101–110 of 119 posts
The author makes a mistake here. It's fine to think of entropy as messiness; that's the Boltzmann picture of statistical mechanics. The mistake is thinking that lowering entropy, or getting rid of the mess, is a satisfactory strategy. Think of it as a negative feedback system, like a thermostat. Keeping entropy low means continually correcting errors. This is a successful strategy only if the world always stays the s…
Earlier quoted context omitted.
> unlike a dividend, there is no way to directly tie the repurchase of shares to x amount of actual long term market value I don't understand what you mean. From the point of view of the company - and what you called its significant incentive to go ‘growth’ if I understood your comment - there is no difference between spending $1bn repurchasing shares or distributing dividends.
To the investors there is! If you spend $1bln buying back shares, that isn’t money in their pocket until they sell. And if they sell, they don’t get any future ‘growth’. And if the company/economy doesn’t do well next quarter, they’re losing it in the form of decreased stock value, or even implosion/complete loss. A dividend is direct cash in the bank. Much lower (zero) ongoing risk of losing that payment. But it get…
I thought we agreed that the difference to investors is that selling shares back to the company is better from a tax perspective than receiving a dividend.
> If you spend $1bln buying back shares, that isn’t money in their pocket until they sell.
In aggregate, they just sold $1bn. Individually, they can sell the proportional part. (Ignoring the second-order effects due to the uncertainty about the timing of the buybacks.)
> And if they sell, they don’t get any future ‘growth’.
Just like when they get the dividend and they end up owning the same share of the same company. The difference is that they pay less taxes.
> And if the company/economy doesn’t do well next quarter, they’re losing it in the form of decreased stock value, or even implosion/complete loss.
This seems more of a reason to avoid companies that do not distribute money (either in the form of dividends or buybacks), doesn't it?
> A dividend is direct cash in the bank. Much lower (zero) ongoing risk of losing that payment. But it gets taxed directly at a higher rate.
Selling the stock to the company is also cash in the bank - and it doesn't get taxed at a higher rate.
Whatever the relevance of "they don’t get any future ‘growth’" argument it's unrelated to the difference in rates between income taxes and capital gain taxes.
For the sake of the argument, let's say that both tax rates are equal. If company A distributes $1bn and company B doesn't would you still say that investing in company A the investros "don’t get any future ‘growth’"? In that case your preference for 'growth' companies is not based on the fact that dividends are taxed at a much higher rate than long term capital gains.
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noise is the way out of local optimums ?
I've observed this personally! After finding a solution to a problem and repeating it numerous times, I'll often randomly change one parameter of the solution (I'm talking about things like opening jars, not building complex systems, but it could apply there as well) to see if it works better. This often happens randomly because I ask my self "what if I did this?" as I'm performing the action. The result is that almo…
Earlier quoted context omitted.
I've observed this personally! After finding a solution to a problem and repeating it numerous times, I'll often randomly change one parameter of the solution (I'm talking about things like opening jars, not building complex systems, but it could apply there as well) to see if it works better. This often happens randomly because I ask my self "what if I did this?" as I'm performing the action. The result is that almo…
I'm curious - what's your "better" way of opening a jar?
Kidding =]. I actually don't have a better way of opening jars, it was more an example to show the triviality of the type of problems this kind of trial and error can work for. Maybe a better example is figuring out a repeatable way to get a stubborn door to shut. Things like that.
EDIT: Actually, you probably already know this, but if you turn a jar upside down and hit it on a counter top, it can knock the lid loose enough to twist off. I didn't mention it because I didn't figure that one out on my own, but if you're looking for jar-opening tips, that's a good one.
Earlier quoted context omitted.
To the investors there is! If you spend $1bln buying back shares, that isn’t money in their pocket until they sell. And if they sell, they don’t get any future ‘growth’. And if the company/economy doesn’t do well next quarter, they’re losing it in the form of decreased stock value, or even implosion/complete loss. A dividend is direct cash in the bank. Much lower (zero) ongoing risk of losing that payment. But it get…
> To the investors there is! I thought we agreed that the difference to investors is that selling shares back to the company is better from a tax perspective than receiving a dividend. > If you spend $1bln buying back shares, that isn’t money in their pocket until they sell. In aggregate, they just sold $1bn. Individually, they can sell the proportional part. (Ignoring the second-order effects due to the uncertainty…
1) tax efficiency 2) actual risk of losing money/extracting value from their holdings.
If an investor wants reliable, regular income, stock buybacks aren’t helpful. Dividends are. Enough to be worth using less tax efficient structures.
However if an investor wants a maximally large portfolio at a indefinite future point, they generally don’t care about dividends. In fact if they want maximum tax efficiency above cash flow (which such investor generally wants), and are comfortable with risk, they want to avoid dividends.
Stock buybacks ARE more tax efficient than dividends, but also higher risk.
In theory (and usually in practice even more so), buying back the $1bln increases the value of ongoing remaining stock holdings by $1bln.
However, unlike a dividend, that doesn’t get converted into cash. It turns cash into increased scarcity for equity ownership in the company.
Depending on expected future earnings multiples (cough inflated P/E) this can swing widely, but also provide ‘leverage’ for a company doing this.
Which increases ongoing dependence on management of the company, market perception of the companies worth, etc. which increases actual risk to the investor going forward.
It is far more tax efficient though.
Which if ‘everything always goes up’ is not a big deal, and often desirable. If someone is making sure they have cash in a bank account every month so they don’t need to be eating cat food, less so.
Does what I’m saying make more sense in that context?
I suspect that the ‘market goes up’ + automation of trades has also made dividends look less necessary. It’s been awhile since we’ve had a good stock market crash.
