Dilbert Creator: If everyone indexed...

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docneil88
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Dilbert Creator: If everyone indexed...

Post by docneil88 » Thu Aug 07, 2014 12:44 pm

Scott Adams, who created Dilbert, has an MBA in economics and management from UC Berkeley. Here are some excerpts of his musings from The Scott Adams Blog dated August 4, 2014 ( http://www.dilbert.com/blog/entry/how_t ... in_stocks/) :
An investment advisor needs to justify his pay, and that means pretending to have stock-picking magical powers that science has never discovered. Every study on the topic shows that the professionals generally don’t beat the market average over time. But they do cause a lot of churn that causes a lot of unnecessary taxpaying on gains. And the professionals charge enough to take perhaps 25% of your potential annual gain in fees.

Meanwhile, wise people such as you buy your market index ETFs and avoid all of the risks injected by the professional investment advisors. But your potential stock gains are suppressed because so many other people are using professional advice and losing money. That makes the category of “investing in stocks” look riskier than it is.

So my suggestion for permanently lifting the value of the stock market to new sustainably high price-earnings ratios is to pass a law making it illegal to offer financial services without disclosing the truth – that they are mostly a waste of your time.

...Once society gets rid of the risk of professional investment advice, stocks should go to a permanently higher price-earnings ratio. Given the massive dollar amounts in the investment economy, this instant increase in the value of stocks would have an enormous impact on humanity.
Ann Marsh at http://www.financial-planning.com/news/ ... 061-1.html has an interesting response. She quotes some people critical of Adams' piece; rather than denying Adams' claim that professionals don't beat the market average over time, they point to ways that investment advisors can add value, e.g. "talking you out of doing something stupid."

Well, if actively managing a portfolio of individual stocks is stupid, they usually aren't talking you out of that. To be fair though, some investment advisors do recommend index funds, and some provide worthwhile financial planning services such as helping an investor look her financial picture as a whole, helping her determine her willingness and ability to take equity risk, and helping her maintain her target equity/bond split during market crashes and market bubbles. Best, Neil
Last edited by docneil88 on Thu Aug 07, 2014 12:52 pm, edited 2 times in total.

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Re: Dilbert Creator: If everyone indexed...

Post by Gropes & Ray » Thu Aug 07, 2014 12:51 pm

If there were no trading, I wonder if some stocks would have value at all. You certainly aren't buying Brk.A for the dividend.

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Re: Dilbert Creator: If everyone indexed...

Post by Boglegrappler » Thu Aug 07, 2014 1:07 pm

If there were no trading, I wonder if some stocks would have value at all. You certainly aren't buying Brk.A for the dividend.
I'm not following the underlying logic.

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Re: Dilbert Creator: If everyone indexed...

Post by docneil88 » Thu Aug 07, 2014 1:32 pm

Gropes & Ray wrote:If there were no trading, I wonder if some stocks would have value at all. You certainly aren't buying Brk.A for the dividend.
In a world with only passive investors, there would be much less trading than there is now, but far from zero trading. Index funds generally have turnover of at least a few percent per year. However, at least for market-cap weighted index funds, that trading is not based on perceived value of that which is purchased.

One of the arguments in favor of indexing is that price usually tracks true value fairly closely at any one moment of time, so it's very hard for active managers (without insider info) to overcome the various tax, trading, and management costs of active management over the long-run. The premise of that argument would not hold in an all-indexing world. But, in my view, that world will never come close to happening, because most people have a natural inclination to try to be well above-average in whatever they do. Granted, that natural inclination may, as a general rule, be irrational in the world of investing. Nonetheless, I still think there will always be very many people who will try to beat the averages in a major way via active investment management, so prices will continue to track true value fairly closely based on all information available at any one moment in time.

If the pendulum did swing heavily toward index funds and prices became rather inefficient as a result, that would probably attract a new crop of active investors trying to exploit those inefficiencies.
Last edited by docneil88 on Thu Aug 07, 2014 1:57 pm, edited 2 times in total.

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Re: Dilbert Creator: If everyone indexed...

