# Why do we want share prices to go up?



## Tysonboss1 (24 January 2010)

Wouldn't all us so called Investors be far better off if stock prices fell by 10%pa than if they increased by 10%pa?

I often come across posts from investors cheering because some stock that they have $5000 in has doubled in value, and they seem to think that this has made them richer, and it has. However a rising stock prices just pushes you further away from financel freedom.

Consider this analogy,

You are a 20 year old investor who has found you can buy inner city carparks for $10,000 each and and lease them for $1,000per year. You realise that if you bought 100 carparks you could retire on $100k / year.

You think about it and realise that by regularly investing part of your wage + all rent received you could purchase 100 carparks in 25 years. So you set about buying as many car parks as you can. Two years into you plan you have 2 carparks worth $20,000 and can see how the compounded growth of reinvesting the rent will speed up your return over the years.

Then suddenly somthing strange happened, There was stories all over the media about wealth to be had in the car park market, and other investors rushed in doubling the price of car parks to $20,000 each.

At first you are glad, your net worth just doubled from $20,000 to $40,000 and it seems you are richer than ever, you happily delight your friends with stories of you quick fortune.

But you soon relise that the carparks still only provide a dividend of $1000pa, and you still have 98 more carparks to buy at the new price of $20,000 each till you can retire on the earnings, your dream of owning 100 by age 45 is now impossible.

Surly it would be much better for if the price of carpark got lower and lower rather than higher and higher. Should they drop to $5000 each you should be laughing cause it just knocked 12years off your investment plan

The lower the price of the investment becomes the faster you will be able to own enough to retire on.


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## Wysiwyg (24 January 2010)

Why do you think the world should stand still until you get your fill? Asset values are constantly changing due to many factors and the least of which being waiting for you to get your fill.


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## BradK (24 January 2010)

I feel exactly the same way about housing. Ulitmately, out of control house prices will have a negative impact on society. 

Would be very happy to live off rent and give up the capital gains. 

Our Australian love affair with property capital gains is irrational - but as Ross Gittins says, the economy is irrational. 

Brad


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## prawn_86 (24 January 2010)

I guess it depends what your investing for. If your investing longer term for yeild then you dont really want prices to go up until you have got as much as you want/need.

The other thing is that it is likely that yeild will rise at least a little over time. But i can see your point.


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## Tysonboss1 (24 January 2010)

Wysiwyg said:


> Why do you think the world should stand still until you get your fill?




I don't want the world to stand still, I am simply saying that putting total focus on capital gains is some what short sighted for most people.

Alot of investors who post on this forum often seem upset if the share price of the company they have invested in goes no where for 12 months.

It seems most people put complete focus on share price, and judge the achievements of a company by it's share price. If a person Buys X stock on monday for $1 and by friday it's 90c, It's easy for the person to get upset and disheartened even though the underlying company may still be operating strongly.

You can often see posts where people are complaining that stocks haven't moved after good annoucements, I see this as a good thing. 

I know it's fun to see the stock price of your company increase in value, But just think about whether you own enough of the stock to celebrate the rise. And if a stock price falls, Don't let that discourage you from your investment plan, it may be a blessing in disguise.

The thing with capital gains is you can only access the value by selling the farm.


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## Tysonboss1 (24 January 2010)

prawn_86 said:


> The other thing is that it is likely that yeild will rise at least a little over time. .




Yes, using the carpark example, If the annual rent rose to $2000. then you would probally still be happy paying $20,000.

But a stagnating or slow moving share price would be better, Say if the rent rose to $2000 but the prices only rose to $15,000.


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## roland (24 January 2010)

If the price of the car parks goes down, then there would be more people wanting to get in and buy them, so competition and demand for what is available increases.

The guys that build car parks will see the added demand as a signal to build more car parks which meets the damand but devalues the other car parks even further. So to maintain your original value you would have to add to your portfolio of car parks.

No matter how many car parks you buy at the lower price, you will never beat the guy  who started buying at the lower price. His expectation on income can be lower since his cost was lower, so the return on your more expensive car parks will never recover.


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## yonnie (24 January 2010)

R: I think your story is not logical. You cant be 100% certain that more people will buy when price goes down. When price is a little lower, you might be right. But if price drops substantially due to external circumstances like lack of credit, then you wont find buyers and demand will be very poor.

A good time to buy for the savvy investor though.


