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plurpy

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  • Warren Buffett's Portfolios Don't Reward Investors For The Added Risks [View article]
    One of the most epically stupid articles I have ever read. Your comparison charts are flawed. You show the huge gain 2000-2003, then restart the chart at the beginning of 2004 putting the S&P back to even. You effectively "grossed up the loss" on the S&P to make your point.
    Lets make this simple. Go to yahoo finance, plug in BRK for the longest period for which they have data (1996 to present) against the S&P 500. BRK has over a 450% rate of return (without a dividend) and the S&P has a 170% (which would be somewhat higher if you added the dividend). But do you think that 280% mind boggling difference is luck and dividends? And remember we need to discount and ignore the BRK gains before 1996, where Buffet was so far ahead it would be embarrassing to show the S&P on the same page.
    As a professional portfolio manager, I measure BRK ownership as a test of personality of other advisors. Those who do not use BRK in a professionally created portfolio are either a) foolish - they ignore the facts or b) arrogant enough to believe they can beat Warren. I am neither, therefor own BRK for every client (though I agree that it is a higher risk asset so it cannot be as big as broad index funds). Which are you?
    Mar 6, 2014. 09:42 AM | 14 Likes Like |Link to Comment
  • Warren Buffett Is Wrong About Dividends [View article]
    A well constructed portfolio will shed cash payments from stock and bonds of about 2%. The other 2 to 3% of capital (for living expenses) is from the sale of stock, generally from a broad allocation sale to a slightly higher cash position, same bonds, slightly lower stock.
    I do not believe the choice is as critical as it is often made out to be. The portfolio's dividend yield is little effected by this type of rebalancing. The problem facing some folks is a lack of diversity from which to sell….hence the debate. If they had 20 or so stocks and etf funds to choose from the questions becomes less difficult on what to sell. The answer is a little of everything.

    For what it is worth! Thanks for the responses.
    Feb 10, 2014. 04:30 PM | Likes Like |Link to Comment
  • Warren Buffett Is Wrong About Dividends [View article]
    Not at all. What I am saying is that the investor will reap from the dividend in the manner it is reinvested. If it is left in cash, it gains nothing. If it is invested in the stock of the company (Div Reinvested, "DRIP") it gains the same as the stock. If it is used to buy another company, it may grow faster.
    Too many investors believe that paying or not paying a dividend alters the quality of the stock. That is not true. Apple pays a dividend and it's price is all over the map, a utility pays one and it moves glacially. This difference (in risk) is found only by looking at the capital choices facing the company. If too much capital flows in and the investment opportunities are not sufficient to absorb the cash, a dividend is paid, period. In Apple's case, buying stock was correctly perceived to be riskier to the shareholder than paying out some of the the earnings as they already had too much cash. Since they were running out of ides on how to spend it they decided to leave the choice to the investor. The cash that was paid at $700 allowed the investor to wait until $390 to buy. Or not. In the utility's case, the growth is highly regulated leading to less opportunities to do something with the cash. But to say that there is not a choice is the problem with automatically doing dividend reinvestment or to assume that dividend payments are better or worse. Dividend payments are CHOICES which also give us CHOICES!
    My firm does not automatically DRIP a dividend payer. As the BOD has already considered the options and decided that retaining the capital or buying back stock was insufficient alone to deal with retained earrings, we are likely not in a position to overrule them. Neither is the average investor.
    To automatically DRIP a stock is to fail to understand that the choice to retain or buy back has already been considered and the dividend payment chosen as better choice. To override that choice (unless the board is ALSO buying back stock) is something most investors are probably unqualified to make. My firm rarely does DR, as i believe (except for broad etfs) it is a mistake. Dividends are paid to cash, and they reallocated based on opportunities and risk for the client. If the best opportunity is the company that paid it, we will make a calculated priced decision, not a passive override.
    Feb 8, 2014. 12:43 PM | Likes Like |Link to Comment
  • Warren Buffett Is Wrong About Dividends [View article]
    I believe you are looking at the problem improperly. Paying a dividend is a capital allocation choice made by a company. If they believe they can reinvest the cash (buy back stock, R&D, acquisitions) they will retain the earnings and NOT pay a dividend. If they can't, they pay out the cash and allow the investor to do so. But to maintain that a dividend somehow alters the amount of money that is made in a portfolio is madness. Whether it is dripped, paid in cash, or retained by the company, it went somewhere on the balance sheet of the owner of the stock. You did not get something for nothing if you dripped it, you will do better or worse if you invest it in something else, and you did not lose value if you spent it as retirement income. You got the value of what you bought.
    Buffett (correctly) believes he can reinvest the cash better than the owner of the stock, so he correctly retains those earnings. GE knows they cannot, so they pay a dividend. When it became apparent Apple had run out of ways of effectively spending their ballooning cash hoard, they paid a dividend.
    The share price drops by the amount on the ex div date not because of an "effect that goes away over time" but because that precise share of capital left the company and now resides on the balance sheet of the owner of the stock in cash.
    Then the company earns more money by doing more work and the price per share continues to rise over time. The rise in price after the Ex div date is due to that extra work - not magic.
    Look at it this way. If a company has a return on equity of 10%, and its stock pays a dividend in cash of 4%, it instantly goes down to 96% of the original price at the EDD. If the dividend is kept in cash, the return on capital of the 4% is zero. If it is used to buy back the same stock, it is 10%. If it is used to but a stock that has a ROIC of 20%, the investor took advantage of the board's decision to leave it up to them to reinvest the proceeds.
    Dividends are not good, bad, magic, stupid, or wonderful. They are merely a choice that reflects the reinvestment opportunities facing the management of the company. If those opportunities seem uncertain or meager, a cash dividend is best. If you are Warren Buffett, you know that giving the money to the investor is almost always a lower ROIC outcome.