Post by Leeraar » Thu Aug 07, 2014 1:36 pm

From "Dilbert and the Way of the Weasel" by Scott Adams, 2002 (Page 178 in my copy):
Everything you need to know about financial planning
  • Make a will.
    Pay off your credit cards.
    Get term life insurance if you have a family to support.
    Fund your 401(k) to the maximum.
    Fund your IRA to the maximum.
    Buy a house if you want to live in a house and you can afford it.
    Put six months’ expenses in a money market fund.
    Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement.
If any of this confuses you, or you have something special going on (retirement, college planning, tax issues) hire a fee-based financial planner, not one who charges a percentage of your portfolio.
L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")

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Re: Dilbert Creator: If everyone indexed...

Post by Gropes & Ray » Thu Aug 07, 2014 1:52 pm

docneil88 wrote:In a world with only passive investors, there would be much less trading than there is now, but far from zero trading. Index funds generally have turnover of at least a few percent per year. However, at least for market-cap weighted index funds, that trading is not based on perceived value of that which is purchased.
Who's buying the stock when it gets turned out of the index if everyone indexed?

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Re: Dilbert Creator: If everyone indexed...

Post by Phineas J. Whoopee » Thu Aug 07, 2014 2:02 pm

Gropes & Ray wrote:If there were no trading, I wonder if some stocks would have value at all. You certainly aren't buying Brk.A for the dividend.
Your point is frequently made here. I'd like to present a different view.

The venerable Dividend Discount Model says precisely what you say: there's no value if there's no dividend. Zero divided by anything is still zero. I think the model is oversimplified, and so do some other posters (but I'll let any who wish to do so speak for themselves).

In my view, buying a stock is buying a share of future earnings, plus a share of the fixed capital. Earnings need not be paid out as cash dividends in order to exist.

I don't mean to start any debates with religious overtones, but rather to point out there is a different view which has coherence and logic.

Now, I don't mind if somebody says stocks that don't pay dividends aren't attractive to themselves personally. That's fine. I do take exception when posters claim, as you have not just now, that there can be no other value and anybody who isn't focusing on dividends is just wrong.

To reiterate, you didn't claim that.

PJW

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Phineas J. Whoopee
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Re: Dilbert Creator: If everyone indexed...

Post by Phineas J. Whoopee » Thu Aug 07, 2014 2:03 pm

Gropes & Ray wrote:
docneil88 wrote:In a world with only passive investors, there would be much less trading than there is now, but far from zero trading. Index funds generally have turnover of at least a few percent per year. However, at least for market-cap weighted index funds, that trading is not based on perceived value of that which is purchased.
Who's buying the stock when it gets turned out of the index if everyone indexed?
Those who use other than total market indices would trade among themselves, but the premise is silly. Not everyone is an average investor, therefore the total market is not the best for everybody. Furthermore, if the price discovery mechanism were to break down it would introduce inefficiencies, and I'm sure some enterprising individuals would be willing to step up to the plate and reel in the free money, if I may mix a metaphor.
PJW
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telemark
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Re: Dilbert Creator: If everyone indexed...

Post by telemark » Thu Aug 07, 2014 2:04 pm

You didn't quote the part where he says
If everyone bid up the price of stocks and agreed to keep them high, prices could stay there indefinitely.
and then proceeds to reason (if reason is the operative word) his way to
But your potential stock gains are suppressed because so many other people are using professional advice and losing
money.
He classifies that entry under "General Nonsense" which I think is very apt.

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Re: Dilbert Creator: If everyone indexed...

Post by chaz » Thu Aug 07, 2014 2:18 pm

Leeraar wrote:From "Dilbert and the Way of the Weasel" by Scott Adams, 2002 (Page 178 in my copy):
Everything you need to know about financial planning
  • Make a will.
    Pay off your credit cards.
    Get term life insurance if you have a family to support.
    Fund your 401(k) to the maximum.
    Fund your IRA to the maximum.
    Buy a house if you want to live in a house and you can afford it.
    Put six months’ expenses in a money market fund.
    Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement.
If any of this confuses you, or you have something special going on (retirement, college planning, tax issues) hire a fee-based financial planner, not one who charges a percentage of your portfolio.
L.
I like Scott Adams.
Chaz | | “Money is better than poverty, if only for financial reasons." Woody Allen | | http://www.bogleheads.org/wiki/index.php/Main_Page

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Re: Dilbert Creator: If everyone indexed...

