E decreases more, and the stock price would therefore rise more than company A assuming a constant P/E ratio.

    The maths doesn't change. Both investors are in the same boat. You can't expect a company to pay out dividends AND have the same "value" (however you wish to define it) before and after paying out the dividend. In your example, investor A surprisingly has $10000 more money than investor B, due entirely to the dividend. Doesn't that sound surprising to you?
    Mar 19 10:17 AM | 1 Like Like |Link to Comment
  • Play It Safe: Don't Buy And Don't Short Natural Gas At The Current Levels [View article]
    VD...first of all thanks for all your great work. I know you're probably very busy and don't have time to read all your PM's, so I might try my luck here. Are you still short on CAK? I'm getting killed on the position... :( Thanks for your expert insight.
    Mar 19 09:49 AM | Likes Like |Link to Comment
  • Dividends And 'The Magic Pants' [View article]
    This comment from Larry helped me understand the value premium, would you agree or disagree?

    "First, there are two "stories" or explanations for the value premium. Some believe that it is a risk story. Meaning value stocks are riskier. There are many papers showing risk based explanations for the value premium. If that is the case then the information is in the price. You get higher expected returns for taking more risk--no different than with stocks vs tbills. Others believe it's a behavioral mistake, leading to mispricing. Some explanations in the literature include investors have preference for "lottery tickets", stocks with positive skewness and excess kurtosis---average poor performance but chance to hit home run. So IPOS and small GROWTH stocks and penny stocks are among them. Small growth stocks in generally due so poorly that they are called the "black hole" in finance, they are anomaly for the EMH. There are other explanations including investors persistently overestimate ability of growth stocks to grow, and underestimate the strong tendency for abnormal earnings (both good and bad) to revert to the mean. "
    Mar 19 01:16 AM | Likes Like |Link to Comment
  • Dividends And 'The Magic Pants' [View article]
    Can one not subscribe to more than one school of thought to arrive at one's personal world view? They are not, as far as I can tell, contradictory (as I tried to explain above).
    Mar 18 11:02 PM | Likes Like |Link to Comment
  • The Quest For Yield [View article]
    On the stockchart "this may look worse than it is owing to the dividends received"....doesn't stockchart take into account the dividend paid out, and reduce the share price of previous dates accordingly?

    For example, according to yahoo finance, the real share price of HVPW was in the 25's in March, but since several dividends had been paid out since, the adjusted share price is in the 23's (as in the chart). So stockchart actually shows you what the total return would have been like (assuming no dividends paid out). It doesn't look worse than it is, no ex-date drops are actually visible on the chart.

    Am I misunderstanding something or is this a rookie mistake by Mr Fry?
    Mar 18 11:00 PM | Likes Like |Link to Comment
  • Dividends And 'The Magic Pants' [View article]
    Ptstanford...I think you have some misunderstanding.

    Larry has stated repeatedly does that he believes in buying value (low P/E, P/B, etc) companies... (not individually but as a class). So his "sector" funds are value funds...which is not really the most common definition of sector (e.g. financials, industrials...which he has not recommended). He has also explained in other articles where he thinks the value premium arises from, and why value might not be fully priced into the market.

    At least that's how I see it. I welcome your viewpoint.
    Mar 18 10:54 PM | Likes Like |Link to Comment
  • Dividends And 'The Magic Pants' [View article]
    PT...the models predict long-term price movements, not short-term, daily fluctuations.

    The stock price of the company will be adjusted downwards on the ex-date of the special dividend, to reflect its lower book value. But daily fluctuations may obscure this.

    But in the long run, paying out dividends will affect (decrease) a company's intrinsic book value, which will affect its P/B ratio, which will affect its expected returns (as the studies show)...that's all Larry is saying. So the investor gains the dividend but sacrifices on potential future growth.

