Dow posts worst Opening Day in 8 years

Discussion in 'Anesthesiology' started by BLADEMDA, Jan 4, 2016.

  1. SDN is made possible through member donations, sponsorships, and our volunteers. Learn about SDN's nonprofit mission.
  1. facted

    facted ASA Member 7+ Year Member

    374
    150
    Dec 15, 2008
    NYC
    If you're doing your diversification based on time, then it's timing the market. Ie: your part cash, part stock at this time comment above. You imply changing your strategy and allocation based on time.
     
  2. SDN Members don't see this ad. About the ads.
  3. Mman

    Mman Senior Member 10+ Year Member

    3,713
    1,269
    Mar 22, 2005
    You should never have all your money in stocks. You should always have some allocation to bonds and cash. But just so we are clear on how bad a decision that would have been to be in stocks, if you had 100% of your money in stocks in May 2008, right before the crash, but didn't sell you'd be up 104% since then (6.2% annual return). Your money would have literally doubled in less than 10 years even if you had the worst timing ever for the 2008 crash. Think about that. And that's a strategy that only had money put in at the worst time and wasn't continuing to invest more money in as the market went way down. If you are investing into it all along on the way up, your returns were way better.
     
  4. DrCommonSense

    DrCommonSense

    1,499
    383
    Sep 20, 2016
    Texas
    Actually from 2000 to 2017, the SP500 is up annualized at a 4.8% rate with dividends reinvested. This is with an extreme increase in the last few years with very high valuations.

    I agree with the market timing thing but the conventional wisdom that "just put money in the market at ANY time" is concerning to me.

    We are using metrics from the US market over the last 100 years or so.

    How about the Japanese market? If you got in 1989, you'd still be at half today. Plenty of other markets throughout the world has been the same way.

    Just because the USA had a great run for the last 100 years doesn't mean it will be the same returns.

    America was the SUPERPOWER CREDITOR nation of the world that was UNTOUCHED by either WW1 and WW2 whereby it had basically a GREAT RUN that is likely unprecedented.

    In the last 17 years we had literally two crashes, which would have really hurt the portfolio of someone even with a 3% withdrawal rate if they continued to take out at the bottom.

    The markets are artificially inflated with ZIRP, QE and massive amounts of leverage that are UNPRECEDENTED in the history of the US market. We also have debt that is UNPRECEDENTED with huge liabilities at the local, state and federal levels.

    GDP growth is largely at ALL TIME LOWS despite all of this money printing and huge deficits. We have an aging population that will collapse the Medicare and SS system.

    We also have a Millenial generation that has a COLLEGE BUBBLE with >1.4 trillion in student loan debt whereby they can't buy homes easily after getting mostly worthless degrees. These millenials have significantly LOWER SALARIES than their parents after adjusting for inflation DESPITE huge college DEBTS.

    We also have ridiculous levels of leverage in the RA market considering the borrowing metrics compared to 30 years ago.

    Even Vanguard Boglehead's and Schiller are guess the market will increase approximately 4% on average over the next 10 years if we're lucky.

    http://nypost.com/2015/11/05/youre-probably-not-going-to-make-money-investing-in-the-next-10-years/

    For instance, in my trust, we have a specialized TIAA money market account that gives a PROMISED 4% per year on average. This has been in line with the SP500 for the last 17 years and will probably outperform it in the next 10 years.

    I believe in diversification of assets including REITS, International Index Funds, high paying money market accounts, Vanguard Total Stock Index (broader than SP500 with very low fees) and DRIP individual stocks like ATT.
     
    Last edited: Apr 25, 2017
  5. facted

    facted ASA Member 7+ Year Member

    374
    150
    Dec 15, 2008
    NYC
    He didn't say from 2000...he said from the day before the last crash, which included a market dip of over 50%!!!

    Cherry picking dates "from 2000, etc..." does no favors. Why not just pick 1995? Market from then to now is annualized at 9.4%

    The fact that you can always cherry pick the exact date to make your returns seem great or terrible is the exact reason you shouldn't time the market. You don't know when those peaks and valleys are. And even though Bogle knows a heck of a lot more about investing than I do, since the date that article was published, the market is up 12% annualized. Did you "reallocate" when you read the article in 2015?

    I do agree with you, though, that being diversified is essential.
     