Post by Gropes & Ray » Thu Aug 07, 2014 2:26 pm

Phineas J. Whoopee wrote:In my view, buying a stock is buying a share of future earnings, plus a share of the fixed capital. Earnings need not be paid out as cash dividends in order to exist.
I do agree that stocks have value without dividends, and that it is in the fixed asset value and in the earnings (even if not distributed). But there has to be at least theoretical possibility of converting the share into cash, either by selling the share, selling the company, or paying a dividend. Without the hope of selling the individual share, the odds of a dividend or selling the entire company are very slim. It's too big to easily sell, and it doesn't pay a dividend, so I would say that a substantial portion of Brk.A is based on the speculative value of capital gains, not just the underlying assets or earnings. Without trading, it would probably drop. But, the idea of a fully indexed stock market where there is no trading is far fetched, so this is just a thought experiment at best. Heck, I happily own some Brk.B since it's in the indexes now.

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Re: Dilbert Creator: If everyone indexed...

Post by Scandium » Thu Aug 07, 2014 2:29 pm

Phineas J. Whoopee wrote:
Gropes & Ray wrote:
docneil88 wrote:In a world with only passive investors, there would be much less trading than there is now, but far from zero trading. Index funds generally have turnover of at least a few percent per year. However, at least for market-cap weighted index funds, that trading is not based on perceived value of that which is purchased.
Who's buying the stock when it gets turned out of the index if everyone indexed?
Those who use other than total market indices would trade among themselves, but the premise is silly. Not everyone is an average investor, therefore the total market is not the best for everybody. Furthermore, if the price discovery mechanism were to break down it would introduce inefficiencies, and I'm sure some enterprising individuals would be willing to step up to the plate and reel in the free money, if I may mix a metaphor.
PJW
Yes if everyone index the stock market would be predictable and more and more would take advantage of it, until it became pointless and everyone would index instead.. I somehow don't think Scott Adams recommended this as a serious alternative.

It's the same way that voting is pointless because one vote never changed anything, but if nobody bothered to vote then one vote would change something, and it would be beneficial for you to vote. There's always a balance, and we usually slide to the side of it due to human ignorance and bravado.

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Re: Dilbert Creator: If everyone indexed...

Post by dkturner » Thu Aug 07, 2014 2:48 pm

Gropes & Ray wrote:
docneil88 wrote:In a world with only passive investors, there would be much less trading than there is now, but far from zero trading. Index funds generally have turnover of at least a few percent per year. However, at least for market-cap weighted index funds, that trading is not based on perceived value of that which is purchased.
Who's buying the stock when it gets turned out of the index if everyone indexed?
The rich guy who has been hiding from the index police. He buys them and takes them private. 8-)

You're not associated with Ropes & Gray by any chance are you?
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Re: Dilbert Creator: If everyone indexed...

Post by Leeraar » Thu Aug 07, 2014 2:50 pm

Scandium wrote:It's the same way that voting is pointless because one vote never changed anything, but if nobody bothered to vote then one vote would change something, and it would be beneficial for you to vote. There's always a balance, and we usually slide to the side of it due to human ignorance and bravado.
No matter who you vote for, you always end up with a government.

L.
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Re: Dilbert Creator: If everyone indexed...

Post by swaption » Thu Aug 07, 2014 2:50 pm

Gropes & Ray wrote:
Phineas J. Whoopee wrote:In my view, buying a stock is buying a share of future earnings, plus a share of the fixed capital. Earnings need not be paid out as cash dividends in order to exist.
I do agree that stocks have value without dividends, and that it is in the fixed asset value and in the earnings (even if not distributed). But there has to be at least theoretical possibility of converting the share into cash, either by selling the share, selling the company, or paying a dividend. Without the hope of selling the individual share, the odds of a dividend or selling the entire company are very slim. It's too big to easily sell, and it doesn't pay a dividend, so I would say that a substantial portion of Brk.A is based on the speculative value of capital gains, not just the underlying assets or earnings.
Now I'm convinced (by your user name) that you are a lawyer :happy

Can't agree with what you wrote above. There is no such thing as the speculative value of capital gains, at least nothing that is divorced from dividends and earnings expectations. What you might mean is earnings growth, which is really just earnings. Perhaps BRK likely gets some credit for that based on the skills of management, etc.

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Re: Dilbert Creator: If everyone indexed...

