The Div-Net Delievers Again

I'd like to introduce a special guest blogger today. His name is Dr. Frank Quietly, and he's the director of sleep solutions for Comfy Mattress Inc.

Dr. Quietly: (Quietly) Hello. (Sips a cup of chamomile tea)

Rather than me tearing this post the new asshole it deserves, I'm going to let Dr. Quietly here do it. Take it away Doc.

Thanks Nelson. Dr. Quietly here. Don't you all notice how angry he gets? He should really calm it down a bit, agreed?

The post he wanted me to critique is called Investing for Capital Appreciation or Dividend Income which was published over at the Div-Net. I'm looking forward to a calm exchange of ideas.

While dividend investors can ignore responding to folks with trading philosophy, sometimes it does become difficult to argue with value investors.

While dividend investing has many things in common with value investing, there are several distinct differences. Value investors don't put as much emphasis on dividends as a dividend investor does. Same with the buy and hold forever philosophy. But whatever, they're pretty close I guess.

Value investors who in general are looking to invest below book value sometime have an argument that focusing on dividend is not that critical.

I'd have to respectfully disagree again here fellas. Value investing doesn't always mean buying below book value. Value investing is basically trying to find names that the market has beaten down for whatever reason and trying to buy them on the cheap. Do you see how someone can calmly disagree with a point Nelson?

Nelson: Shut up. Fuck off.

Dr. Quietly: (Slowly shakes head. Takes another sip of tea)

Business should be applauded for reinvesting profits back into business to grow. In essence, either create additional value or continuously increase value for their shareholder. That is a good argument.

Dr. Quietly: Once again fellas, I have an issue with that point. It implies that value investors hate dividends and would rather have a company's profits reinvested back into the company. This just isn't true. Value investors look at every company individually. If a company is sitting on a large amount of cash, then they often push for increased dividends or even a special dividend. If the company is barely breaking even or perhaps even losing money, then the value investor cares more about the sustainability of the company. It simply depends on the situation.

However, the key here is “creating value for the shareholders”.Each individual will look at this differently. For me, “creating value for shareholder” is how much I am getting back in return.

Once again, true. But one must remember that return consists of an income component and a capital gain component. Each are valuable.

In my investment approach of buy-and-hold, I am also looking for management to continuously increase the value of its business (and hence my stocks value).

You are not alone in your investment approach. I'd say that just about every approach of investing (with the exception of short term trading) focuses on that.

These guys aren't so bad Nelson. Why did you ask me to do this again? And why are you so angry? (Sips tea, pets cat)

I do not plan to cash out my profits (if any). In that context, I only have paper value creation. Unless I cash out, that increased value has no meaning for me.

You only have paper wealth creation? This is true. Except there exists a whole system that is designed to let you cash out in a short period of time. I mean I am literally 5 minutes away from having any of my equity positions turned back into cash. Hell, I could spend 2 minutes on the can and still have plenty of time to do it. This argument is just a little bit ridiculous. Respectfully speaking of course.

Nelson: Dr. Quietly, are you getting upset?

Dr. Quietly: Of course not. I'm thinking of a nice waterfall and am very tranquil right now.

Who knows some nutjob manager will screw things and value is vanished.

With apologies to Mrs. Quietly and everyone who enjoys soothing calmness, WHAT THE FUCK ARE YOU TALKING ABOUT? A "nutjob manager" can just as easily fuck things up in a dividend payer. Management risk is something that ALL investors have to deal with, not just value investors.

Nelson: Dude?

Dr. Quietly: Deep breaths. (Takes a couple deep breaths and a sip of tea) I think I'm good

While I am waiting and continue to trust management, I need management to share some profits with me. That’s rational argument and prudent money management which shows to me company cares for its shareholders.

Dr. Quietly: Dammit! For the last fucking time, value investors don't hate dividends! They just think there's more to a fucking investment then the fucking dividend yield! They care about hidden value, or a company trading less than book value, or a company that may be worth more split up, or a company in a downturn that has a great balance sheet and can weather the storm for a while. They care for one or a combination of these things!

Also, a company shares ALL of its earnings with you. Retained earnings have value. That's why they're on the fucking balance sheet. Every dollar in earnings that gets reinvested in the company increases the value of that company. Just because it doesn't go into your pocket doesn't mean that it's wasted and gone forever.

A nice balance is all I ask for.

Nelson: You should calm down

Dr. Quietly: I fucking can't! I mean income is good, but doesn't this guy realize that buying debt is probably a billion times safer, and if you re-invest the profits into new debt you get the same goddamn compounding effect?

Nelson: He writes for the Div-Net and his name is Dividend Tree. Probably not. That's kinda his M.O.

Going after buy and hold approach solely for capital appreciation is a high risk strategy, even when buying at deep value.

Dr. Quietly: (Starts hyperventilating)

Nelson: Dude, you okay?

Dr. Quietly: That's... Just... So... Stupid...

Nelson: You mean that a) value stocks very often have dividends, rendering the main argument of this post as bullshit, b) Value investing is no more risky than any other form of stock market investing and c) A value investor would argue that buying at a steep discount to book value acts as a safety buffer?

Dr. Quietly: (Nods slowly while breathing into a paper bag)

...this value creation has no meaning.

Dr. Quietly: (Head explodes)

Oh. Shit. How am I supposed to get that out of the carpet?