  6. DrCommonSense

    DrCommonSense

    1,499
    383
    Sep 20, 2016
    Texas
    Claiming the market "always goes up" is always cherry picking. You are using the SP500 over the last 100 years in the USA only.

    How about adding in the Nikkei in Japan? Or Germany during the Wars? Or Egypt, Argentina, etc?

    I enjoy that people think they can just look at this stuff and be like "well in the past it did this, so its shown the market will always go up no matter valuations/debt/leverage/geopolitics/demographics/etc".

    Its like the magical SP500. Its a law of nature that it can only go up.

    This isn't to say Im not in the market and heavily in Index funds already but I still believe in diversification of multiple asset classes like I wrote about in the above post.
     
  7. Mman

    Mman Senior Member 10+ Year Member

    3,713
    1,269
    Mar 22, 2005
    Actually you picked the 2008 date, not me. I merely provided the data.

    Also, if you care to talk about the bad run in Japan you should at least also point out the decade long monster run up they had prior to that which puts anything the US market has done to shame. Nikkei still had something like a 5-6% return per year from 1985-2015. Cherry picking from a peak in the past to show the worst performance possible isn't a scientifically valid way to predict future performance of something.
     
    facted likes this.
  8. Mman

    Mman Senior Member 10+ Year Member

    3,713
    1,269
    Mar 22, 2005
    There is a fundamental benefit to a capitalist society with the rule of courts and laws that allows businesses to prosper. It cannot be compared to dictatorships and socialists and whatever else you'd care to compare it with.
     
  9. DrCommonSense

    DrCommonSense

    1,499
    383
    Sep 20, 2016
    Texas
    Yeah how would that benefit the younger generation though?

    By the logic of "getting in at any time regardless of valuations", someone in Japan would've gotten totally crushed

    Japan's stock market peaked exactly 25 years ago

    Its been over thirty years and no one knows where its going to go in the future.

    Japan is dying demographically with an elderly population, so there is a real threat their GDP growth will be NIL over the next few decades, weighing down the Japanese market.

    USA has a "better demographic situation" but only in lower skilled and low educated people who are very indebted.

    I have attached a chart about the changes in income over the last 20 years on average throughout the USA.

    This is DESPITE massive QE, ZIRP and artificially low interest rates that prop up the market. Valuations are through the roof and projected GDP growth for the USA is anemic at best.

    So the "historical" conditions that led to such a stock runup were vastly different conditions than now. Whose to say we won't have a Nikkei situation in the next 30 years or only very little appreciation of the market?

    Maybe the best choice will be high paying dividend stocks that dont have quick growth such as ATT vs "growth" stocks/SP500.

    How can you be so confident the US won't fall into a Nikkei situation or worse in the future?
     

    Attached Files:

    • map.PNG
      map.PNG
      File size:
      832.8 KB
      Views:
      6
    Last edited: Apr 25, 2017
    epidural man likes this.
  10. dr doze

    dr doze To be able to forget means to sanity Lifetime Donor 10+ Year Member

    3,267
    993
    Dec 6, 2006
    You play the cards that you are dealt. It is reasonable to expect less from financial assets going forward. My 25 yo kid's IRA is in Vanguard 2060 retirement target fund which is 90/10 stock bond. 55/35 US/International. A 60 year old couple can recently expect have one of them live to 90. That is a 30 year horizon. Because they have low earning capacity going forward and what is expected is not necessarily what you get and because of sequence risk should have one helluva lot less in stocks in almost all cases.
     
  11. DrCommonSense

    DrCommonSense

    1,499
    383
    Sep 20, 2016
    Texas
    So Japan doesn't have capitalism or the rule of law?
     
  12. facted

    facted ASA Member 7+ Year Member

    374
    150
    Dec 15, 2008
    NYC
    Japan has a massive demographics issue and decreasing productivity. Those are not two issues which we have problems with. Japan's lost decades cab be attributed to a host of factors including a ridiculously high savers rate and lack of consumption which for better or worse are not exactly issues here.

    Our companies moving forward will continue to grow and do just fine. Will there be ups and downs? Of course. We may even have a few years of negative returns, but our 30 year outlook is just fine.
     
