Wikinvest Wire

Vanderbilt and Buffet , railroads and stocks

Monday, November 09, 2009

In this otherwise excellent WSJ story about "Commodore" Cornelius Vanderbilt's 19th century railroad empire as it relates to Warren Buffet's acquisition of Burlington Northern, in which you learn a lot about the history of the railroads as well as that of the stock market, the little, offhand, parenthetical comment highlighted below has stuck with me...

Mr. Buffett's approach to investment often seems to parallel the Commodore's. Vanderbilt accepted no salary as an executive, but took only the dividends on his personal stock. (In his era, investors expected steady dividends, not rising share prices.)

To prosper, he had to make his corporations profitable, year after year. He bought lines with permanent advantages—those that ran through developed regions that provided local traffic, for example, and that had low grades, which reduced operating expenses. So, too, does Mr. Buffett look to the long term.
It seems that, back in the olden days when money and credit didn't flow quite as freely as they do today (for better or worse), instead of buying stocks in hopes that the share price would go up, investors bought stocks to get a share of the company's profits in the form of a dividend stream.

That is, good 'ol fashioned income - a higher stock price was a bonus.

Today, investors use company earnings (real or imagined, since accounting has become much more "flexible" in the last hundred years) to determine whether a stock's price is fair, then they root for that price to go higher while receiving little or nothing in the form of dividends.

Isn't there something fundamentally wrong with this sort of "progress".

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8 comments:

Ted S. said...

Tim, why do you torture yourself with thoughts like this?? Just buy some tech stocks, turn on CNBC, and get wealthy with the rest of us.

Tim said...

Ha! Sometimes I wonder...

Anonymous said...

I don't agree with dividends.
First, in vanderbuilts time, money was worth something, as it was based on gold. Now with the devaluation of the dollar you need to have "cheap" money and lots of paper to make any real money. Also competition is tougher now, and moving items when oil is expensive relative to supply is expensive. Think when this whole cap and trade thing comes into play, it is going to cut transportation off at the knees, because they have to buy those BS carbon credits.

On dividends, what the investors are really doing is hampering the potential growth of the company by making them give away all or most of their profits, that they could have reinvested. If a investor gets a dividend, think of all the waste one accumulates when you reinvest your dividends back into the company. you have broker fees, exchange fees, haircut fees, etc and you have your money out of play while you wait to get the money back in play again.

Also it has been shown that companies tend to reinvest and get a better return than the individual investor.

I would rather sell a portion of my shares periodically and have them appreciate via share price, than wait for a company handout that can be discontinued, diluted, or cut. Dividends are in short, for old lady's and other green investors that get suckered in to purchasing them as a supplement for real income at the detriment of their portfolios' performance and at companies who are hampered by this out of date practice.

Anonymous said...

Forgot this;
http://bootstrapinvesting.com/2009/04/20/why-dividends-suck.aspx

fresno dan said...

Capital appreciation - a scam.
Buy and hold - a scam.
All the accounting gimmicks, all the nice propaganda - the market is up 60%. Well, buy a hundred dollars of stock - it goes down 50% and than up 50% - and you have 75$. Wash and repeat.
The market always recovers - ask the Japanese.

Anonymous said...

Anon 1:46 - you are clearly part of the problem, not part of the solution

Tim said...

What's interesting is that if you go back to Benjamin Graham's definition of "investment" vs. "speculation", there is very little of the former going on in equity markets today.

"An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative."
Graham and Dodd's Security Analysis (original 1934 edition)

Anonymous said...

B-bu-but if companies paid out dividends, then how could any of them possibly attract talent since the profits would be going to shareholders instead of the company management bonus pool?

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