Article sharing is one of the benefits of DIV-Net. Periodically, I plan to post on Dividends4Life some articles originally appearing on The DIV-Net to allow my readers to experience first hand the high-quality authors writing for The DIV-Net.
This article by Old School Value originally appeared on The DIV-Net July 5, 2008.
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As one of the few value investors in The DIV-Net so far, I would first like to touch on what value investing is.
Charlie Munger stated it quite clearly. Intelligent investing = value investing.
By value investing, the general population tends to think of it as bottom feeding and being cheap, but such a statement only holds true in a town called Speculatown.
Value investing is much more than buying cheap companies. It's just like how we all love to find something great in the sale bin and then brag about it to our friends. It revolves around paying less or a fair amount to its real value, referred to as intrinsic value or buying $1 for 50c.
Benjamin Graham, the father of value investing, stated in his book Security Analysis,"An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative."
Without data and reasoning associated with an appropriate price tag, this type of activity should be labeled "Get Rich Quick Like That Guy on TV".
Speculation is darn easy but value investing is difficult. Difficult because it requires;
Many great value investors mentioned by Warren Buffett in his famous speech, The Super Investors of Graham and Doddsville, show the track record of these great investors. They weren't able to beat the benchmark year after year, but their overall records tell the true story.
Seth Klarman clarifies the idea when saying that"while others attempt to win every lap around the track, it is crucial to remember that to succeed at investing, you have to be around at the finish".
This brings me to the point of long term buy and hold. While there certainly are opportunities where the market provides short term no brainer investments, a long term buy and hold methodology will allow an investor to look at the horizon, focus on quality businesses and live a life without the computer.
By investing for the long term in quality companies, we are recognizing that we are the business partners.
As an associate member of the Dividend Investing and Value Network, I hope to bring light to great companies and value investing. I am proud to be a business partner and hope to be one with you as well.
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(Photo: sanja gjenero)
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Below is a guest post by Sarah Scrafford.
Corporate ownership and private enterprise have been the buzzwords of developed economies for quite some time. Privatization has been a positive trigger for rallying stock markets all over the world. It was the sign that heralded the readiness of a corporate entity to meet the harsh and demanding needs of the private investor. But what makes a public company a headline stealer? It’s either the fact that the company has made castles in the air real for a multitude or, at the other end of the spectrum, because it has shattered the dreams of millions.
What is the factor that people use to differentiate between one good “investor-friendly” company and another? Great investors have long known that the only real sign of a great company or business is the amount of cash it can generate year after year. For the common investor, a rough estimate of this is the cash dividends that he/she receives on account of owning company stock - the higher the dividend, higher the return on his investment. But what makes a good company a great one?
Let’s look at two famous ones - GE and AT&T. Both companies have maintained the enviable and stellar record of never having missed a year in paying dividends. The icing on the cake for the investors in these two enterprises is that the dividends have been on the upward trend, continuously increasing from start to now. But the difference between these two and other companies lies not in the amount of dividends paid, but in the “Dividend Decision” itself.
The big question is - how much of the company’s cash earnings should be distributed as dividends? AT&T has always paid out more than 60 percent of its per share earnings and GE has sent out at least 35 percent year after year. Now the question arises - why don’t other companies follow the path that these two have chosen?
Classic theories state that the dividend decision taken by the Board of Directors takes into account all investment opportunities and then allocates capital to a place where it will hopefully earn a better return than it would if it were paid out as dividends. In simpler terms, it means that the company will pay out dividends only if it cannot find a new project or opportunity which would offer higher returns than cash invested elsewhere.
GE as a corporation operates in an industry where innovation can bring about or create a brilliant new chance to rake in the dollars. While AT&T pays out more because, in an aging industry where growth rates are nearing lower single digits, it cannot invest the money it generates to deliver better returns, GE can afford to retain its earnings and invest so that the pace of creating shareholder value is higher than the average alternative.
Coke and Warren Buffett have been in a similar marriage since 1988. Coke has an excellent record, just like GE and AT&T. But why did Buffet make more money than everyone else? In 1988, he bought Coke at an average of $4.75 per share. Today, the cash dividends alone amount to $1.52 per share. That's a cash return of 32 percent every year. And as long as Coke increases its dividend payout, Buffett only becomes richer and richer, at an increased pace.
To put it in a nutshell, if the stock markets didn’t exist, the only way an investor could earn from an investment is through dividends. It has thus become of utmost importance to find save haven in dividend-paying companies during the markets’ troubled times.
Sarah Scrafford is an industry critic, as well as a regular contributor on the subject of entrepreneurial finance. She invites your questions, comments and freelancing job inquiries at her email address: sarah.scrafford25@gmail.com.
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