  13. Mman

    Mman Senior Member 10+ Year Member

    3,713
    1,269
    Mar 22, 2005
    I think it's called a straw man. You are the one that stated "getting in at any time regardless of valuations". I did not. I'm stating I'd still get in at these valuations. If our market has a run up like Japan in the 1980s, the S&P will be at 8000 in about 2 or 3 years and I will tell you to back off your exposure to equities.

    There is no real comparison between Japanese market in the 80s and US market in 2017. There just isn't. We don't have the same market valuation. We don't have the same demographic problem. We don't have the same lack of consumer spending. We don't have the same interest rates. Anybody trying to equate the 2 is being dishonest.
     
  14. DrCommonSense

    DrCommonSense

    1,499
    383
    Sep 20, 2016
    Texas
    Our GDP growth is abysmal as well:

    How slow is US economic growth? 'Close to zero'

    We also have a demographic crisis in terms of aging of the population with the younger generation being filled with the uneducated class.

    Smarter/educated people have been having fewer and fewer kids.
     
  15. facted

    facted ASA Member 7+ Year Member

    374
    150
    Dec 15, 2008
    NYC
    Our GDP increased over 2% in 4th quarter and around 2% for the year. News Release: Gross Domestic Product

    As for demographics, we have an issue with the baby boomers eating up costly services but by no means do we have an issue with having adequate numbers of young workers which Japan struggles with. Comparing long term US economic prospects to those of our Japenese counterparts makes little sense. There are so many other economic factors at play.

    Like I've said before: the 30 year US economy will be just fine, but a diversified portfolio is always good to spread risk.
     
  16. epidural man

    epidural man ASA Member 10+ Year Member

    2,647
    486
    Jun 3, 2007
    San Diego
    Is it not true that people who support passive investing - are also assuming they can "time the market"?

    I mean, what if you start drawing - or need to draw your money right after the market has a large (and inevitable) pull back? This passive investment - and stating the market will be "UP" over 30 years seems to indicate that you will time the market so you can pull out money when it is up.

    Also, historically speaking, when the market makes a big correction, how big will it be? If I put money in cash now, and it S&P goes to 2800, then drops and I try and "time" the market - It isn't hard to know that if I go back in at any time below an S&P <2300, I've timed the market to beat a passive investment. That doesn't take brilliance. It takes patience.
     
  17. Mman

    Mman Senior Member 10+ Year Member

    3,713
    1,269
    Mar 22, 2005
    Actually any money you are going to need in the next 5-10 years should never be in the stock market. That's why when you retire you should have a conservative asset allocation. That's why you literally never need the money that is in stocks right after a large pull back.
     
    Southpaw likes this.
  18. pgg

    pgg Laugh at me, will they? SDN Moderator 10+ Year Member

    10,527
    4,373
    Dec 14, 2005
    Home Again
    No.

    Then you made an error in your asset allocation % ... you had money you might "need" in the short term too heavily invested in equities.

    Or - if you really "need" the money, you withdraw it from your bond allocation instead of the equitie. (This will bring your AA closer to the proportion you intended anyway. The absolute wrong thing to do is sell the equity side and push your AA even further out of balance.)

    Long term investment in any market index fund is implicit belief that over the long term (decades) the economy that market represents will grow and create value and wealth.

    There's no timing involved in taking the "things will get bigger over my lifetime" position.

    Market timing is understood to mean making moves to extract profit from short term variations - i.e. the "noise" in the generally upward long term trend.

    If you're going to equate "buy and hold for 30 years" with "timing" then you're using a fundamentally different definition of the word than literally everyone else. Which is odd, unless you're trying to make some rhetorical point by deliberately misusing the term. :)

    What if the market NEVER corrected to your planned 2300 buy-in point? When do you quit timing and buy in anyway?

    What if it goes to 3500, then glides down to 2500, then back up to 3500 by the year 2030? You just going to sit and wait for it to go below 2300?


    From March of 1995 to March of 1996 the S&P500 went from the 480s to 640s, a pretty big gain. +30%!! What if you sat it out and waited to buy on a dip to the mid 500s?

    But it goes up and up ... and then a correction happens and it's down to the 800s in 2002. But still not to your 550 threshold. So you sit.

    7 years later, its March of 2009 and it's briefly down to the upper 600s. But nope, it doesn't hit 550. So you sit.

    Now it's over 2000. Still going to sit on the sidelines?

    The problem is that waiting to "buy on the dip" carries very real risk that a sufficiently low dip may NEVER come.
     