Post by Peter Foley » Thu Aug 07, 2014 3:04 pm

Neil wrote:
To be fair though, some investment advisers do recommend index funds, and some provide worthwhile financial planning services such as helping an investor look her financial picture as a whole, helping her determine her willingness and ability to take equity risk, and helping her maintain her target equity/bond split during market crashes and market bubbles. Best, Neil
Picking up on Neil's comment, while I am a confirmed do-it-yourselfer, I do also recognize that some individuals just don't have the mental capacity or ability to manage their own money. There is a role for professional advisers. A fee for service relationship is often recommended here. One should be careful to group these financial planners with professional stock pickers. Neil makes a valid distinction with his comment.

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Re: Dilbert Creator: If everyone indexed...

Post by MathWizard » Thu Aug 07, 2014 3:04 pm

Gropes & Ray wrote:If there were no trading, I wonder if some stocks would have value at all. You certainly aren't buying Brk.A for the dividend.
Ultimately, if there were no trading, and the company was making money, and shareholders of the company could get money
no other way, the shareholders could either decide in a stock buyback to allow some to get value out of the company, or
decide on a dividend, which would force everyone to take income.

Since there are tax reasons for large individual investors not to want a dividend, and they own the majority of most stocks,
I suspect the stock buyback would be the way the vote would go. Brk.A did a stock buyback in 2011.

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Re: Dilbert Creator: If everyone indexed...

Post by nisiprius » Thu Aug 07, 2014 3:05 pm

Gropes & Ray wrote:
docneil88 wrote:In a world with only passive investors, there would be much less trading than there is now, but far from zero trading. Index funds generally have turnover of at least a few percent per year. However, at least for market-cap weighted index funds, that trading is not based on perceived value of that which is purchased.
Who's buying the stock when it gets turned out of the index if everyone indexed?
The people buying the Extended Index fund.

Well, that's literally true in the case of the Vanguard 500 Index fund and the Vanguard Extended Index fund. More generally, I think the set of stocks that aren't in any index must be the null set, and the set of stocks that isn't in any index FUND isn't much larger.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: Dilbert Creator: If everyone indexed...

Post by Gropes & Ray » Thu Aug 07, 2014 3:44 pm

swaption wrote:Now I'm convinced (by your user name) that you are a lawyer :happy
I am a lawyer, but not with Ropes & Gray. I'm just picking on them (and big-law in general). My second choice was "Kirkpatrick, Lickhard and Bill Gates - But Not the Bill Gates You Would Expect," followed by, "Buchanan, Ingersol and the Owner of an NFL Team Who Doesn't Actually Practice Law But Gets to Be Named Because His Family is Very Popular in Pittsburgh." I used to use Beer Stearns, but somehow that doesn't feel relevant anymore.
swaption wrote:Can't agree with what you wrote above. There is no such thing as the speculative value of capital gains, at least nothing that is divorced from dividends and earnings expectations. What you might mean is earnings growth, which is really just earnings. Perhaps BRK likely gets some credit for that based on the skills of management, etc.
I don't think we're necessarily in disagreement. If two stock traders both know Brk's earnings, and its asset value, but they exchange it anyway, the buyer almost has to be buying on the hope of cap gains, because there is no dividend. Sure, the buyer may be forecasting earnings growth, but that's only speculation... so his hope for cap gains is speculative. I can buy a stock on the hope of a dividend or the hope of a capital gain. But if I'm buying today on the hope that I can sell for more tomorrow, in the absence of concrete proof that there will be a cap gain, that seems like speculation. There is always the theoretical possibility of selling the company in a cash-out merger or of getting a dividend (which supports some level of the stock price), but I'm guessing most Brk.A investors are in it for the hope of a capital gain from selling the share (which has to at least add a delta).

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Re: Dilbert Creator: If everyone indexed...

