Excellent post Jeff. As a Financial Advisor who has to survive in this wacky system you really hit the nail on the head. The irrationality of the stock market these days has certainly kicked the old "tangible value" system to the curb. Obviously, there is still value in dividend of "value" stocks but they just arent sexy and wont turn you into a millionaire overnight :). Thanks for the relevant and entertaining posts. keep 'em coming!
You're neglecting, in your analysis, the historical growth of these firms' profits and revenues. It is not unreasonable to expect a firm to grow by a lot if it has shown an ability to grow a lot before. Other firms, like JP Morgan Chase and Bank of America do not have such large valuations and more modest growth. There are also ways besides dividends for firms to return profit to shareholders. Share buybacks are very real.
There certainly are some firms with overly high prices. But most are, if not fair, at least reasonable. Consumer goods firms tend to be less so because a lot of people buy their stock because they buy that firm's products, but don't perform any analysis at all. If you check some non cosgood firms you may be surprised by the reasonableness of their prices.
I think there is a bit of an oversight or misinterpretation maybe regarding dividends. It's portrayed as a good thing you get out of a company. And while it's right, and there is growth and value stocks, it's kinda pointless to say the one or the other is better, and there is also not a whole lot which changed. What people have to understand, is that a company which made 10% profit, can reinvest the profit or share that profit - and for you it makes no real difference. Why? Because if the company keeps the money and reinvests it, it's worth is now 110%. If it pays it to the shareholders, they own the company and the profit now, which has exactly the same value as if the company just reinvested it. As an individual investor you are even likely to reinvest your 10%. So instead of having 10 shares worth 11 dollars each, you get 1 dollar per share paid out, and buy another share for that, ending up with 11 shares worth 10 dollars each. No difference.
Only differences can be taxes depending on the country you live in. Because if dividends are taxed right away, you actually can't reinvest everything again but only the amount after taxes. While if the company reinvests it, you kind of profit from the forbearance of any taxes.
And while this text is talking about individual companies only, investing into individual companies is always a bad idea with high risk. If all your money is on one company, and that one company is toast, then your money is gone.
The stock market always rewards risk with reward. There are very few exceptions. And one exception is diversification. Because instead of investing into some "average company" you split your investment to 1000 avergage companies in 100 different countries. You don't lose any of your rewards, but you vastly reduce your risks. And this is why investing into funds is so attractive.
And there is actually something to look into from historical perspective:
In the past funds were actively managed by...well...managers who needed (or wanted) to get paid.
These days they are more and more funds replaced by "passive management". These funds are then called ETFs. They are just a replication of an index. Like the MSCI ACWI, which is an index of the world ecomony. A bit like NASDAQ 100 or S&P 500 (for which you also got ETFs), but for the whole ecnomony in the world. ETFs on these indexes on average outperform actively managed funds -and they are cheaper to maintain (down to 0.2% or so per year). Of course it is never guaranteed that the world economy will increase, but historically it always did with a couple of gaps of 10 years or so in between, which is why you should have a horizon of longer periods like 15 years to make sure you (almost) definitely make profit. But these ETFs are only really accessible for a few years /decades now. Previously you had to give some manager your money and hope for the best. And even in a scenario where the manager made a profit of the amount of inflation, the 1% or so he is taking from that money every year as payment, still made you lose value.
I hope my explanations added a bit of extra information and increased the viewing angle.
Excellent post Jeff. As a Financial Advisor who has to survive in this wacky system you really hit the nail on the head. The irrationality of the stock market these days has certainly kicked the old "tangible value" system to the curb. Obviously, there is still value in dividend of "value" stocks but they just arent sexy and wont turn you into a millionaire overnight :). Thanks for the relevant and entertaining posts. keep 'em coming!
You're neglecting, in your analysis, the historical growth of these firms' profits and revenues. It is not unreasonable to expect a firm to grow by a lot if it has shown an ability to grow a lot before. Other firms, like JP Morgan Chase and Bank of America do not have such large valuations and more modest growth. There are also ways besides dividends for firms to return profit to shareholders. Share buybacks are very real.
There certainly are some firms with overly high prices. But most are, if not fair, at least reasonable. Consumer goods firms tend to be less so because a lot of people buy their stock because they buy that firm's products, but don't perform any analysis at all. If you check some non cosgood firms you may be surprised by the reasonableness of their prices.
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I think there is a bit of an oversight or misinterpretation maybe regarding dividends. It's portrayed as a good thing you get out of a company. And while it's right, and there is growth and value stocks, it's kinda pointless to say the one or the other is better, and there is also not a whole lot which changed. What people have to understand, is that a company which made 10% profit, can reinvest the profit or share that profit - and for you it makes no real difference. Why? Because if the company keeps the money and reinvests it, it's worth is now 110%. If it pays it to the shareholders, they own the company and the profit now, which has exactly the same value as if the company just reinvested it. As an individual investor you are even likely to reinvest your 10%. So instead of having 10 shares worth 11 dollars each, you get 1 dollar per share paid out, and buy another share for that, ending up with 11 shares worth 10 dollars each. No difference.
Only differences can be taxes depending on the country you live in. Because if dividends are taxed right away, you actually can't reinvest everything again but only the amount after taxes. While if the company reinvests it, you kind of profit from the forbearance of any taxes.
And while this text is talking about individual companies only, investing into individual companies is always a bad idea with high risk. If all your money is on one company, and that one company is toast, then your money is gone.
The stock market always rewards risk with reward. There are very few exceptions. And one exception is diversification. Because instead of investing into some "average company" you split your investment to 1000 avergage companies in 100 different countries. You don't lose any of your rewards, but you vastly reduce your risks. And this is why investing into funds is so attractive.
And there is actually something to look into from historical perspective:
In the past funds were actively managed by...well...managers who needed (or wanted) to get paid.
These days they are more and more funds replaced by "passive management". These funds are then called ETFs. They are just a replication of an index. Like the MSCI ACWI, which is an index of the world ecomony. A bit like NASDAQ 100 or S&P 500 (for which you also got ETFs), but for the whole ecnomony in the world. ETFs on these indexes on average outperform actively managed funds -and they are cheaper to maintain (down to 0.2% or so per year). Of course it is never guaranteed that the world economy will increase, but historically it always did with a couple of gaps of 10 years or so in between, which is why you should have a horizon of longer periods like 15 years to make sure you (almost) definitely make profit. But these ETFs are only really accessible for a few years /decades now. Previously you had to give some manager your money and hope for the best. And even in a scenario where the manager made a profit of the amount of inflation, the 1% or so he is taking from that money every year as payment, still made you lose value.
I hope my explanations added a bit of extra information and increased the viewing angle.