Comments on: Debating financial speculation with speculators http://blogs.reuters.com/felix-salmon/2011/06/23/debating-financial-speculation-with-speculators/ A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: Hung Pfanstiel http://blogs.reuters.com/felix-salmon/2011/06/23/debating-financial-speculation-with-speculators/comment-page-1/#comment-55621 Sun, 19 Oct 2014 16:20:09 +0000 http://blogs.reuters.com/felix-salmon/?p=8751#comment-55621 Well, in response to pressure from concerned citizens and action groups, Johnson & Johnson has decided phase out the use of micro-beads!!! Learn more about this victory and future plans here: 5 Gyres Victory!

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By: mwwaters http://blogs.reuters.com/felix-salmon/2011/06/23/debating-financial-speculation-with-speculators/comment-page-1/#comment-27920 Sat, 25 Jun 2011 00:22:55 +0000 http://blogs.reuters.com/felix-salmon/?p=8751#comment-27920 Without reading all the comments, I will say the “investment is good and speculation is bad” construct is fatally flawed. I’m a big supporter of more regulation of the finance industry, but I think pure, greedy speculation can have a lot of upside, particularly through increasing liquidity in certain instruments.

In the commodity markets, for example, it would be tough to see a market for hedges for airlines, farmers or food producers without traders constantly trying to make a buck. The old-fashioned market-makers on the NYSE floor also do the same thing, doing nothing except trying to buy low and sell high. I read once that most guys still on the floor read the New York Post rather than the WSJ. They couldn’t really care less about the long-term fundamentals of a company, but they still help grease the wheels for investment.

The real issue is how speculators could take systematically dangerous risks. Do you remember all the CME traders threatening the downfall of the international markets? Neither do I. On the shadow market, on the other hand, counterparty risk can be extremely unpredictable and subject markets to bank runs. The real way to help make financial markets robust is not to demonize “speculation,” but the system robust to too much speculation.

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By: TFF http://blogs.reuters.com/felix-salmon/2011/06/23/debating-financial-speculation-with-speculators/comment-page-1/#comment-27909 Fri, 24 Jun 2011 19:47:30 +0000 http://blogs.reuters.com/felix-salmon/?p=8751#comment-27909 “I would like to suggest that the double tax on dividends be eliminated, so that more companies would be willing to distribute more of their profits.”

Sure, I like that proposal fine! Especially if we can convince the Lords of American Industry that a variable dividend is not the end of the world. (I believe European companies already follow this practice?)

The key to investing — as opposed to speculating on market sentiment — is putting capital in places where it can be used efficiently. If a company doesn’t have promising internal growth prospects, and can’t find a fairly-priced acquisition with good synergies, then management needs to find the discipline to return that cash to shareholders. Let them figure out how to allocate it next.

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By: KenG_CA http://blogs.reuters.com/felix-salmon/2011/06/23/debating-financial-speculation-with-speculators/comment-page-1/#comment-27908 Fri, 24 Jun 2011 19:34:38 +0000 http://blogs.reuters.com/felix-salmon/?p=8751#comment-27908 TFF, I wasn’t putting words into your mouth, as my comments were not so much specifically directed at you, but rather at the concept of buybacks in general. However, judging from your comments, you have a much different philosophy on managing your wealth than most people who use public equity markets for that purpose. Since there are so many stocks that pay little or no dividend, I think it’s safe to assume that most people who buy stocks are doing so with the hope they will appreciate and be able to realize long term capital gains. It is those people who are counting on buybacks to drive share prices up.

Since the post started this thread with a question about financial innovation, I would like to suggest that the double tax on dividends be eliminated, so that more companies would be willing to distribute more of their profits. That would be a far more efficient way to deliver value to shareholders than buybacks.

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By: TFF http://blogs.reuters.com/felix-salmon/2011/06/23/debating-financial-speculation-with-speculators/comment-page-1/#comment-27905 Fri, 24 Jun 2011 19:20:04 +0000 http://blogs.reuters.com/felix-salmon/?p=8751#comment-27905 KenG, I think I explained myself quite clearly. You may disagree, but don’t put words into my mouth. Share buybacks are good for shareholders to the extent that they drive per-share earnings higher. Whether or not the share price increases, I win. Either the per-share earnings shoot through the roof, escalating ever more rapidly, or the share price gets dragged along behind the per-share earnings. EITHER WAY I WIN!

IBM does pay a dividend, targeting roughly a 20% payout ratio. Their share buy-backs are on top of this. Easier if we stick to real examples. I’m typically not invested in any companies that don’t pay a dividend, as I believe that practices helps to encourage a financially disciplined mindset for management.

You own companies for their future cash flow. Unless a company is growing VERY rapidly, it probably tosses off more cash than it can productively use internally. The remaining cash goes towards acquisitions (sometimes make sense but are usually dilutive), share buy-backs (which make terrific sense when your P/E ratio is low), or dividends (which are tax-inefficient but otherwise nice). The nice thing about share buy-backs is that the money can easily be diverted to acquisitions if something genuinely profitable turns up. The market tends to react negatively when you cut the dividend.

And yes, I’m quite ready to sell a company when the mood changes. Nothing sweeter than buying a company at a 12 P/E, enjoying 10% to 15% earnings growth for a couple years, and selling at a 16 P/E. But your rationale for buying/owning a company should NEVER depend on presumptions of a rising share price, certainly not over anything less than a decade.

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