Post by Phineas J. Whoopee » Thu Aug 07, 2014 4:16 pm

Gropes & Ray wrote:...
I don't think we're necessarily in disagreement. If two stock traders both know Brk's earnings, and its asset value, but they exchange it anyway, the buyer almost has to be buying on the hope of cap gains, because there is no dividend. Sure, the buyer may be forecasting earnings growth, but that's only speculation... so his hope for cap gains is speculative. I can buy a stock on the hope of a dividend or the hope of a capital gain. But if I'm buying today on the hope that I can sell for more tomorrow, in the absence of concrete proof that there will be a cap gain, that seems like speculation. There is always the theoretical possibility of selling the company in a cash-out merger or of getting a dividend (which supports some level of the stock price), but I'm guessing most Brk.A investors are in it for the hope of a capital gain from selling the share (which has to at least add a delta).
Lots of words, there, but little meaning. You're claiming the hope of a higher price later is speculative, but the hope of dividends later is not. I'm sorry G&R, but you simply can't get away from the facts that stock market investing involves risk, and that a dollar's a dollar and neither knows nor cares where it came from.

I will agree with you that if it were illegal to have an active market in securities, and there was no resulting black market, it would be hard to value them, unless I made up equally ridiculous circumstances like despite the lack of a market you could borrow against them. We can both make up unrealistic stories.

I'm not sure what more I can say beyond what I already have, that earnings and fixed capital are what matter, and earnings do not have to be paid out as cash dividends in order to exist. Despite your previous posts you seem to be claiming otherwise. Do I misunderstand?

PJW

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Re: Dilbert Creator: If everyone indexed...

Post by Jack » Thu Aug 07, 2014 4:30 pm

Scott Adams wrote:...Once society gets rid of the risk of professional investment advice, stocks should go to a permanently higher price-earnings ratio. Given the massive dollar amounts in the investment economy, this instant increase in the value of stocks would have an enormous impact on humanity.
This is simply Dow 36,000 Hassett all over again.

Hassett argued that stocks, based on history, were less risky than perceived and therefore justified a Dow 36,000 price. Unfortunately this prediction occurred right before the dotcom crash.

But Scott Adams logic doesn't even make mathematical sense. Even if a change in perceived risk caused a rise in stock prices, it would be a one-time windfall for current stock holders. From that time forward, the return on stocks would be no better than the return on bonds. High price means low returns. As he says, this would have an enormous impact on humanity -- a very bad impact. Everyone would have to save the total dollars they expected to spend in retirement because there would be little or no real investment return.

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Re: Dilbert Creator: If everyone indexed...

Post by Gropes & Ray » Thu Aug 07, 2014 4:57 pm

Phineas J. Whoopee wrote:You're claiming the hope of a higher price later is speculative, but the hope of dividends later is not. I'm sorry G&R, but you simply can't get away from the facts that stock market investing involves risk, and that a dollar's a dollar and neither knows nor cares where it came from.
Hope of a dividend is speculative until declared. And, I'm not saying dividends are better than cap gains.
Phineas J. Whoopee wrote:I will agree with you that if it were illegal to have an active market in securities, and there was no resulting black market, it would be hard to value them, unless I made up equally ridiculous circumstances like despite the lack of a market you could borrow against them. We can both make up unrealistic stories.
Yes, this whole exercise is premised on the unrealistic story that there was no single-stock trading because the whole world was invested in indexes.
Phineas J. Whoopee wrote:I'm not sure what more I can say beyond what I already have, that earnings and fixed capital are what matter, and earnings do not have to be paid out as cash dividends in order to exist. Despite your previous posts you seem to be claiming otherwise. Do I misunderstand?
I guess it comes down to the probability of liquidity events. You can get a dividend, you can sell the share or the whole company can be sold (liquidating the assets and earnings). If you eliminate trading, then you're down to just one option for non-dividend stocks (assuming they would never start paying a dividend), and the price would fall because the odds of a sale are slim.

And, if earnings/assets could never be paid out (as the result of a sale), ever, because an evil wizard declared it so, then the stock would have no value. You can't eat a stock certificate. But that's an unrealistic story. This whole discussion is premised on an unrealistic story. Unless you invested in Packers stock... then it's true.
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Re: Dilbert Creator: If everyone indexed...

Post by Leeraar » Thu Aug 07, 2014 5:15 pm

I think that Scott Adams' thesis is that if the costs did not go to the leeches, they would accrue to the investors.

L.
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Re: Dilbert Creator: If everyone indexed...

Post by swaption » Thu Aug 07, 2014 7:26 pm

Gropes & Ray wrote:
I guess it comes down to the probability of liquidity events. You can get a dividend, you can sell the share or the whole company can be sold (liquidating the assets and earnings). If you eliminate trading, then you're down to just one option for non-dividend stocks (assuming they would never start paying a dividend), and the price would fall because the odds of a sale are slim.