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## MITCH027 (24 January 2010)

i think the arbitrary goal of securing 100 carparks (ignoring price, yield) is a bad idea

If prices drop some more, you will be able to secure $98 carparks at a cost of $5 each. They might continue their decline to a value of $1 at retirement age because cars are no longer a viable means of transport (fuel costs skyrocketing, alternative fuel vehicles, flying cars, etc)

wouldn't the more appropriate goal be to build a portfolio of $XXX that will return $XXX per annum at retirement age that will allow you to live comfortably?


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## bellenuit (24 January 2010)

But isn't the flaw in your argument that the value of the shares or the car parks is primarily based on the net present value of the income stream from the car parks or shares (rent or dividends in these cases). I know there are other factors like risk, volatility, what stage of development the company is in, alternative investments  etc., but it is the potential income stream that determines value. This at least is the textbook explanation of value.

So if share prices were to gradually fall over time, it would primarily be because the dividends from those shares are falling in value. You can't have your cake and eat it.


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## SmellyTerror (24 January 2010)

> But isn't the flaw in your argument that the value of the shares or the car parks is primarily based on the net present value of the income stream from the car parks or shares (rent or dividends in these cases). I know there are other factors like risk, volatility, what stage of development the company is in, alternative investments etc., but it is the potential income stream that determines value. This at least is the textbook explanation of value




That.

If you'd only make $1000 a year on the now-$20000 car park, you wouldn't buy it. You'd get an investment that payed more than 5%. Which would drive the price of the car park back down until people were willing to buy again.

Welcome to supply and demand.

But if, as the price of the carpark went up, the return also went up - so when it was $20000 you'd make $2000 a year - then damn right you'd want the prices to go up. Not only would the return on new car parks be the same as it ever was (10% in this example), but also the value of the car parks you bought originally would be going up, AND you'd be hopeful that the price / return on the ones you're getting now would go up in time, too.

That's why we want share prices to go up. Not only do returns tend to remain at a similar percentage of the cost of new shares, but we ALSO make money from the increase in value, AND gain increasing benefits from shares held longer term.

Increase in value + increase in return > increase in return alone.

Silly question. :


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## Tysonboss1 (24 January 2010)

MITCH027 said:


> They might continue their decline to a value of $1 at retirement age because cars are no longer a viable means of transport (fuel costs skyrocketing, alternative fuel vehicles, flying cars, etc)
> 
> wouldn't the more appropriate goal be to build a portfolio of $XXX that will return $XXX per annum at retirement age that will allow you to live comfortably?




Car Parks was a metaphor for the share market in general.

I think you goal should be to build a portfolio of $X value to generate $X income, However what I am saying is the higher the price climbs the lower the %yield so the more you have to have invested.


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## Tysonboss1 (24 January 2010)

bellenuit said:


> But isn't the flaw in your argument that the value of the shares or the car parks is primarily based on the net present value of the income stream from the car parks or shares (rent or dividends in these cases).




No, not really. A share prices more due to the number of shares being sold compared to the number of buyers, the more buyers the higher the price. 

and the number of buyers and sellers fluctuates for many reasons, there is no formula that says X stock pays Y dividend so is worth Z.


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## Tysonboss1 (24 January 2010)

SmellyTerror said:


> But if, as the price of the carpark went up, the return also went up - so when it was $20000 you'd make $2000 a year - then damn right you'd want the prices to go up. Not only would the return on new car parks be the same as it ever was (10% in this example), but also the value of the car parks you bought originally would be going up, AND you'd be hopeful that the price / return on the ones you're getting now would go up in time, too.




Even if the income went to $2000 you shouldn't want the price to go up, You would "accept" the higher price because it has been offset by higher income so the end result is the same 10% return. But you would be much better off if it didn't go up and you received 20% return.


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## boofhead (24 January 2010)

I wouldn't say number of buyers vs sellers is the thing that decides price. It doesn't take much to find a company where there are many more buyers than sellers but the price still moves down during the day. Some just want to sell, some just want to buy so they go at the market rate. Some think it has a particular value and only buy/sell at that price.


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## Tysonboss1 (24 January 2010)

What started my whole thought process on this topic was the recent share market crashed caused by the GFC.

At the darkest days of the market crash I was picking up stocks on ultra high dividend yeilds. 

at one stocks low I was getting a yeild of 60%, Thats $600/year for every $1000 I put in. Now at the time I thought thats great yeild, but my main focus was on the inevitable recovery in the share price and the capital gains that would bring.

Now the share price has recovered and the company is back to trading at a yeild of 10%, So I am happy with the massive capital gain. 

