Best education on dividends you'll ever receive

Mar 2, 2013

In this issue:
» A crisis bigger than 2008 could be on its way
» Another huge reduction in spectrum prices needed
» EU bonus cap unnerves banks
» India amongst the biggest loser this week
» ....and more!

------------------------------------- It's Not Just About Picking The Right Stocks... -------------------------------------

Take a look at the pyramid alongside...

This simple structure holds the secret to investing success!

That's right! You could read a dozen books on how to pick the right stocks, and yet never really create solid wealth from your portfolio.

And most of the times, the reason has something to do with this pyramid.

So, what's this all about? Find out all about this simple yet powerful investment rule here...

What event do most value investors look forward to every year? It is of course the AGM of a firm that's perhaps the biggest proof of the kind of magic that value investing can work. The AGM of Warren Buffett's investment vehicle Berkshire Hathaway that is. But no matter how hard we try, many of us may not get a chance to meet the value investing legend in person. Where we have an equal chance though is getting access to the Oracle of Omaha's annual letter to shareholders. That this piece of document is an extremely useful reference guide for value investing is an understatement. Indeed, there are investors galore who've minted millions just by soaking in the wisdom that these letters have carried in them.

Thus, when the letter for the year 2012 arrived last night, we were all ears. And as usual, it was packed with some fantastic insights into the world of investing and finance. Buffett also bemoaned about how he underperformed the S&P for only the ninth time in the 48 year history of Berkshire Hathaway. And how he has beaten S&P over every period stretching five years but even this record under threat now. But this does not cause even a small dent to his stupendous outperformance relative to the S&P which at last count stood at 78:1. In other words, one's corpus would have grown 78 times more had one invested in Berkshire Hathaway in 1964 as compared to S&P. Really mindboggling whichever way you look at it.

The biggest take away from the letter though has to be the Oracle of Omaha's discussion on dividends. In a discussion that ran into roughly 3 pages, he forever settled the debate on dividends. He clearly showed us how it is better to reinvest the earnings back into the business than it is to pay them out as dividends. Of course, the assumption here is that the company under consideration is able to earn an above average return on capital on all reinvested earnings. And also that such companies trade at a slight premium to their book value.

These conditions are indeed very reasonable. And thus when they both are present, it is always better from a long term perspective to re-invest earnings into the business. Not to forget that a shareholder earning a dividend has little control on how much dividends he can get. For a business that reinvests earnings however, the shareholder can always share a part of his holdings depending on the cash he requires.

Thus, the choice is clear as per Buffett. Between two companies that earn the same rate of return on capital and are likely to trade at a similar valuation multiples, one should choose the one that pays out lesser proportion of earnings as dividends. Provided of course, the reinvested earnings enjoy the same returns on capital.

Do you think that after more than a decade of sequential rise, gold prices will correct now? Please share your comments or post them on our Facebook page / Google+ page

 Chart of the day
The fact that the finance minister has hinted at fiscal prudence going forward is indeed good news. But we all know how more often than not there is a huge gap between what the Minister says and what it actually delivers. Thus, today's chart of the day is an attempt to find out to what extent fiscal promises were met in recent years. As the chart shows in two of the past three years, the actual fiscal deficit has managed to overshoot the target that was set. So, will it be the same this time around? Based on back of the envelope calculations, it does look difficult for the FM to achieve the target he's set for himself in FY14 and he would certainly need help from factors outside his control if he were to get anywhere close. And this is what we have the maximum issue with. The policy makers should try and make the economy resilient enough so that our dependence on external factors comes down significantly.

Source: Business Standard

In India from an early age we are taught to revere and respect the elderly. So, when we read Stan Druckenmiller, one of the best performing hedge fund manager's comments, we were taken aback. His warning for the youth of America is: 'Don't let your grandparents steal your money'. But, when we read a little more into his warning, we wanted to hide under the covers. The ballooning costs of Social Security, Medicare and Medicaid, will bankrupt the youth in the US. The unfunded liabilities are as high as US$ 211 trillion! This poses a much greater danger than the country's US$ 16 trillion debt ceiling being debated in Congress.

According to Stan, this crisis is bigger than the 'sub-prime crisis' in 2008. As per the 2010 US Census, there were 40 m people in the US 65 and over. By 2020, that number is expected to grow to 55 m. Plus as the elderly population rises, the number of workers who pay into social security is dropping. Shifting the tax incidence to the elderly may be one solution. But this it would need some deft political manoeuvring. Well, all in all, this situation really makes us appreciate India's demographic dividend all the more.

Big bonuses. At one point of time these two words were the hallmark of Wall Street. They alone attracted traders and bankers to their profession. Soon it became the norm for the banking and financial industry across the world. But once the subprime crisis struck in 2008, big ticket bonuses became the target of angry investors. The likes of Bear Stearns and Lehman Brothers went down the history of global finance as failed banks. That too despite the fact that they paid the biggest bonuses. Goldman Sachs was called 'too big to fail'. Its attempt at reverting to big bonus payout in 2009 was also heavily criticized. However it was not until recently that bank managements took a stern approach towards bonus payouts. European banks in particular, reeling under the pressure of austerity, decided to cap bonus. However, it seems the going is unlikely to be easy!

