Today's dumbest investment advice

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Today's dumbest investment advice

Post by bertilak »

Or perhaps dumbest this week, year, decade, ever?

The Only Reason to Buy Exxon Mobil Is Its Dividend. The Street's summary: "Buy the stock, get the dividend and then get out as fast as you can."

The article advises you to buy a stock the day before ex-dividend, then sell next day. You break even on price (right!) and get the dividend as a bonus. It doesn't appear to be an early posting of an April 1 article.

I can see how some "civilian" might ask about this, but for some reputable(?) source to recommend it is ludicrous.

If anyone is thinking of taking that advice, don't. The next day's price will be lower by the amount of the dividend plus or minus normal market fluctuations. All you will have accomplished is paying the cost of the trades.
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Re: Today's dumbest investment advice

Post by Toons »

Go figure,,,,,,
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Re: Today's dumbest investment advice

Post by minimalistmarc »

Quite incredible that even a beginner financial writer can be so stupidly misleading.
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Re: Today's dumbest investment advice

Post by PVW »

The Street - is that like the Onion for financial news?
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Re: Today's dumbest investment advice

Post by nisiprius »

This might be worse than dumb. It might be fraud. "Buying the dividend" used to be a scam practiced by cheesy stockbrokers on gullible clients. (According to the author's profile it doesn't sound as if he works in the investment industry though, so probably not...)
Last edited by nisiprius on Fri Feb 05, 2016 2:24 pm, edited 1 time in total.
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Re: Today's dumbest investment advice

Post by ThereAreNoGurus »

Or perhaps dumbest this week, year, decade, ever?
Wow... simply stunning, I'd have to agree with the two latter most. That article is going to be tough to beat.
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Re: Today's dumbest investment advice

Post by prudent »

If the selling price is exactly the same as the buying price minus the dividend, what is the tax impact? You have a taxable dividend plus a capital loss...

Does that make it worse than just the commissions?
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Re: Today's dumbest investment advice

Post by bertilak »

ThereAreNoGurus wrote:... simply stunning ...
Good word. I was pleased to be able to work in "ludicrous!"
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Re: Today's dumbest investment advice

Post by bertilak »

prudent wrote:If the selling price is exactly the same as the buying price minus the dividend, what is the tax impact? You have a taxable dividend plus a capital loss...

Does that make it worse than just the commissions?
The closer you look, the dumber it gets.

EDIT: Could the cap loss be used to offset the interest income?
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Re: Today's dumbest investment advice

Post by nisiprius »

prudent wrote:If the selling price is exactly the same as the buying price minus the dividend, what is the tax impact? You have a taxable dividend plus a capital loss...

Does that make it worse than just the commissions?
Yes. It really speaks very poorly of TheStreet that this got published. Just about every brokerage and mutual fund company explains it. Vanguard, for example: Buying and selling mutual fund shares
Before you invest a large amount in a mutual fund, ask about the realized gains in its portfolio. If they represent a significant portion of the fund's net asset value (NAV) and the record date of the next capital gains distribution is near, you may want to delay your purchase until after the record date. Otherwise, you'll "buy the dividend," and that can cost you money in taxes.
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Re: Today's dumbest investment advice

Post by nisiprius »

Yikes! Is this a TheStreet.com thing? :Hurry before the stock goes ex-dividend" is all over the place there. Can it be that the cult of dividend stock investing doesn't understand this? Do people who promote dividend stocks encourage the misunderstanding?

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Re: Today's dumbest investment advice

Post by ResearchMed »

About the author:

"After 20 successful years in the IT industry, Saintvilus decided his second act would be as a stock analyst -- bringing logic from an investor's point of view. Richard's work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets."

Don't know how long this "second act" has lasted thus far.

Maybe he should go back to the IT industry...

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Re: Today's dumbest investment advice

Post by PVW »

This author seems to be a proponent of "buy the dividend"

http://www.thestreet.com/story/13449358 ... -sale.html
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Re: Today's dumbest investment advice

Post by bertilak »

Yikes!

I thought it was a one-off oddity but it looks like I've stumbled upon a nest of Street Vipers!

Time to call in ... Billy the Exterminator!
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Re: Today's dumbest investment advice

Post by Random Musings »

But there is always this classic:

The stock market is a scam....

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Re: Today's dumbest investment advice

Post by samtex »

Here is an explanation on the ramifications of dividends:


http://www.investopedia.com/articles/st ... ations.asp

Samtex
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Re: Today's dumbest investment advice

Post by AKdream »

You weren't aware of this, but apparently "buying the dividend" is an actual strategy. From Saintvilus's article today on IBM:

"IBM's yield is more than twice the 2% average yield paid out by the average stock in the S&P 500 (SPX) index. And that's why IBM's yield is too attractive to pass up if you are playing the "buy the dividends" strategy, in which investors buy stocks for the sole purpose of collecting the announced quarterly dividend and then sell the stock within days after the dividend cash payment has been paid.