And, if earnings/assets could never be paid out (as the result of a sale), ever, because an evil wizard declared it so, then the stock would have no value. You can't eat a stock certificate. But that's an unrealistic story. This whole discussion is premised on an unrealistic story. Unless you invested in Packers stock... then it's true.
This just is not right. Liquidity is not necessary for value, but it certainly can enhance value. Take your house for instance. What if someone told you it could never be sold? You would still derive the same benefit every year. But you would lose quite a bit of flexibility and in order to realize full value you would have to live there for something close to forever. At some point you also might stop reinvesting in the house.

But something analogous is true for anything you own, from a dry cleaner to BRK. It's worth what it pays to the owner. We operate on an act of faith that a business that grows and has higher earnings will be worth more to the nesxt owners, but that's not such a great leap. Over time, businesses just get bigger, their earnings get bigger, and their dividends theoretically get bigger. Why do you need to sell? So you can exchange one dividend and earnings stream for another? Because of some intertemporal change in your needs (ie retirement). In essence this is why my I Bonds are worth way above par to me. I can value the fat dividends whether there is a secondary market or not. I'm sure not going to let the Treasury's monopoly on liquidity that results in their standing low ball bid of par determine my value.

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Re: Dilbert Creator: If everyone indexed...

Post by Browser » Thu Aug 07, 2014 8:35 pm

If everyone indexed except 2 guys, then I guess those 2 guys would set the price of the market for all the indexers, right?
We don't know where we are, or where we're going -- but we're making good time.

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Re: Dilbert Creator: If everyone indexed...

Post by Gropes & Ray » Fri Aug 08, 2014 8:13 am

swaption wrote: This just is not right. Liquidity is not necessary for value, but it certainly can enhance value. Take your house for instance. What if someone told you it could never be sold? You would still derive the same benefit every year. But you would lose quite a bit of flexibility and in order to realize full value you would have to live there for something close to forever. At some point you also might stop reinvesting in the house.
I can live in my house, even if no one would ever buy it. But I cannot live in a stock certificate. I need to somehow convert it to cash if I want to eat food. Fortunately, in the real world, there is a market for stock, so we just sell it to the next guy. But if I owned 51% of a small c-corp, and I decided I wanted to be the president/CEO, and I would pay all profits to myself as a bonus, then the stockholders with the other 49% wouldn't have much value because they would have no way to convert their stock into food/housing/fancy cars. Their shares, in a third party sale, would have to be discounted by the probability that I would ever sell the business (and thereby be forced to let them participate in the liquidity event). If you disagree, I know a lot of frozen-out minority shareholders who would like to sell you some stock.

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Re: Dilbert Creator: If everyone indexed...

Post by ftobin » Fri Aug 08, 2014 9:23 am

Leeraar wrote:I think that Scott Adams' thesis is that if the costs did not go to the leeches, they would accrue to the investors.
I also think that's what he was trying to point out, but I disagree with it. The "leeches" would be investing the money as well -- the money they "leech" doesn't disappear, it's just transferred to new owners.

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Re: Dilbert Creator: If everyone indexed...

Post by Pizzasteve510 » Fri Aug 08, 2014 10:07 am

swaption wrote:
Gropes & Ray wrote:
I guess it comes down to the probability of liquidity events. You can get a dividend, you can sell the share or the whole company can be sold (liquidating the assets and earnings). If you eliminate trading, then you're down to just one option for non-dividend stocks (assuming they would never start paying a dividend), and the price would fall because the odds of a sale are slim.

And, if earnings/assets could never be paid out (as the result of a sale), ever, because an evil wizard declared it so, then the stock would have no value. You can't eat a stock certificate. But that's an unrealistic story. This whole discussion is premised on an unrealistic story. Unless you invested in Packers stock... then it's true.
This just is not right. Liquidity is not necessary for value, but it certainly can enhance value. Take your house for instance. What if someone told you it could never be sold? You would still derive the same benefit every year. But you would lose quite a bit of flexibility and in order to realize full value you would have to live there for something close to forever. At some point you also might stop reinvesting in the house.