The European Union (EU) has provisionally agreed on a 1:1 bonus-to-salary ratio for bankers. However as per Financial Times, European banks believe that that are at risk of losing key traders and managers. US and other international rivals that do not have such caps in place could attract the best talent. Hence the bonus cap could pose a competitive threat to Europe's finance industry. We believe not just in the EU, but banks and financial institutions the world over should put restrain on bonus payouts. Also the payouts should be linked to long term performance. Only then will financial markets globally witness some stability.

The Government was counting on one major source of revenue to bridge the fiscal gap for the financial year 2013 (FY13). This source was the spectrum auction. It had a huge target of Rs 400 bn that it had planned to garner from this auction. This is why they had priced the 2G spectrum at the level that they did in November 2012. It is not news that the round of auction fell flat. So it decided to slash the rates by nearly 30% and tried again last week. Unfortunately this round fell through as well since only one operator participated in the auction. Now Goldman Sachs feels that the government needs to slash the spectrum rates by 50% if it plans to get close to its target of raising Rs 400 bn from the telecom sector. But the question is will a price cut of 50% excite the operators and get them to participate actively in the auction?

Given the troubles that the telecom sector is facing; even a 50% cut may not be enough to get the operators to participate. Their reluctance in shelling out large sums of cash comes from their stretched balance sheets and low margins. Thanks to the intense competition in the sector and rock bottom tariffs, operators have been suffering a loss of margins. Most of the new guys on the block are still bleeding. At the same time, the regulatory costs and one time payments have just been mounting up. This has forced most of them to take on huge quantum of debt to meet the payment requirements. Unless things improve for them, they are not very keen to shell out more cash. But they do need spectrum to continue or expand operations. So it is not that the demand is not there. The government needs to keep its targets on the back seat and instead sit down with the operators and listen to them. This will help it to arrive at a conducive pricing. Only then will the spectrum auctions be successful.

It was a mixed week for global stock markets. The US stock markets ended the week higher by 0.6% as strong economic data overshadowed growth concerns in China and Europe and let investors discount the impact of federal spending cuts (referred to as sequester). As per the economic data, the US manufacturing activity expanded in February 2013 at the fastest pace in 20 months. Among the European stock markets, the stock markets in Germany gained 0.6% over the week. However, the stock markets in France ended the week lower by 0.2%. The data out of Eurozone was disappointing with region's unemployment rate at 11.9% for the month of January. The final reading of Markit's purchasing-managers index (PMI) also suggested that the euro zone remained in contraction territory in February.

Among the major Asian stock markets, China (up 2.0%) and Japan (up 1.9%) led the gains boosted by positive economic data from US. China's manufacturing grew at its slowest rate in five months in February 2013. The economic data from Japan suggested slight improvement in unemployment but a decline in business investment. However, there was some optimism as Japan's prime minister nominated a new central bank chief known to support deflation fighting economic strategies.

It was an eventful week for India as Union Budget was announced. The Budget disappointed markets and the Indian equity markets led the losses and ended the week down by 2.1%. In another key event, HSBC Markit manufacturing Purchasing Managers' index (PMI), rose to 54.2 in February, after falling to a three-month low level in January.

Source: CNNfn, Yahoofinance, Kitco

 Weekend investing mantra
"Usually a very long list of securities is not a sign of the brilliant investor, but of one who is unsure of himself" - Philip Fisher

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4 Responses to "Best education on dividends you'll ever receive"


Mar 2, 2013

What is the actual output since last day 5 yrs;
How much did OUR production increase / new fields identified?
Who is buying the new output and the old stock?
How is just traded as ETF?
What use does Gold serve directly to the buyer?
Based on this, the justification of OUR (India) footing the bill for inflated prices that only benefits is criminal loss to our exchequer and day to Ordinary citizen's pocket. Majority buy and sell on paper / from out the country stock just for profiteering while the actual user pays high prices to use it for actual purpose (very sparingly)!

Technically, why should it be priced over 600-1200 at the most than even the slide that has started around 1500???? I certainly will like to understand the fundamentals if there is any of why we poor III world people should suffer due to world's poor management of Economy by Developed nations and their Market dominated policy?



Mar 2, 2013

Oracle of Omaha's annual letter to shareholders.
pl post link to these letters

Like (1)

George Elava

Mar 2, 2013

Downward trend of gold is temporary. Yellow has to go on up steadily in the coming years also. Only because the control on paper currency will be exhausted!

Like (1)


Mar 2, 2013

There is already a correction we are observing in Gold but it is not the right time to decide its fate from here because global economy picture still not so clear but as Gold is not for trader it could be kept at side by a long term investor at 20 to 30 % of their total portfolio as indisputably it will give protection from inflation for that portion in any economic turmoil.

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