Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : Qualcomm Incorporated (QCOM) -- Ignore unavailable to you. Want to Upgrade?

To: qveauriche who wrote (129477)	6/3/2003 11:27:05 AM
From: Stock Farmer	Read Replies (2) \| Respond to of 152472

John - The analysis seems to be that the roi for equity investments consists entirely of the npv of dividends paid in the future. Isn't it more realistic to also factor in the price one can get for the shares at the time he's ready to sell it? Yes! But now the $34 question: what is that price, and how is it calculated? A first-order answer requires our ability to trace a recursive trail until the very last shareholder ends up holding worthless paper as the company shuts the doors for the last time. This process ignores a few possible outcomes, but is reasonably close to the bog-standard trajectory of public companies. And all models are wrong, some are merely useful. So let's use this model. Find a share. Track its progress through life from now forward. If we could get all of the people who ever held it in a room together and ask them how much each made, and lost, and total everything up, even with the most charitable brokers on the planet who take no commissions on trade, the total will come out to exactly the sum of distributions by the company minus the initial price the initial shareholder paid for the share!!! If you don't believe me, it's simple to prove it for yourself by tracing out scenarios where person A buys a share for price A sells it to person B for price B who sells it to person C who sells it to person D... and so on all the way up to person ZZZ who ends up not being able to sell, for an effective price of zero. If we label the prices of each transaction with the person's name (A, B, C, D... ZZZ), and reduce all values to constant dollars (e.g. present value) then we know each person's profit (excluding dividends and distributions) is Person A: B-A Person B: C-B Person C: D-C : Person ZZZ: 0-ZZZ The sum of this is (B-A)+(C-B)+(D-C)+...(0-ZZZ) = -A Which is INDEPENDENT of the number of shareholders in between!!! That doesn't mean that every equity purchase is a loss. It's only a loss if there aren't any ofsetting distributions (e.g. dividends). If we count the distributions of the company during the holding period of each person and label it with a lower case letter, then we now have Person Purchase Sale Distributions Profit A A B a B-A + a B B C b C-B + b C C D c D-C + c D D E d E-D + d : ZZZ ZZZ n/a (0 zzz 0-ZZZ + zzz Total: n/a n/a (a+b+c...+zzz) (a+b+c...+zzz) - A So the total profit of all shareholders going forward is (a+b+c+d+...+zzz) - A. Again, the result is independent of the number of people who buy and sell the share! It is equal to the stream of future dividends minus the purchase price. So what does this mean about the purchase price "A"? Well, firstly, one would be looking at a very risky scenario if they buy a share at a price A higher than the sum of expected future distributions. What this means is that the expected profit from all future shareholders is negative, or that a loss is going to be distributed amongst all current shareholders (self included). So the purchasor is not inclined to purchase for a price much above (a+b+c+...+zzz). What about the seller? Well, if they hang on forever, they can expect to receive no less than the present value of the sum of expected distributions (a+b+c+...zzz), so this is the minimum they would want to receive in exchange for giving them up. So the seller is not inclined to purchase for a price much below (a+b+c+...+zzz). So in a perfect world where two parties hold the same expectations of the present value of the future distributions, they would agree on a sale price A equal to (a+b+c+...+zzz)!! Maybe higher, maybe lower, depending on their tolerance for risk and charity. If we hold expectations for a stream of dividends, then a consistent profit expectation is the difference between this and current market price. Simple. You wrote: I admit I'm not likely to see dividends from QCOM equal in npv to the price of the stock. And an outcome of this is that you are expecting a pending loss is about to be distributed amongst current and future shareholders of QCOM, yourself included. Only you may not be expecting this outcome explicitly. Buying at this price is a kind of financial equivalent of Russian Roulette. Which is kind of what I've been saying all along. John