How ever had  the company not recovered in share price I would have been far better off through the yield.

I mean a compounded rate of 60% for 20 years is better than a one of 600% return followed by a 10% compounded rate for 20 years.


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## Tysonboss1 (24 January 2010)

boofhead said:


> I wouldn't say number of buyers vs sellers is the thing that decides price. It doesn't take much to find a company where there are many more buyers than sellers but the price still moves down during the day. Some just want to sell, some just want to buy so they go at the market rate. Some think it has a particular value and only buy/sell at that price.




I mean the number of shares not the number of actual people.

eg, if there are 10 buyers wanting to buy 1000 shares each but 1 guy wanting to dump 1,000,000 shares there will be downward pressure and the reverse is also true when buys outweigh the sells.

offcourse it still comes down to people taking the low or high bids for it to move in either direction.


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## BradK (24 January 2010)

Great thread


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## Tysonboss1 (24 January 2010)

http://www.youtube.com/watch?v=9sgCYOeYrnw&feature=channel

Here's a great vid where Warren Buffet touches on this exact topic.


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## Julia (24 January 2010)

Tysonboss1 said:


> At the darkest days of the market crash I was picking up stocks on ultra high dividend yeilds.
> 
> at one stocks low I was getting a yeild of 60%, Thats $600/year for every $1000 I put in. Now at the time I thought thats great yeild, but my main focus was on the inevitable recovery in the share price and the capital gains that would bring.
> 
> ...



You're assuming that yield would be sustainable.  I'd say that's questionable if the share price isn't going up.  

A company paying out a yield of 60% makes no sense.  Why wouldn't they be putting most of that into growing the business?

Re another of your points about yield decreasing as your capital gain increases, this is going to be relevant or not depending on your overall financial situation.  e.g. if you are deriving your living from your investments you will decide how much p.a. you need, then decide whether you will obtain this from expected capital growth and/or dividend and franking income.

So, say you want just $50k p.a.  and you have decided to get this from dividends and franking credits.  As long as these are sustainable from the company's point of view, that level of income won't change just because the SP rises and gives you a capital gain.  Remember that dividends are decided on the basis of cents per share, not % of the SP.  The latter is simply a convenient way of assessing the yield factor.


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## Tysonboss1 (24 January 2010)

Julia said:


> You're assuming that yield would be sustainable.  I'd say that's questionable if the share price isn't going up.
> 
> So, say you want just $50k p.a.  and you have decided to get this from dividends and franking credits.  As long as these are sustainable from the company's point of view, that level of income won't change just because the SP rises and gives you a capital gain.  Remember that dividends are decided on the basis of cents per share, not % of the SP.  The latter is simply a convenient way of assessing the yield factor.




How is the $ amount a company pays out as an annual dividend to share holders affected by the share price movements, Just because the share price trends down for a while doesn't mean that the underlying assets / businesses will lose profitabilty.

In regards to your second paragraph in the quote, This point reflects my point exactly, If share prices rise strongly and stay at high levels it will take a person many more years to acquire enough of the shares to pay them $50K / year than if the shares had stayed at lower levels.

Offcourse once you are towards the end of your investing you don't care about how high the prices go because you already own enough to give you the required return. 

But that wasn't who I was talking about. I am talking about the young guys who celebrate their $20K portfoilio doubling and fear crashs. I am just trying to make the point that you can really benefit from lower share prices more than high.


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## Sdajii (24 January 2010)

Basically, he saw a good thing, got on it, then other people saw it and got on it until it was no longer a good thing. If he is smart he will quickly sell out while his two car parks are overvalued then either use his $40,000 to buy four car parks when the market loses interest, or, if the price of car parks stablises at a realistic price of around $15,000 he can either buy back in or find some other undervalued investment to jump into with his original $20,000 plus his quickly made $20,000. Or, he may buy back his original two car parks for $30,000 and invest his $10,000 profit into the speculative air space car parking for the proposed hovercars which are predicted to hit the market in a few years.

Either way, it was a good thing to get in on the undervalued investment while it was under the radar, and once the buying in further becomes too expensive, he can stop buying in.

Of course, he may sell out at $40,000 thinking he is getting out while car parks are overvalued, only to realise that the aliens were immigrating, increasing car park demand, and the few who knew about it early bought up, hence the jump in prices. Now that it's common knowledge the car parks at $100,000 each, and he has missed the boat. Oops!