    WholeLottaGame7, facted and Mman like this.
  19. DrCommonSense

    DrCommonSense

    1,499
    383
    Sep 20, 2016
    Texas

    This article pretty much sums up the fallacy of not worrying about valuations:

    'Reputable' Investing Newsletter To Millennials: "If You Do Not Have 100% In Equities, You Are Crazy" | Zero Hedge

    Oh wait I forgot, zerohedge is always bad right? But the argument can't be refuted though I promise.
     
  20. BLADEMDA

    BLADEMDA ASA Member 10+ Year Member

    16,026
    2,362
    Apr 22, 2007
    Southeast
    I agree that some prudence is warranted at these valuations. But, the market could go up another 20% before it corrects and nobody knows the degree of correction. I prefer to increase "cash" allocation as valuations climb beyond fair value. That's why I"m holding 10% more cash than I'd prefer right now. Still, timing the market is extremely difficult to do which is why one should never go 100% all cash but rather tweak his/her allocation based on valuation.

    [​IMG]
     
  21. pgg

    pgg Laugh at me, will they? SDN Moderator 10+ Year Member

    10,527
    4,373
    Dec 14, 2005
    Home Again
    Zerohedge could publish an article about the blueness of sky, but I'd never know, because I won't read it.

    Mad Money Cramer might be accidentally right about something once in a while, but I'll never know that, either.

    I hope things work out for you.
     
    facted likes this.
  22. DrCommonSense

    DrCommonSense

    1,499
    383
    Sep 20, 2016
    Texas
    I 100% agree.

    Increased Cash position at this time is very prudent but the rest should remain in stocks.

    Still 100% investing in 401K in Vanguard Index Funds but much of my excess cash is sitting on the sidelines outside of that since investing heavily in the SP500 and DRIP stocks over the last few years.

    What do you think about Betterment for investments?

    Betterment | Investing Made Better

    Supposedly this stuff reallocates your investments for tax efficiency and uses mostly Vanguard Index Funds
     
  23. Mman

    Mman Senior Member 10+ Year Member

    3,713
    1,269
    Mar 22, 2005
    ZeroHedge is horrible and that article is horrible. The argument can't be refuted? Sure it can because it's wrong. Is it true that a dollar invested at the peak of a market will have less than stellar returns when you look back in hindsight? OF COURSE. Everybody agrees. But if you are regularly investing every month for decades, that allows you to also be regularly when the market is cheap. The relevant point is nobody can call a market top in real time. It's only years in hindsight you can say it.

    Also, their S&P chart is horribly misleading. Here is a more financially correct logarithmic scale...

    S&P data on log scale

    Doesn't look quite so scary at this point, does it? I mean any article that attempts to show the great depression market crash as being a teeny little blip because it only dropped a few hundred points compared to what happened in 2001 or 2008 is just being dishonest. That anybody would trust anything in an article so blatantly misleading is kinda scary.
     
    pgg likes this.
  24. epidural man

    epidural man ASA Member 10+ Year Member

    2,647
    486
    Jun 3, 2007
    San Diego
    Bankers are so dumb.

    dumb dumb dumb.

    Don't they know that the market is efficient and they can't time the market? What are they doing?

    I've always said, bankers have no idea about finance or the markets or how to make money. What a bunch of idiots.

    bankers.jpg
     
    DrCommonSense likes this.
  25. DrCommonSense

    DrCommonSense

    1,499
    383
    Sep 20, 2016
    Texas
    Except during depression era the dividends were >10% per annum, so you could live off the dividends waiting for the stock to come back.

    This argument becomes very problematic when dividends are only 2% (basically all time lows) that it is today.

    Like I said, these markets are UNPRECEDENTED so speculation about previous markets is largely meaningless going forward due to the factors being so varied from previously.
     
  26. Mman

    Mman Senior Member 10+ Year Member

    3,713
    1,269
    Mar 22, 2005
    was the dividend 10% before or after the 80% loss of market value? Because a $2 dividend on a $20 stock is 10%, but when that same stock was $100 it was 2% yield. So a 2% yield today becomes a 10% yield if we have a market crash like the Great Depression.

    And to reiterate, a chart of S&P values for 100+ years that isn't in log scale is intentionally trying to mislead you into incorrect observations. I mean just look at it in the log scale and tell me how it's some crazy bubble that has to come crashing down imminently?
     