But something analogous is true for anything you own, from a dry cleaner to BRK. It's worth what it pays to the owner. We operate on an act of faith that a business that grows and has higher earnings will be worth more to the nesxt owners, but that's not such a great leap. Over time, businesses just get bigger, their earnings get bigger, and their dividends theoretically get bigger. Why do you need to sell? So you can exchange one dividend and earnings stream for another? Because of some intertemporal change in your needs (ie retirement). In essence this is why my I Bonds are worth way above par to me. I can value the fat dividends whether there is a secondary market or not. I'm sure not going to let the Treasury's monopoly on liquidity that results in their standing low ball bid of par determine my value.
I wanted to chime in on what is looking like a 1 on 1 debate over semantics.

That said, I wanted to insert the idea that ownership stakes in an enterprise can have more sources of value than just earnings distributed to shareholders. A few examples:

- by accumulating 51 percent of company A, investor Bob can insert his son as VP of nothing for a high salary. This allows his son to grow a resume useful for employment in the future, perhaps later at another company. His incentive to have control or influence on the company accrues value to his family beyond the corporate earnings

- by investing in Company A, Company B gains access to scarce intellectual property, a permit to use land or port facilities, or some other business advantage that increases earnings of company B. Company B is willing to pay a premium for the shares over earnings.

- hipster bob knows it is cool to invest in greenco. Hipster bob knows that 100 shares will open the door to a date with his dream girl, so he buys and impresses her. I know a silly example, but so is the thread. :-)

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Re: Dilbert Creator: If everyone indexed...

Post by Gropes & Ray » Fri Aug 08, 2014 10:19 am

Pizzasteve510 wrote: I wanted to chime in on what is looking like a 1 on 1 debate over semantics.
I suspect none of us really disagrees with the other, we're just taking different, unshared assumptions into account. But you gave some great examples of how shares can be valued above and beyond their underlying asset/earnings.

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Re: Dilbert Creator: If everyone indexed...

Post by farnsy » Mon Apr 30, 2018 2:50 pm

Meanwhile, wise people such as you buy your market index ETFs and avoid all of the risks injected by the professional investment advisors. But your potential stock gains are suppressed because so many other people are using professional advice and losing money. That makes the category of “investing in stocks” look riskier than it is.

So my suggestion for permanently lifting the value of the stock market to new sustainably high price-earnings ratios is to pass a law making it illegal to offer financial services without disclosing the truth – that they are mostly a waste of your time.
This is nonsense.

The italicized parts above is completely illogical. If you buy a stock and pay no management fees on it but your neighbor invests in it through a manager who charges a big fee and causes churn, that does not affect your long run returns.

If we were to reduce or get rid of expensive financial services, this would increase the wealth of those who are not currently investing or who are paying a lot to managers, but it would do nothing to help those who are currently investing through cost-effective managers. In fact, it would likely harm them by increasing competition for the same assets.

As far as I can see, his logic is as follows: fewer people invest than would if transactions costs and fees were lower. Since fewer people invest, prices are lower than they otherwise would be. And for some reason he thinks that low prices are inherently bad. Not true. As a buyer of stocks, low prices are good. More savings dollars chasing the available equity would drive expected returns down for everyone. For people who are already not spending a lot on these costs, this would be unambiguously bad.

Adams would do well to think of the market as a bunch claims on dividends. If you make it cheaper and easier to get these claims and more people start doing so, then there are fewer dividends to spread around per investor. I'm not against passive management, and at some level I agree that we shouldn't throw money into the pockets of asset managers, but we must remain logical. For example, a high price/earnings ratio is not inherently a good thing and should not be a policy goal.

In short, as a passive investor, it is in your interest that other people continue to invest through active managers, or don't invest at all.

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Re: Dilbert Creator: If everyone indexed...

Post by carofe » Mon Apr 30, 2018 3:38 pm

Interesting article, however, there is always going to be people wanting "more", or afraid of "extremely simple" ideas. There is always going to be people wanting to risk it with active management or at least mix index funds with active funds because they think all index is too radical. The "if everyone indexed" thing is never going to happen, it is only possible in theory; human nature will make sure it never happens.
Nothing to be concerned about, move along, nothing to see here :wink:
US Total Stock Market + Intermediate Term Bond. That's it.

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Re: Dilbert Creator: If everyone indexed...

