Forum Archive Index - January 2000

[Phil Eriksen <phil@acepay.co.nz>]

> However in the long term its earnings yield per
> share that matters most and in any severe downturn (which usually catch
> most people by surprise) its the quality stocks with good earnings per
> share which don't collapse in a heap like the rest. The fact that dividend
> yield is overseas is very low and often irrelevant is a sign that (a) there
> are some good fast growing quality techs and some bad techs with fast
> growing share prices (b) that share markets overseas are over mature and
> due for a healthy correction. (once previously where that statement
> "dividend yield is very low and often irrelevant" was true Warren Buffett
> sold off everything and returned the money to his investors. After the
> correction when "dividend yield is very low and often irrelevant" was no
> longer true he started up Berkshire Hathaway and did brilliantly). In NZ in
> 1987 the "dividend yield was very low and often irrelevant".

To the best of my knowledge, dividend yields in the US have almost
always been lower than in countries such as New Zealand.  The reason I
think is simply that American business is less conservative, as are it's
investors, who demand aggressive expanding companies.  To fund this, US
business retains a much higher % of earnings, whereas NZ companies often
pay out virtually everything.

As for Buffett, my understanding of the man is that dividend yield
wasn't of much importance to him, but what the company did with its
retained earnings was the absolute key.  When analysing a company, if he
could plainly see that the company was generating well over a dollar of
value for each dollar retained, he would be keen.  If the company was
able to retain earnings to add huge amounts of value, I would think his
preferred dividend yield would be zero.  

I'm not surprised he isn't active to any great degree in the market.  A
huge amount of money has flowed into the market due to the "baby
boomers", the boom, the internet age etc, and i simply can't see proof
that this capital is being deployed in a way that will create long term
value.  I followed a link off Sharechat the other day to an article
talking about advertising during the Superbowl.  I forget the exact
number, but many of the businesses advertising are net companies.  And
not just Yahoo.  One of them is a business (computer.com, i think) that
is launching its business that day by spending half of it's money on a
superbowl ad.  I visited the site, there was no original idea, nothing. 
If I gave you $50,000 to start a fish and chip shop, would you spend
half of it on the sign on the window?  It's madness.  

The Buffett situation will be fascinating over coming years.  His
situation (little debt, owning highly profitible companies, having
access to the float from insurance operations) means that if the market
goes mad in the other direction(ie down) he might well be able to do his
favorite thing - "something really big".  Although it's a bold
prediction, i wouldn't be shocked, if the market allowed it, to see
Berkshire owning 100% of Coke.  

> Spreading over x number of shares is, as Warren says, a way of covering up
> your mistakes and its much better to do more thorough analysis or hold off
> a bit and try and get them all right. With larger numbers of shares you're
> just locking into mediocrity and a low average rate of return.

Completely agree, but when stocks are going up 500%, but anyone can see
that these shares are risky, diversification is a must.  If I was gonna
invest in, say, NZ listed tech companies, I would put small amounts in
all of them.  I'd rather, however, try and put bigger amounts in a
company i (hoped!) was well selected.

Cheers,
Phil

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