  27. dr doze

    dr doze To be able to forget means to sanity Lifetime Donor 10+ Year Member

    3,267
    993
    Dec 6, 2006
    epidural man likes this.
  28. pjl

    pjl ASA Member 10+ Year Member

    781
    355
    Oct 29, 2006
  29. epidural man

    epidural man ASA Member 10+ Year Member

    2,647
    486
    Jun 3, 2007
    San Diego
    This is such an interesting graph. Thanks for posting.

    The price you pay today, determines the returns you get later.
     
    Last edited: May 4, 2017
  30. DrCommonSense

    DrCommonSense

    1,499
    383
    Sep 20, 2016
    Texas

    Here you go:

    S&P 500 Dividend Yield

    As you can see, dividend yields are the LOWEST in the history of the market over the last few years.

    Also notice how dividend yields DID NOT INCREASE around 2008 despite a HUGE drop in the value of the market nor did they go up in 2000 after the first tech bubble.

    Compare dividend yield dramatic increase during the depression era that takes the sting out of "buy and hold" strategy considering they will obtain good income to weather the storm.

    LARGE amounts of TOTAL returns are dependent on dividends. Very low dividend yields for SP500 at about HALF the historical norm is VERY bad on returns:

    The Two Components of Total Return: Part II Dividends
     
  31. Mman

    Mman Senior Member 10+ Year Member

    3,713
    1,269
    Mar 22, 2005

    I don't think you got my point. During the Depression, dividend yields went up because the price crashed while the dividend remained the same. They didn't increase the dividend. So people before it bought stocks with a 3% yield which is not drastically different from today. The 3% yield on cost didn't change during the depression, merely the yield compared to current price. Also with historical comparisons, dividend yield isn't terribly relevant since dividends are only a portion of profits and what companies choose to do with their profits (dividends vs retained earnings) changes over time and is impacted by things like tax codes that have nothing to do with the inherent profitability of a company.

    And why do you claim dividend yields did not increase in 2008? On Dec 31, 2007 the S&P had a dividend yield of 1.87%. 12 months later the yield was 3.23%. That's an increase of 72%.
     
    Last edited: May 5, 2017
  32. epidural man

    epidural man ASA Member 10+ Year Member

    2,647
    486
    Jun 3, 2007
    San Diego
    It certainly is true what companies do with their debt and earnings. I'm not sure there has ever been a time compared to the last five years with stock buy backs in order to keep company stock price elevated.
     
    DrCommonSense likes this.
  33. Mman

    Mman Senior Member 10+ Year Member

    3,713
    1,269
    Mar 22, 2005
    There is a common misconception that the purpose of stock buybacks is to keep stock price elevated. What a buyback is used for is to return money to shareholders in the form of increased share of future earnings. It's like a dividend, except you don't have to pay tax on it right now. If you are a share holder of company XYZ ($100 per share) and they had $2 spare cash per share sitting around, they could give you a $2 dividend at which point your share of stock would now be worth $98, or they could use it to buy back 1/50th of their outstanding shares at which point your stock would still be worth $100 (albeit for a 1/50th greater share of future earnings). It's $2 of value to your name either way, it's just that if it's a dividend you have to pay tax on it this year and if it's a buyback you don't.

    Warren Buffett has repeatedly argued that buybacks are a more tax efficient way to return value to share holders and that's why Berkshire has never paid a dividend.

    On the other hand, a discussion of if/when/how companies occasionally utilize debt to return money to share holders is more productive and interesting especially given interest rates. Buybacks vs dividends is mostly just a discussion of whether you'd rather have cash and pay tax on it or greater claim to earnings in the future. Has nothing to do with artificially inflating the stock price.
     
    Last edited: May 5, 2017
    facted and pgg like this.
  34. pgg

    pgg Laugh at me, will they? SDN Moderator 10+ Year Member

    10,527
    4,373
    Dec 14, 2005
    Home Again
    Just about every time you post something Mman, I learn something. Thanks.
     
    okayplayer likes this.
  35. BLADEMDA

    BLADEMDA ASA Member 10+ Year Member

    16,026
    2,362
    Apr 22, 2007
    Southeast


    There's always a correction coming; it's only a matter of time," he said. "The real question you have to ask yourself is: Is it worth it to actually reallocate your portfolio to try to avoid that correction when you don't know when it will come, how it will come and what form it will take?"