Post by RadAudit » Mon Apr 30, 2018 3:59 pm

Scandium wrote:
Thu Aug 07, 2014 2:29 pm
It's the same way that voting is pointless because one vote never changed anything, but if nobody bothered to vote then one vote would change something, and it would be beneficial for you to vote. There's always a balance, and we usually slide to the side of it due to human ignorance and bravado.
Under the heading there is always one ...

We had a state delegate race last year that had to be decided by drawing straws because the vote was tied. That race helped decide which party gained control of the state government. Sometimes a single vote can count.
FI is the best revenge. LBYM. Invest the rest. Stay the course. - PS: The Calvary isn't coming, kids. You are on your own.

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Re: Dilbert Creator: If everyone indexed...

Post by fortyofforty » Mon Apr 30, 2018 4:05 pm

Browser wrote:
Thu Aug 07, 2014 8:35 pm
If everyone indexed except 2 guys, then I guess those 2 guys would set the price of the market for all the indexers, right?
Trying to extend the gedankenexperiment, I don't think that premise is necessarily true. If new cash is injected into the market, via the indexers, they must buy the shares either from one (or both) of the "2 guys" or from other indexers. Other indexers might sell to meet outflows, or to maintain a balance between stocks and bonds in a balanced index fund.

By offering to buy, the indexer needing to deploy new cash can bid up the price until one of the "2 guys" sells, or another indexer sells. If other index investors are following the market, they might be tempted to sell shares of their index ETF when the bid meets what they want to receive.

Now, if you're assuming everyone besides the "2 guys" indexes in total market funds (or one giant total market fund) that might be different. Then, perhaps, the prices are set by the interactions of the "2 guys". I'm trying to imagine the various scenarios, just for fun.
"In a time of universal deceit, telling the truth becomes a revolutionary act." - George Orwell | There are many roads to doublin'. | Original Vanguard Diehard

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Re: Dilbert Creator: If everyone indexed...

Post by jalbert » Mon Apr 30, 2018 4:14 pm

Retail investors only hold 38% of US equity.
Index fund investor since 1987.

JBTX
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Re: Dilbert Creator: If everyone indexed...

Post by JBTX » Mon Apr 30, 2018 5:04 pm

He’s a smart and talented guy in many respects, but I’m not sure I buy his argument here. To the extent there are active traders, it provides a more liquid market for everybody. Same with futures. If it weren’t for all the speculators, it would be much more difficult for hedgers (like farmers) to set up and liquidate their positions.

Ultimately you have to have some mechanism to set stock prices. Active traders set prices. Presumably without an active market prices would not be as fairly set, and potentially a smaller active market in relation to indexers would lead to higher volatility and less liquidity.

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sergeant
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Re: Dilbert Creator: If everyone indexed...

Post by sergeant » Mon Apr 30, 2018 5:09 pm

This thread was started 4 years ago.
Lincoln 3 EOW!

JBTX
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Re: Dilbert Creator: If everyone indexed...

Post by JBTX » Mon Apr 30, 2018 5:37 pm

sergeant wrote:
Mon Apr 30, 2018 5:09 pm
This thread was started 4 years ago.
Well given most threads are a rehash of prior threads of the same subject, perhaps thread recycling has its merits.

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fortyofforty
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Re: Dilbert Creator: If everyone indexed...

Post by fortyofforty » Mon Apr 30, 2018 6:00 pm

JBTX wrote:
Mon Apr 30, 2018 5:37 pm
sergeant wrote:
Mon Apr 30, 2018 5:09 pm
This thread was started 4 years ago.
Well given most threads are a rehash of prior threads of the same subject, perhaps thread recycling has its merits.
Hey, at least it's not "Why international?", "How much international?", "Do I need international?", or "What percentage of international is optimal?"
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Re: Dilbert Creator: If everyone indexed...

Post by anoop » Mon Apr 30, 2018 10:25 pm

Gropes & Ray wrote:
Thu Aug 07, 2014 1:52 pm
Who's buying the stock when it gets turned out of the index if everyone indexed?
This could be a zen koan.

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Re: Dilbert Creator: If everyone indexed...

Post by columbia » Tue May 01, 2018 6:41 pm

Why is the gentleman a source of information, such that anyone would care what he has to say (on investing)?

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