dividend investing

There are a lot people who think that investing for dividends is great. They work hard, very hard, to accumulate the investment corpus enough for them to live on dividends for rest of their life. 

There’re at least two problems with it. The first is that dividends are just one of the components of the total return. The other, often the major portion, is capital gains. 

Generally, dividend paying firms do not have much growth left in them; and high-growth firms generally do not pay out any dividends because all internal profits are ploughed back into the business to generate growth. For high growth firms, increase in market price reflects capital gains which will be quite high too.

So this obsession with dividends is laughable. More so because even for people who need cash, they can sell some portion of their portfolio as capital gains. There may be times when market price may not be the best to sell, but investing in stocks is that game. For fixed income, it’s better to stick to fixed currency investments.

The second is that considering dividend yield based on cost (past purchases) isn't a great idea. It's the opportunity cost on current market price what matters. 

There’s another problem too. Somehow these people like to grind all their life only to live on a teeny portion of their wealth; dividends. They’ll be glad to leave their wealth for someone else to enjoy. Freakish, perverse, or masochist, how do we define them?

Try telling this to dividend buyers...

the twenty percent return strategy

The (so-called) value investors have dug a hole for themselves when they talk about margin of safety and bash (higher) discount rate in dealing with risk in cash flows.

They like to discount cash flows at 10%, bring down the present value by 40% as margin of safety, and then expect the stock to give them 20% return.

In fact, I have seen some of them discount earnings, rather than cash flows.

They also have the habit of beating round the bush so much. Can't put across their point without some bullshitting. 

not investing

What is value investing? It means nothing, or nobody knows what it means. In fact, it is nonsense. 

If you acknowledge value investing, well... If you criticize value investing, well… Heck, if you write about value investing, well... People think that low PE/PB stocks are value investing. It’s fool’s paradise to assume that. 

Academicians come out with stories that bring down the very premise of value investing. And the self-proclaimed value investors have their stories that always uphold their virtues. The truth is that both stories have a lot to catch up. 

Because, there’s no such thing as value investing. The definition of investing was laid down by the great BG long back. It doesn’t have value or growth attributed to it. There’re 3 key components to investing: Thorough analysis, safety of principal, and expectation of adequate return. So it’s either investing, or it isn’t. 

Stocks represent businesses behind them. To be a good investor, you need to understand the business first. You need to know the difference between price and intrinsic value. 

Price changes all the time, and therefore the multiples change too. Because prices change to weird levels, and thus create a wide enough gap between price and value, there’s scope for investing. If this ain’t so, it ain’t investing: It is something else: can be speculation or trading, or anything…

Academicians have a constant itch to talk and write, and even concoct theories. They come up with stories about almost anything, and put up for display. Their job is done.  

Finance is commonsense, in that there’s not much difference between personal finance and corporate finance. Coming out with Greek letters and complex theories don’t make good financial decisions. They make good looking books. Good financial decisions make good financial decisions. 

A business is formed to make money. If it’s viable, it’ll make money. As it makes money, it grows. And it doesn’t happen over a quarter, or a year. It takes time; it’s a long process. In the meantime, people price it based on their theories. Most often, these theories are crap; therefore, investors get opportunities to invest, and make money. 

Investing is neither value investing, nor growth investing, nor momentum investing, or any other. Investing is just investing. 

CAPM is crap; and so is the margin of safety in the sense that some people view it. Cost of capital used in finance to discount cash flows is also stupid because that is supposed to be a theoretical business valuation. What investors want is make money, not theory; and for that their own opportunity cost is a better discount rate. 

Starting a new business is a waiting game. Making it expand, and grow its cash flows is a waiting game. Making business profits is a waiting game. And for the same reason, investing is a waiting game. 

Cash flows are powerful indicators. Focus on them. It is very much possible to earn excess returns (beat the index) if you know how to estimate cash flows, know your opportunity cost, and you’ve the behavioral acumen to play the waiting game. If not, no worries; invest in the index. 

Individual investors are neither answerable to the marginal investors of the business, nor to the academic finance. 

Don’t listen to self-proclaimed value investors; and don’t listen to the academicians. Most people, most of the time are better off not listening to other people’s opinions.