    "I have never been able to make that prediction solidly enough to reallocate my portfolio," Damodaran continued. "Maybe there are others who are better at timing the market than I am, so I'm not going to stop other people from making their own judgment. But for me, market timing has never worked."
     
  36. BLADEMDA

    BLADEMDA ASA Member 10+ Year Member

    16,026
    2,362
    Apr 22, 2007
    Southeast
    A more skeptical view of buybacks was presented in the study by the three researchers at Research Affiliates. The common presumption, they noted, is that buybacks are good because they remove shares from the market. But if the same corporations also are issuing new stock separately, that would mitigate the benefits.

    Why would companies issue new shares? One reason is to finance executive compensation as CEOs and other top corporate officials exercise stock options. "When management redeems stock options, new shares are issued to them, diluting other shareholders," the authors note. "Buyback? Not really! Management compensation? Yes."

    Another reason is to pay for non-cash acquisitions of other companies. With some mergers and acquisitions, issuing new stock to make the purchase can dilute or erode the value of shares already outstanding. The purchase of one public corporation by another generally wouldn't make much of a net impact because new shares of the one entity are being used to retire those of the other. But buying a private company with new stock, as with Facebook's acquisition of WhatsApp, would represent new issuance and thus dilution.

    Further, corporations sometime buy back shares at the same time they are increasing debt, which can make a company more risky.

    Several giant companies that had some of the largest buybacks last year also engaged in some of the biggest stock issuance, including Cisco, Oracle, Johnson & Johnson, Wells Fargo and Merck, according to the report.

    The researchers take a swipe at the occasional practice of adding a company's buybacks and dividend yield together to generate a performance measure for shareholders. With buybacks representing 2.9% of the capitalization of S&P 500 companies and dividend yields at 1.9%, that suggests a combined 4.8% yield for shareholders.

    But this number fails to include new issuance that offsets most or all of the former number. "We do not think that the naïve sum of dividends plus buybacks has merit," the authors said.

    Taken together, the report sees little overall benefits from share buybacks for mainstream investors.

    "The reality is that publicly traded companies in the United States are issuing far more new securities than they are buying back," the authors say. "In the aggregate ... buybacks are simply a mirage."

    Financial, Economic and Money News - USATODAY.com
     
    epidural man and DrCommonSense like this.
  37. dr doze

    dr doze To be able to forget means to sanity Lifetime Donor 10+ Year Member

    3,267
    993
    Dec 6, 2006

    Actually a good discussion from CNBC for a change.
     
  38. dr doze

    dr doze To be able to forget means to sanity Lifetime Donor 10+ Year Member

    3,267
    993
    Dec 6, 2006
    That answer is sometimes that is true. Not all buybacks are good. Just like not all high dividend payouts are good. In a perfect world share buybacks are better than dividends because of tax advantages, logically corporate boards and management would have more insight as to whether their shares are cheap and they were completely un-conflicted in their duty to share holders. In reality conflicts exist.
     
  39. BLADEMDA

    BLADEMDA ASA Member 10+ Year Member

    16,026
    2,362
    Apr 22, 2007
    Southeast
    In this day and age a lot of share buy-backs DO NOT help the average investor/shareholder. I firmly believe increasing dividends is a much better allocation of the money as "share buy-backs" tend to go towards management compensation.
     
  40. Mman

    Mman Senior Member 10+ Year Member

    3,713
    1,269
    Mar 22, 2005
    A lot of dividends out there also harm their companies long term growth. Share buy backs by themselves do not go to management compensation, because companies that don't partake in buybacks also issue new shares to management.

    They are separate issues and should not be confused with each other. It's like saying people use credit cards to buy things they can't afford. Well sure, but people also use credit cards to buy things they can afford and pay off the balance each month. The credit card itself isn't bad (just like the buyback isn't bad), but it can be misused by poorly run companies. Just like dividends aren't necessarily bad, but they can be poorly utilized as well.


    In a perfect world if you are an investor, you should prefer a share buyback to a dividend because it gets preferential tax treatment. The world isn't perfect and you might invest in bad companies. If you are invested in a bad company, don't blame the share buyback, blame the entirety of the corporate decision making that includes the share buyback. We've had plenty of companies rack up debt to keep paying their dividend recently which is equally bad behavior.