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> To the investors there is! I thought we agreed that the difference to investors is that selling shares back to the company is better from a tax perspective than receiving a dividend. > If you spend $1bln buying back shares, that isn’t money in their pocket until they sell. In aggregate, they just sold $1bn. Individually, they can sell the proportional part. (Ignoring the second-order effects due to the uncertainty…
I think several things are getting confused here. I’m mentioning two factors: 1) tax efficiency 2) actual risk of losing money/extracting value from their holdings. If an investor wants reliable, regular income, stock buybacks aren’t helpful. Dividends are. Enough to be worth using less tax efficient structures. However if an investor wants a maximally large portfolio at a indefinite future point, they generally don’…
That's absolutely wrong. (If that's - in some sense - correct, it will also be true that distributing $1bn in dividends the company increases the value of ongoing remaining stock holdings by $1bln.)
Anyway, the question was if the tax treatment of dividends relative to capital gains gives investors a strong incentive to prefer 'growth' companies that do not ever return capital to the owners rather than 'not-so-much-growth' companies that pass a substantial part of their cashflows ot the owners. And the answer is 'not as much as you implied' because there are also companies that distribute money using a mechanism that is not affected by the tax treatment of dividends so investors can avoid dividends without being restricted to 'growth only' companies.
Earlier quoted context omitted.
I think several things are getting confused here. I’m mentioning two factors: 1) tax efficiency 2) actual risk of losing money/extracting value from their holdings. If an investor wants reliable, regular income, stock buybacks aren’t helpful. Dividends are. Enough to be worth using less tax efficient structures. However if an investor wants a maximally large portfolio at a indefinite future point, they generally don’…
> In theory (and usually in practice even more so), buying back the $1bln increases the value of ongoing remaining stock holdings by $1bln. That's absolutely wrong. (If that's - in some sense - correct, it will also be true that distributing $1bn in dividends the company increases the value of ongoing remaining stock holdings by $1bln.) Anyway, the question was if the tax treatment of dividends relative to capital ga…
Even if the shares are not destroyed, the assets of the company now include those $1bln shares and are non-voting. Every other shareholder now has their actual voting power/control/share increase proportionally.
Take the hypothetical case where all but 1 share was bought back by the company. The owner of the one remaining non-bought back share is now the controlling shareholder and that share should be valued at the prior market value of all public shares, modulo what everyone things about it’s new future in such a scenario.
Dividends do not work the same way, and would not do the same thing - though for a value company, share price generally is based off the dividend payment history over a period of time, and expected likelihood of that trend continuing. So missing a dividend would definitely have an impact.
It isn’t quite like a bond, but many people try to use value companies that pay dividends for similar purposes - cash flow.
If a dividend isn’t paid, theoretically you’d expect the money not spent to be an asset on the books and increase the overall share price proportionally, modulo the markets valuation of such a thing. But it still isn’t cash in anyone else’s bank account, and the companies management could just spend it on something else at any time.
Earlier quoted context omitted.
> In theory (and usually in practice even more so), buying back the $1bln increases the value of ongoing remaining stock holdings by $1bln. That's absolutely wrong. (If that's - in some sense - correct, it will also be true that distributing $1bn in dividends the company increases the value of ongoing remaining stock holdings by $1bln.) Anyway, the question was if the tax treatment of dividends relative to capital ga…
Mind providing some references as to how removing $1bln of shares from the market doesn’t increase every remaining shareholders value by $1bln, assuming market cap stays the same (which it generally does, independent of another variable)? Even if the shares are not destroyed, the assets of the company now include those $1bln shares and are non-voting. Every other shareholder now has their actual voting power/control/…
The market cap definitely doesn't stay the same. When $1bn goes out the door (either as a distribution of dividends or to repurchase shares) the value of the company goes down quite a lot instantaneously. [Maybe somewhat less than $1bn though, as cash on hand may be discounted due to the risk of mismanagement, the tax on the dividend is considered, etc.] The market value adjusts instantaneously when a dividend is distributed as it's known in advance, in the case of buybacks the company only discloses them from time to time but the adjustment to the fundamental change in value happens eventually.
Can you provide a single reference that says that the value of a company doesn't goes down when it gives money away?
> Every other shareholder now has their actual voting power/control/share increase proportionally.
All the shareholders together own a company that is worth less than before - the only difference is that it has less dollars in it's current account. [That is, all the remaining shareholders. When all the previous shareholders are considered they jointly own a company that is worth less than before and a bag of money - their aggregate wealth is essentially unchanged as discussed above.]
> Take the hypothetical case where all but 1 share was bought back by the company. The owner of the one remaining non-bought back share is now the controlling shareholder and that share should be valued at the prior market value of all public shares, modulo what everyone things about it’s new future in such a scenario.
Ok, let's assume that I have an Intel share and everyone else agrees to sell their shares to the company at the current price of $40 and the company can somehow get the $160bn financing required to buy those shares. Then my share is worth $160bn?
Yesterday, all the shareholders together had a company worth $160bn. If today I own a company worth $160bn and the other shareholders have $160bn in cash, where do you think the extra $160bn came from?
A simpler case: Alice and Bob are equal shareholders in a company. The company has $10mn in cash. They reach an agreement about the valuation of the company being $20mn. The company uses the $10mn in cash to buy back Alice's interest. [I said the company has $10mn in cash for simplicity. It could have more or have less and take a loan for the rest without affecting the argument.] Now Bob is the sole owner of the company. How much is the company worth? Do you really think that the company is still worth $20mn?
What if I'm a sole owner and sell half of my shares to the company? Has my wealth doubled? Can I have the (half) cake and eat it too? Can I keep selling half my interest to multiply my wealth?