If you want to make an analogy, you can't base the start on the assumption that nothing will ever change, then add a change to your analogy and say that nothing will ever change again in the future of this man's life. The market is dynamic, it changes, you never know what is going to happen, and it was silly for him to assume in the first place that neither car park prices, nor rental rates would ever change.


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## Tysonboss1 (25 January 2010)

Sdajii said:


> If you want to make an analogy, you can't base the start on the assumption that nothing will ever change, then add a change to your analogy and say that nothing will ever change again in the future of this man's life. The market is dynamic, it changes, you never know what is going to happen, and it was silly for him to assume in the first place that neither car park prices, nor rental rates would ever change.




Again it was a simple metaphor for asset prices in general, 

I understand that over time asset prices flutuate, However all I am saying is that there is more to gain from lower prices than Higher. 

Please watch the video I gave a link for in one of my previous posts, you will see warren buffet prefers stocks to go down too,


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## skc (25 January 2010)

A nice way to think about this topic is unlisted companies and assets. Without day to day share price movement, one can truely appreciate what investments supposed to mean from a business perspective. It's all about the return it generates. Capital value should be a result of the returns, not the other way round.

There is however, some slight premium to an asset where there is a liquid market that you can readily cash out on.


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## wayneL (25 January 2010)

Let's go from the absurd to the ridiculous.

Supposing you bought XYZ @ $0.005 with a 60% divvie and it went to $500 over a reasonably short period of time.

Who gives a rat's about the divvie any more? Put a wide trailing stop on and buy a dividend stock when you get taken out.

Sheesh! A six bagger and you're  looking for the negatives?


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## Beej (25 January 2010)

Tysonboss1 said:


> What started my whole thought process on this topic was the recent share market crashed caused by the GFC.
> 
> At the darkest days of the market crash I was picking up stocks on ultra high dividend yeilds.
> 
> ...




That high yield was only available because of perceived increased risk being priced in by the market at that time. The market was pricing many/most shares as if there was a very high chance that earnings would fall dramatically and that in many cases companies would go bankrupt. Now, it turned out that most ASX listed companies did OK, only saw minimal earning falls and in most cases it's back to business as usual (for now anyway). BUT, anyone buying at that time (which included myself by the way!) was taking on the risk that things could have got much more pear shaped than they did.

PS: For my long term share portfolio (non super) I invest for yield, and potential for the yield to *grow*, noting that a growing yield over the long term usually correlates with a growing share price as well. The supply/demand arguments work when looking at share prices in the short term, but over the long term it's earnings/yield that drive the prices IMO. The only exception to this are true "bubble" cases where the share price has been pushed way way way too high due to speculatively driven demand (think .com bubble, P/E ratio's for large companies 50-100 etc).

Cheers,

Beej


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## Sdajii (25 January 2010)

The analogy here is like saying "Oh, look, an undervalued stock! I will just keep accumulating this one stock for the next 20 years, I won't buy anything else and I'll just assume that this one individual company will continue to behave in exactly the same way forever, with a static price and yearly dividend"

Quite clearly, you're going to end up saying "Gee, it was pretty stupid of me to put all my eggs in one basket and expect the exact same entry cost for 20 years and the same dividend for 50"

I tell you what, if you had a stock with a fixed dividend for the next 50 years, I can guarantee it wouldn't be sitting heavily undervalued for long. It would be a limited opportunity, and I guarantee that anything with a guaranteed 10% PA dividend over a 50 year period isn't going to fall in price, so you'll either have to buy in when you have the money, or miss the boat.

If you absolutely positively know you are never going to sell, AND the dividend is never going to change, AND you are ONLY ever going to invest in this one venture, AND you are COMMITTED to buying lots of it over the next 20 years, then sure, the more car park prices drop the better, but that's an extremely unrealistic hypothetical, don't you think? If you find such an example in the real world, please point me in the direction of this magical gravy train, 'cause I want a ticket.

If you want your stocks to go down I am sure you will have plenty of opportunity, and if you manage to fail, please give me your strategy!


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## Mofra (25 January 2010)

If you're geared at all it would be far easier to obtain further credit secured by an appreciating asset.


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## Julia (25 January 2010)

Tysonboss1 said:


> How is the $ amount a company pays out as an annual dividend to share holders affected by the share price movements, Just because the share price trends down for a while doesn't mean that the underlying assets / businesses will lose profitabilty.



If the SP has fallen to the point where there's a 60% yield, it has to reflect that the stock is regarded as high risk.   If the SP rises, and therefore the yield reduces, that in turn obviously reflects market sentiment that less risk is attached to the company.  Market sentiment is usually pretty right.
My point is that you're dreaming if you think you're going to get a 60% dividend on a long term basis.  Simply makes no sense.