    Now new share issuances to pay execs is something we should worry about, but a lot of that is already included in diluted earnings per share which accounts for stock options outstanding.


    For those caring about share buybacks and management options and what not, it's quite easy to track the number of shares outstanding for a company over time. IBM is an oft talked about company in terms of share buybacks and their shares outstanding have decreased from 1.7 billion 15 years ago to 940 million last quarter. That means every share you owned 15 years ago has essentially gotten a nearly twice bigger piece of their profits as the company bought up almost half of the stock.

    As a general rule of thumb, smaller and growing companies issue new stock to raise capital and mature companies buy back stock as they end up generating too much cash to reinvest in the company and want to return value to stock owners. But as always, poor management can lead to poor decisions.
     
    Last edited: May 5, 2017
  41. DrCommonSense

    DrCommonSense

    1,499
    383
    Sep 20, 2016
    Texas
    lIts a HUGE problem when the share buy backs are largely done on leverage and not DCF of the companies in the effort to boost management's bonuses:

    Rising interest rates will prick the leveraged share buyback craze
     
    epidural man likes this.
  42. DrCommonSense

    DrCommonSense

    1,499
    383
    Sep 20, 2016
    Texas
    If the company covers the dividend easily with DCF, there is really no problem with higher dividends. That is why the SP500 dividend aristocrats have OUTPERFORMED the SP500 fund

    Being a dividend aristocrat beats being the S&P
     
  43. DrCommonSense

    DrCommonSense

    1,499
    383
    Sep 20, 2016
    Texas
    Yeah IBM share buy backs have been GREAT.

    Oh wait: Warren Buffett, IBM's biggest believer, sold a third of his stock in the company
     
  44. DrCommonSense

    DrCommonSense

    1,499
    383
    Sep 20, 2016
    Texas
    Here's more evidence the "share buy backs" are for short term benefit of the management at the long term expense of the company due to extremely low interest rate policies from the Fed.

    Bonds for Buybacks Never Bigger in U.S. as $58 Billion Sold
     
  45. epidural man

    epidural man ASA Member 10+ Year Member

    2,647
    486
    Jun 3, 2007
    San Diego
    There is a common misconception that stock buybacks are good for the investor. They assume it is good and usually say that it is like a dividend, except they don't have to pay tax on it right now - unlike a dividend. Unfortunately, it can create many other issues that aren't good for the investor. In fact, buybacks tend to elevate stock price, and make the creating or downside that much greater.

    And by the way, lots of really really smart people feel this way. This is a great quote from one of the many articles below

    "I have always been weary of buybacks, going all the way back to the last buyback boom before the financial crisis. My concern then was that by purchasing shares management was making a declaration, that this is a good time to buy our stock, as opposed to the past or the future. But if management knows that then it knows how to time the market, and if management knows how to time the market, then it’s better off running a hedge fund. Since management is instead running a company, it should focus on what it was hired to do and leave the stock market alone."

    The problem with buybacks is they create no value. Instead of taking that 30 mill that a budding biotech company should be using to create new products, research new uses or indications, they buy back stock to keep price elevated. Instead of large companies using the money for buying small companies and expanding business, the purchase stock to give false value to stock holders. To me, if you want to make people value your company more (by buying stock and thus increasing the price), make the actual company WORTH more by doing something with that money.

    How Stock Buybacks Destroy Shareholder Value
    The Pros and Cons of Stock Buybacks
    Share Repurchases: Do They Create Value? - GuruFocus.com (this one explains why Buffet is really wrong)
    Do share buybacks lead to value creation? Not always - The Economic Times
    http://www.economist.com/news/busin...hares-exceptional-rate-there-are-good-reasons (again, mentions Buffet's wrong statement in 1984 you quoted)
    Profits Without Prosperity
    What the Heck’s Happening to Our Share Buyback Boom?
    Share Buybacks: Not So Good for Shareholders
    https://static1.squarespace.com/sta...f9/1468912866517/The+Truth+About+Buybacks.pdf
    Are share buybacks always good for investors? - Value Research: The Complete Guide to Mutual Funds
    Stock Buybacks: Too Much of a Good Thing
    Share buybacks: Boon or boondoggle for investors? (this one brings up an idea that I don't understand how you are so pro buyback Mman - because buybacks are a short-term solution)
    Stock Buybacks Are Killing the American Economy (don't you love the Atlantic?)
    Do Share Buybacks Create Value? (Spoiler Alert: No) | Zero Hedge (My favorite - only because it is from ZeroHedge)
     
  46. Mman

    Mman Senior Member 10+ Year Member

    3,713
    1,269
    Mar 22, 2005
    you keep using "DCF". I don't think that means what you think it means. Discounted Cash Flow is a method of valuing a stock based on the estimated future free cash flows the company will generate and discounting the future to a net present value.