It can be a lucrative strategy, but it's one that requires excellent timing. In this case, IBM, which pays a $1.30 a share quarterly dividend, will send it out its dividend checks on March 10 to shareholders of record as of Wednesday, Feb. 10."
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Re: Today's dumbest investment advice

Post by lee1026 »

Academic research suggest that buying stocks right before the ex-dividend cutoff and then selling it right afterwards is a profitable thing.

http://people.stern.nyu.edu/mgruber/wor ... ffects.pdf

Key line from the paper: Almost all research on the movement of stock prices on ex-dividend days has found that prices decline by less than the dividend.

Armed with an IRA somewhere like Robin Hood, this might actually be a good idea.
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Re: Today's dumbest investment advice

Post by itstoomuch »

-a price drop after xdiv date, is not always assured.
-a price rise prior to xdiv, is not always assured either.
If dumbest investment advice is so simple...
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Re: Today's dumbest investment advice

Post by nisiprius »

A correspondent points out an article: "buying the dividend" as an intentional strategy is a real thing, under the name dividend capture strategy. The article concludes with the almost comical statement, "The ultimate test of the success or failure of this strategy is whether or not it will work for you."

I do believe you could promote a strategy of throwing $100 bills off the 86th-floor deck of the Empire State Building, to see whether the wind will bring back more or less than the amount you threw. And when people say "But all the experts say you shouldn't do that," you could say "That's why I do it. It's contrarian. Of course, you have to have good timing--it doesn't work for most people."
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Re: Today's dumbest investment advice

Post by bertilak »

nisiprius wrote:I do believe you could promote a strategy of throwing $100 bills off the 86th-floor deck of the Empire State Building, to see whether the wind will bring back more or less than the amount you threw. And when people say "But all the experts say you shouldn't do that," you could say "That's why I do it. It's contrarian. Of course, you have to have good timing--it doesn't work for most people."
Well, I think sometimes there is an updraft at the top of the ES building, so here's how I would play that strategy: I wouldn't personally throw off any $100 bills but write series of articles and perhaps even start a blog promoting the strategy. Then I'd stand there (or at street level) and see if anything blew my way.
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Re: Today's dumbest investment advice

Post by nisiprius »

I think I've found a dumber article, although I'm not sure it counts as "investment advice," unless sports gambling counts as investing. These four stocks predict who wins Super Bowl 50
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Re: Today's dumbest investment advice

Post by nisiprius »

bertilak wrote:
nisiprius wrote:I do believe you could promote a strategy of throwing $100 bills off the 86th-floor deck of the Empire State Building, to see whether the wind will bring back more or less than the amount you threw. And when people say "But all the experts say you shouldn't do that," you could say "That's why I do it. It's contrarian. Of course, you have to have good timing--it doesn't work for most people."
Well, I think sometimes there is an updraft at the top of the ES building, so here's how I would play that strategy: I wouldn't personally throw off any $100 bills but write series of articles and perhaps even start a blog promoting the strategy. Then I'd stand there (or at street level) and see if anything blew my way.
Oh, I think this is a metaphor with real possibilities.

If you have many people standing on the 86th floor and tossing bills over the side, some of them will lose bills to other investors and some will capture bills tossed over by other investors. And then, some investors might be greedy when others are fearful, and might go too far in reaching for yield. In which case, you might try to buy when there's blood in the streets.
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Re: Today's dumbest investment advice

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nisiprius wrote:I think I've found a dumber article, although I'm not sure it counts as "investment advice," unless sports gambling counts as investing. These four stocks predict who wins Super Bowl 50
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Re: Today's dumbest investment advice

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Buying when there is blood in the streets is a great strategy -- when it's not YOUR blood!
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Re: Today's dumbest investment advice

Post by Clever_Username »

nisiprius wrote:I think I've found a dumber article, although I'm not sure it counts as "investment advice," unless sports gambling counts as investing. These four stocks predict who wins Super Bowl 50
There might be something to this. Specifically, CTE. I hope the author -- or at least thestreet.com -- has Dr. Omalu's phone number.
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Re: Today's dumbest investment advice

Post by staythecourse »

You guys are much smarter then me.

Is this dumb advice? I have no clue. My response would be what does the data say?

I am POSITIVE if you look back throughout history the share price does not fall EXACTLY the same as the dividend. That is pretty obvious looking at market movements.

Without talking about data and studies looking into this phenomenon it is just empirical opinion what is "dumb" and what is not "dumb".

Good luck.
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Re: Today's dumbest investment advice

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staythecourse wrote:You guys are much smarter then me.

Is this dumb advice? I have no clue. My response would be what does the data say?

I am POSITIVE if you look back throughout history the share price does not fall EXACTLY the same as the dividend. That is pretty obvious looking at market movements.

Without talking about data and studies looking into this phenomenon it is just empirical opinion what is "dumb" and what is not "dumb".

