Dow posts worst Opening Day in 8 years

[Mman]

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

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.

 

[DrCommonSense]

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.

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?

 

[deleted126335]

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.

 

[DrCommonSense]

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.

So Japan doesn't have capitalism or the rule of law?

 

[facted]

So Japan doesn't have capitalism or the rule of law?

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.

 

[Mman]

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

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.

 

[DrCommonSense]

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.

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.

 

[facted]

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.

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.

 

[epidural man]

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.

 

[Mman]

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.

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.

 

[pgg]

Is it not true that people who support passive investing - are also assuming they can "time the market"?

No.

I mean, what if you start drawing - or need to draw your money right after the market has a large (and inevitable) pull back?

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.)

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.

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. 🙂

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.

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.

 

[DrCommonSense]

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.

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.

 

[BLADEMDA]

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.

 

[pgg]

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.

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.

 

[DrCommonSense]

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.

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

 

[Mman]

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.

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.

 

[epidural man]

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.

 

[DrCommonSense]

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.

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.

 

[Mman]

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.

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?

 

[deleted126335]

I've posted this before. Stocks are risky even for as long as periods of 20 years. High valuations do bode ill for future expected returns. Yes expected returns for stocks are higher than for bonds, but they both are low based on history:

http://www.nytimes.com/interactive/2011/01/02/business/20110102-metrics-graphic.html?_r=1&

 

[pjl]

This thread led me in a very roundabout way to this series of blog posts. It has changed my thoughts on a few matters. Pretty interesting extension of the Trinity study, and various investing strategies with varied valuations.

The Ultimate Guide to Safe Withdrawal Rates – Part 1: Introduction


Sent from my iPad using SDN mobile app

 

[epidural man]

I've posted this before. Stocks are risky even for as long as periods of 20 years. High valuations do bode ill for future expected returns. Yes expected returns for stocks are higher than for bonds, but they both are low based on history:

http://www.nytimes.com/interactive/2011/01/02/business/20110102-metrics-graphic.html?_r=1&

This is such an interesting graph. Thanks for posting.

The price you pay today, determines the returns you get later.

 

[DrCommonSense]

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?

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

 

[Mman]

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

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%.

 

[epidural man]

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 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%.

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.

 

[Mman]

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.

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.

 

[pgg]

Just about every time you post something Mman, I learn something. Thanks.

 

[BLADEMDA]

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."

 

[BLADEMDA]

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

 

[deleted126335]

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."

Actually a good discussion from CNBC for a change.

 

[deleted126335]

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

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.

 

[BLADEMDA]

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.

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.

 

[Mman]

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.

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.

 

[DrCommonSense]

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.

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

 

[DrCommonSense]

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.

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

 

[DrCommonSense]

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.

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

 

[DrCommonSense]

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.

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

 

[epidural man]

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.

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)

 

[Mman]

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

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.

 

[Mman]

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

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.

 

[Mman]

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.

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.

 

[DrCommonSense]

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.

How about doing neither and investing in the business itself?

 

[DrCommonSense]

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.

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.

 

[Mman]

How about doing neither and investing in the business itself?

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.

 

[Mman]

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.

You keep moving the goalposts. If you want to discuss corporate debt and leverage, do that. It's a separate (albeit tangentially related) topic from buybacks. And given low interest rates, companies would be foolish to not have some degree of debt locked in. Being debt free might be a good way to run your personal finances, but using debt responsibly to create effective leverage is like finance 101.

But like I said, if you want to have this discussion, pick an individual company that has done something (dividend or buyback) and then let's discuss them. Painting with a broad brush is just stupid in this instance.

I like dividends and buybacks, I just appreciate that the buyback has favorable tax treatment.

 

[DrCommonSense]

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.

Then why are they increasing leverage levels so dramatically to fund their shares? A mature company shouldn't have to increase leverage by much if they have good cash flows to pay for share buy backs.

 

[DrCommonSense]

You keep moving the goalposts. If you want to discuss corporate debt and leverage, do that. It's a separate (albeit tangentially related) topic from buybacks. And given low interest rates, companies would be foolish to not have some degree of debt locked in. Being debt free might be a good way to run your personal finances, but using debt responsibly to create effective leverage is like finance 101.

But like I said, if you want to have this discussion, pick an individual company that has done something (dividend or buyback) and then let's discuss them. Painting with a broad brush is just stupid in this instance.

I like dividends and buybacks, I just appreciate that the buyback has favorable tax treatment.

Ok how about McDonald's, Yahoo and 3M?

Beware of Firms that Borrow Cash for Stock Buybacks

Please tell me how share buy backs in those companies have been a positive.

 

[Mman]

Then why are they increasing leverage levels so dramatically to fund their shares? A mature company shouldn't have to increase leverage by much if they have good cash flows to pay for share buy backs.

leverage is a good thing when used properly. "dramatically" has no meaning without context.

 

[Mman]

Ok how about McDonald's, Yahoo and 3M?

Beware of Firms that Borrow Cash for Stock Buybacks

Please tell me how share buy backs in those companies have been a positive.

well I can give you 100 reasons why McDonald's and Yahoo have been poorly run for years without even looking at share buybacks. Is McDonald's borrowing cash for their dividend or their stock buyback? How do you differentiate? It's all the same pool of cash.

3M is a little different if you ask me. They do have some debt and did increase a bit in the 2014/15 time frame (though stable in 2016/17). They currently have about $10B of long term debt (total company value of about $200B). They have also decreased shares outstanding by about 25% in last 15 years, or in other words they've returned $50B of value to stockholders via buybacks. I'm not going to do the research for you on what the exact details of their bond offerings were, but given the time frame I suspect it's at a low interest rate. I like them as company and think they are fairly well run over the years, but I don't personally own any of their stock beyond what's in my 401K mutual fund exposure, mostly because I question their ability to grow profits significantly.


But seriously, if you are not happy with McDonald's share buybacks, why are you happy with their dividend? It's literally the same pool of cash they come from.

 

[DrCommonSense]

well I can give you 100 reasons why McDonald's and Yahoo have been poorly run for years without even looking at share buybacks. Is McDonald's borrowing cash for their dividend or their stock buyback? How do you differentiate? It's all the same pool of cash.

3M is a little different if you ask me. They do have some debt and did increase a bit in the 2014/15 time frame (though stable in 2016/17). They currently have about $10B of long term debt (total company value of about $200B). They have also decreased shares outstanding by about 25% in last 15 years, or in other words they've returned $50B of value to stockholders via buybacks. I'm not going to do the research for you on what the exact details of their bond offerings were, but given the time frame I suspect it's at a low interest rate. I like them as company and think they are fairly well run over the years, but I don't personally own any of their stock beyond what's in my 401K mutual fund exposure, mostly because I question their ability to grow profits significantly.


But seriously, if you are not happy with McDonald's share buybacks, why are you happy with their dividend? It's literally the same pool of cash they come from.

The big difference is that management can use share buybacks to game the system using leverage. Most of their bonus metrics are dependent on share price.

Increasing dividends doesn't give management the chance to game the system in the same way because their bonuses aren't tied to dividends as much as share price.

The article I linked showed many big companies that have been pulling this racket for the last 5 years. This distorts the market if done in large amounts.

When interest rates inevitably go up, these companies shares will tank screwing investors.

That's the new reality that is being done far more than ever before.