    To believe a dividend paying stock is superior to a non-dividend payer is to not acknowledge why the choice is made in the first place. To believe the dividend reinvestment is superior to getting the cash is to not understand the choice created by the cash. To compare the income needed to live on in retirement created by a portfolio as being different whether it is from a stock sale or a dividend payment is to fail to acknowledge that it is the same thing on the balance sheet. Eventually capital will need to leave an asset and become an expense unless you have other income to live on.
    Feb 6, 2014. 09:14 PM | 1 Like Like |Link to Comment
  • My bid for Berkshire (BRK.A, BRK.B) would be about 20% lower than the current price, says Michael Price in an outstanding presentation on the process of value investing. GE has 1K tax lawyers figuring out taxes in 100 different countries, says Price, but Berkshire (also operating in 100 countries) has 20 people in the entire home office ... "I don't know how that works?" Unlike a lot of large companies, Berkshire gives little light on its pension liabilities. "There are lots of questions that will come up in the next 5 years there." The video also sheds a good deal more color on two Price longs: Hospira (HSP) and Hess (HES). [View news story]
    High quality assets command a premium, period. A BMW, a house in a great location, and Berkshire. Picking out the preeminent investment of the last 50 years and calling it overpriced is absurd. Professional money managers (including me) avoid BRKA/B at their peril - which is why it comprises nearly 10% of all portfolios, and sometimes I wonder why it is that low.
    Telling people that value is based on metrics that apply to all things evenly is like saying a MacBook is the same computer as a Lenova and should sell for the same price. Or that you should wait for a Mac to come down to the Lenova price. That is an equally stupid proposition as this one by Mr. Price. Plan to go without a computer for a long time, or never own BRKA/B as it never gets to be a "great" value measure purely based on current price not future outcome and a proven ability to exceed expectations. For 50 years. Good luck with the pullback.
    Will Berkshire come down in price? Maybe, but I doubt it will be because of a misstep but rather a larger swoon of the entire market.
    Jun 16, 2013. 01:07 PM | Likes Like |Link to Comment
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