Brilliant post, GV -- and, according to the SI post-watchers, cool as well.
There is a question that has been troubling me for some time, and I should like to hear your take on it.
I am an old-fashioned type, and when I "shop" for a company, I look for the traditional things: reasonable valuations; steady and increasing revenue, cashflow, and earnings growth; low debt, plenty of free cashflow, etc., etc. I could never bring myself to buy stock in the kind of company many investors these days like to hurl their money at: the no-earnings cash-burning types, which literally dominate certain industries. Nor can I buy into the methods devised to to "value" such companies: such as, valuing them in terms of the amount of revenues they generate, or the number of subscribers they have, or the number of hits they get, or whatever -- particularly in view of the fact that the faster such companies expand, the more money they tend to lose. Tut, tut!
In short, I subscribe to the old mythology: you should only buy stock in solid, profitable companies, and should expect a payback on that investment within a reasonable period of time, etc., etc.
But it is a mythology, when you remember that the old methods of evaluation were developed when companies still paid dividends. But relatively few pay dividends any more, and most of the dividends are chickenfeed. Stock appreciation, and only stock appreciation, is where it's at. Payback time, in short, comes only when you sell your stock in the company.
Now, let's say I buy stock in Company A, a virtuous, upstanding, debt-free and profitable company that does everything "right." But Company A lacks "charisma." It produces a boring, if necessary product -- baby diapers, let's say. It does not turn investors on, and so its price appreciates relatively slowly.
Meanwhile, Joe buys stock in Company B, a wastrel company, one that gobbles up cash like there is no tomorrow, with a promising future but a present lived just one jump ahead of the bill collector. Company B is involved in producing some fantastic new technology that nobody really understands but that everybody thinks will crack all the secrets of the universe. So, its price increases by leaps and bounds.
By the end of the year, Company A's price has gone up by 25%; Company B's has gone up by 200%. Joe and I both have to sell our stock, to put our kids through college, say. our dentist bills, say. Whose kid is going to go to Harvard, and whose is going to go to Ho-Hum State College?
Otherwise put: wshich one of us made the wiser investment?
In the no-dividend world, isn't the proof in the pudding -- that is, in stock appreciation? We may think that the stock of Company A should have appreciated more than that of Company B, but the fact is that it did not.
I will continue to buy Company A, and spurn Company B, but is that simply because I am a slave to outdated conventions that no longer apply? And don't say that thirty years down the road Company A will still be around, while Company B will either abandon its wicked ways or end up in bankruptcy court. I am, like, really old, and I don't have thirty more years to wait.
I also realize that the picture is not usually that clear-cut; and that the stock of many "good guy" companies can appreciate at a faster rate than that of many "bad guy" companies. But the basic question here is: does it really matter how, or why, the stock appreciated, or whether it "deserved" to appreciate?
Sometimes I think we might just as well be trading Pokemon cards. The adult versions, of course. <g>
jbe
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