Good luck.
From Investopedia (my emphasis):
  • When a dividend is paid, several things can happen. The first of these is changes to the price of the security and various items tied to it. On the ex-dividend date, the stock price is adjusted downward by the amount of the dividend by the exchange on which the stock trades. For most dividends this is usually not observed amidst the up and down movements of a normal day's trading. It becomes easily apparent, however, on the ex-dividend dates for larger dividends, such as the $3 payment made by Microsoft in the fall of 2004, which caused shares to fall from $29.97 to $27.34.
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Re: Today's dumbest investment advice

Post by TJSI »

Bertilik,

That statement by Investopedia is just plain wrong. Exchanges don't set prices nor can they lower them. The price is set by the bids and asks. The exchange just clears the bids and asks.

Now apparently brokerage houses will lower bids by the dividend unless told otherwise. The opening price can be up, down, or sideways depending on all events that effect the price.

What is true is that everything else being equal ( a calm market) the price will rise before the ex-dividend date and than settle back down after the ex-dividend date. And yes, generally the rise is slightly more than the following reduction.

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Re: Today's dumbest investment advice

Post by staythecourse »

bertilak wrote:
staythecourse wrote:You guys are much smarter then me.

Is this dumb advice? I have no clue. My response would be what does the data say?

I am POSITIVE if you look back throughout history the share price does not fall EXACTLY the same as the dividend. That is pretty obvious looking at market movements.

Without talking about data and studies looking into this phenomenon it is just empirical opinion what is "dumb" and what is not "dumb".

Good luck.
From Investopedia (my emphasis):
  • When a dividend is paid, several things can happen. The first of these is changes to the price of the security and various items tied to it. On the ex-dividend date, the stock price is adjusted downward by the amount of the dividend by the exchange on which the stock trades. For most dividends this is usually not observed amidst the up and down movements of a normal day's trading. It becomes easily apparent, however, on the ex-dividend dates for larger dividends, such as the $3 payment made by Microsoft in the fall of 2004, which caused shares to fall from $29.97 to $27.34.
I am not brilliant in the least, but this makes NO sense. This may be logical, but prices of shares are set by the market, i.e. bid and asks from buyers and sellers.

It is not a mathematical formula. I am nearly sure I would have noticed if the day after dividends are distributed is the exact difference in prices from the day before and after the distribution.

Wasn't there a study posted somewhere in this thread showing that this is not correct?

It just does not pass my "smell test" of common sense. I just don't see that linear relationship in real life over and over and over and over again to see this patter be true. Do you?


Good luck.
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Re: Today's dumbest investment advice

Post by ccieemeritus »

Sadly the the street.com author has accomplished his two objectives:

1) Get people to read the article

2) Get people to link to the article

EDIT: I don't mean anything disparaging to this forum by that. Part of our function is to fight bad information with good information. I'm just pointing out that the street.com author is not in the business of dispensing good financial advice. He's in the business of selling advertising to his articles. He gets those with clicks and links.
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Re: Today's dumbest investment advice

Post by staythecourse »

staythecourse wrote:
bertilak wrote:
staythecourse wrote:You guys are much smarter then me.

Is this dumb advice? I have no clue. My response would be what does the data say?

I am POSITIVE if you look back throughout history the share price does not fall EXACTLY the same as the dividend. That is pretty obvious looking at market movements.

Without talking about data and studies looking into this phenomenon it is just empirical opinion what is "dumb" and what is not "dumb".

Good luck.
From Investopedia (my emphasis):
  • When a dividend is paid, several things can happen. The first of these is changes to the price of the security and various items tied to it. On the ex-dividend date, the stock price is adjusted downward by the amount of the dividend by the exchange on which the stock trades. For most dividends this is usually not observed amidst the up and down movements of a normal day's trading. It becomes easily apparent, however, on the ex-dividend dates for larger dividends, such as the $3 payment made by Microsoft in the fall of 2004, which caused shares to fall from $29.97 to $27.34.
I am not brilliant in the least, but this makes NO sense. This may be logical, but prices of shares are set by the market, i.e. bid and asks from buyers and sellers.

It is not a mathematical formula. I am nearly sure I would have noticed if the day after dividends are distributed is the exact difference in prices from the day before and after the distribution.

Wasn't there a study posted somewhere in this thread showing that this is not correct?

It just does not pass my "smell test" of common sense. I just don't see that linear relationship in real life over and over and over and over again to see this patter be true. Do you?


Good luck.
Wait... even re-reading the quote from investopedia they admit it is not linear. The best example they give to support their comment is not true either. If the microsoft example was accurate the ex. div. price should be: $26.97 and not $27.34. That just shows it is not linear.

Am I missing something?

Good luck.
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Re: Today's dumbest investment advice

Post by bertilak »

It is the CLOSING price that is adjusted. I imagine there could be opening bids or offers that are different. Note that outstanding limit orders are also adjusted. With option strike prices I believe you are on your own -- better be careful.
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