    Note that I'm NOT saying that dividends are bad (and neither is Larry)'s just that you have to accept that the company has less cash, so would be less "valuable" - objectively speaking - in the long run. But you gain cash in your pocket instead. Whether or not you are able to put the cash to better use than the management of the company, is not relevant to this discussion. I'm just trying to flesh out the distinction between long-term/short-term and what the models are purporting to do (as I understand them).
    Mar 18 10:49 PM | 1 Like Like |Link to Comment
  • Dividends And 'The Magic Pants' [View article]

    Thanks for your reply. I'm trying to understand your point of view. It's true that in the real world, all other things cannot be equal. I agree with you on here, no arguments. Taking advantage of Mr Market's volatility (buy low, sell high) is a great way to invest.

    But do we know what a "low" and "high" price to pay for a stock is if the stock price is subjective? Are you saying that there's no point whatsoever in trying to "value" stocks at all? What metrics do you use? Surely you have some system to help you decide when to buy and sell a particular stock? (e.g. Would you use P/E ratios? According to your view, one could also state that P/E ratios are useless because stock prices are random, emotional, and independent of P/E ratios...)

    All Larry is trying to do is to quantify these metrics. To study these, we must make some assumptions (e.g. all other things being equal). This is basic science. When statistical studies are done, they will try to factor out confounding factors so that only one variable is changing at a time. For example, according to Larry, the evidence shows that company with low P/E ratios have better expected returns than companies with high P/E ratios. Wouldn't you agree with this concept? (assuming you do use P/E ratios to "values" companies?)

    Similarly, the evidence states that companies with a low P/B value would be expected to do better than companies with a high P/B value. Wouldn't that be reasonable too?

    Note that I'm not disagreeing with you that in the short run, prices are very random. I agree. But in the long run, the metrics do matter, and companies can be "valued".
    Mar 18 10:34 PM | 1 Like Like |Link to Comment
  • Dividends And 'The Magic Pants' [View article]
    Thanks AP. I agree in as much as management has a major effect on how much return they can generate on their equity. But that's just the agency risk that Larry mentioned in his article.

    Another interesting discussion point:
    "Those of us who collect dividends do so because we understand that the most important "factor" in achieving long-term winning results is the lowering of risk of loss of capital. Dividends, and _only_ dividends allow us to do that without depending on anyone telling us what they _think_ the company is worth."

    Can this be substantiated? While I agree dividends provides lower risk inasmuch as you are receiving a return of and on capital, remember that you will be selling shares during both bull and bear markets as well if you wanted to create homemade dividends. Doesn't that equal out in the long run?
    Mar 18 01:31 PM | Likes Like |Link to Comment
  • Dividends And 'The Magic Pants' [View article]
    Hilo, can you clarify further what you mean by this statement:

    "What's relevant is that at any time the price of a stock is determined _entirely_, _solely_, _only_ by what someone is willing to pay for it. "

    Are you saying that stock prices are largely subjective then? So let's take that "someone" to be you. Would *you* pay more or less for a company that had more cash, or less cash, all other things being equal?

    If you would pay more for a company with more cash (as any rational person would), you are indirectly agreeing with Larry that paying out cash lowers the "value" (however you wish to define it) of the company.

    Larry has asked this question before but I haven't seen a satisfactory answer to that question.
    Mar 18 12:41 PM | 2 Likes Like |Link to Comment
  • Dividends And 'The Magic Pants' [View article]
    Larry has several valuation metrics, "such as low prices to value metrics (such as p/b, p/e, p/cf, p/s) and profitability metrics (such as ROE, or ROA)"

    It seems clear to me, at least the way that Larry explained it, how a dividend paid out reduces both future earnings as well book value. Besides earning 0.1% interest, there are other ways to improve shareholder return if the dividend is not paid "Now, this doesn't even consider the lost interest income the company would have earned had it not paid out the dividend and invested the cash in bonds. Nor does it consider the alternative of using the cash to pay off debt, which would have increased earnings even further by reducing interest expense. Nor does it consider that if the company had kept the cash and invested it, and been able to earn its cost of capital, the value added would have been much greater. "
    Mar 18 11:11 AM | 1 Like Like |Link to Comment
  • Dividends And 'The Magic Pants' [View article]
    wait...what. theres no need to guess. Larry explicity stated that he is not against dividends.
    Mar 18 10:25 AM | 3 Likes Like |Link to Comment