    What you mean to say is that if a dividend is covered easily with FCF, or free cash flow.
     
  47. Mman

    Mman Senior Member 10+ Year Member

    3,713
    1,269
    Mar 22, 2005
    unless you'd like to make the argument that IBM would be growing like crazy and doing awesome if they had only increased their already large dividend instead of executing buybacks, you probably don't want to use them as a point in the favor of buybacks being bad.

    Or perhaps you'd like to look at Nike that has grown like crazy over the years, but continues to decrease it's outstanding share count through buybacks. They've bought back roughly 500M shares the last 15 years (and that's net of any new shares they may have issued) decreasing their share count by 25%. Microsoft has repurchased 2.1B shares the last 15 years.

    Examples are too numerous for me to count, but plenty of well run companies have plowed money back to shareholders via buybacks. The same for dividends. But plenty of poorly run companies have abused debt or new share issuance to do the same. You really need to talk about individual companies for this topic and not some high level global topic.


    Would people feel better about share buybacks if we called it net reduction of outstanding shares? Because that gets the point across that it is separate from issuing new shares to offset the buyback.
     
    Last edited: May 6, 2017
  48. Mman

    Mman Senior Member 10+ Year Member

    3,713
    1,269
    Mar 22, 2005

    If all we want to do is quote articles, we can each list approximately 10,000 well written articles and 100,000 perfect quotes describing the pros and cons of stock buybacks and dividends. If that's what we want, go for it.

    If you'd like an honest discussion, well I'll simply stick to the facts. You say it's a misconception that buybacks are good for the investor. No, it's actually a truth. What you mean to say is that unscrupulous management can execute buybacks while at the same time doing other bad things. Do buybacks tend to elevate stock price? In the short term, no, they simply convert company cash on hand to fewer shares outstanding. In the long term they do elevate share prices because they lead to future earnings being distributed over fewer shares and leading to higher earnings per share.

    Neither dividends nor buybacks are good or bad. They are simply a way to return excess cash to owners of the company. US tax code gives buybacks preferential treatment for stockholders. Individual companies can make either great or horrible decisions to finance either dividends or buybacks.

    And this is the sort of topic that needs to be discussed at the individual company sort of level, not at some higher up good/bad morals argument. Which is why I brought up credit cards. Credit cards can be used horribly at the individual level and lead to lots of problems, but that does not mean the credit card is the problem.

    Would you like to talk about individual company practices and why that company may or may not be a good investment and how their dividend/buyback/debt plays into that? Because that's really the only way to have that sort of discussion.
     
    epidural man likes this.
  49. DrCommonSense

    DrCommonSense

    1,499
    383
    Sep 20, 2016
    Texas
    How about doing neither and investing in the business itself?
     
    epidural man likes this.
  50. DrCommonSense

    DrCommonSense

    1,499
    383
    Sep 20, 2016
    Texas
    Yes well executed "buy backs" can be an advantage to the investor. However, since 2008 due to artificially low interest rates, buy backs have LARGELY been based upon leverage to boost stock pricing for management bonuses while NOT investing in future CAPEX to keep the company going forward.

    Ergo, its a short term strategy at the expense of long term profitability.

    Its VERY different than a company that is organically growing with GREAT DCF with good CAPEX investments that just has so much excess cash flow that they have to do something with it.
     
  51. Mman

    Mman Senior Member 10+ Year Member

    3,713
    1,269
    Mar 22, 2005
    They are. But some businesses are so mature that you can't invest in it much more without just being wasteful. Because if you want companies to invest their money in their own business, you should be arguing that dividends should go away also.
     

Similar Threads
  1. mmss22
    Replies:
    7
    Views:
    1,258
  2. shulk
    Replies:
    50
    Views:
    2,718
Loading...

Share This Page