> In regards to your second paragraph in the quote, This point reflects my point exactly, If share prices rise strongly and stay at high levels it will take a person many more years to acquire enough of the shares to pay them $50K / year than if the shares had stayed at lower levels.



Well, of course.  But that same principle applies across all your investing.
Wealth usually takes time to accumulate in every sense.


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## Tysonboss1 (25 January 2010)

Sdajii said:


> The analogy here is like saying "Oh, look, an undervalued stock! I will just keep accumulating this one stock for the next 20 years,




No it's not, It's like saying "oh, look, Here is a fairly priced stock stockmarket trading on decent yields, I may start a plan to dollar cost average into this market over the next twenty years"

Now all I am saying is that Most investors seem to be hoping for the onset of a sharemarket bubble, rather than steady prices. But if they are going to be "net" buyers of stock over the next twenty years then they are better of paying lower prices,

Now for myself I know that I will personally be Putting Millions of $'s into various investments over the next twenty years, and I would rather get the most bang for my buck and to do this I would prefer to buy as cheaply as possible, So I will not be hoping for the onset of asset price bubbles, and I won't we fearing any down turn in asset prices,


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## Tysonboss1 (25 January 2010)

Julia said:


> My point is that you're dreaming if you think you're going to get a 60% dividend on a long term basis.  Simply makes no sense.
> 
> 
> Well, of course.  But that same principle applies across all your investing.
> Wealth usually takes time to accumulate in every sense.




I am not saying it is possible longterm, I know I can't stop share prices rising. What I am saying though is the lower the better.

I know that the principle applies accross all investing. 

But if you knew that you were going to be steadily putting money into an investment over 20 years, which of the following examples would you be better of with.

1, Slow or slighlty stagnating share price growth for the first 10 years, followed by stronger growth leading into a bull market for the last 10years

or

2, strong bull market in first 10 years leading to stagnation and possible down ward pressure over the last 10 years.

Obviously having prices steady for 10years giving you enough time to build up a decent portfoilio before the price rises would benefit you more.


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## bellenuit (25 January 2010)

Tyson. To me you are really saying you would like to find undervalued stocks that no one else recognises. 

Undervalued.....  It has a higher earnings yield relative to the rest of the market and there is no extra risk attached to that stock compared to the others.

No one else recognises.....  Everyone else has attached a higher risk factor to the stock than it deserves.

You, like Buffet, like everyone else would love to find such stocks. They are out there, finding them is the difficult thing.

When you say that you would prefer stocks to go down in price, you are really saying that you would prefer stocks to maintain earnings with no change in risk to those earnings, but at the same time have their price fall for no justifiable reason.

It happens. The market misprices stocks from time to time. But at the end of the day, if stocks are not mispriced then you want stock prices to rise because that means that the company is growing so that your initial investment is paying more than when you first bought in. 

So unless you can find mispriced stocks, you really want stocks that are rising in value over the long term. That means the company earnings are increasing with no comparable change in risk.


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## Sir Osisofliver (25 January 2010)

Tyson,

Your example, as previously mentioned by Mofra, makes no provision for gearing.

If you were to gear you share portfolio, and periodically top your gearing back up to an "optimal" level whilst the market is strongly trending, you are in effect compounding your compounding, which can result in some spectactular levels of return.

The rub is that the gearing then works against you when the inevitable corrective pattern emerges.

I get excited about share price increases because it means I can access a greater amount of leverage and thereby enhance my return. I will only do this however in certain types of markets, and when markets become overvalued, allow the gearing to fall to non-existant levels.

Cheers

Sir O


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## Sdajii (25 January 2010)

Tysonboss1 said:


> I am not saying it is possible longterm, I know I can't stop share prices rising. What I am saying though is the lower the better.
> 
> I know that the principle applies accross all investing.
> 
> ...




Typically, the only reason a share price is going to go down is that people realise it's actually a crap investment, or for whatever reason, people simply must get out of the investment. So if you bought it before the drop you paid too much, or were unlucky. Why would a good thing go down in price? If that happens, by all means, increase your holdings, but if that happens, I would regret having purchased in the first place. If you find a good, solid investment which for some reason is magically falling in price, why would you buy in? Save your pennies until the knife stops falling then jump in. Why would you want to buy something now which you could buy later for less money? Surely it would be better to buy the thing which is going to go up in value, then sell it when you want to buy the thing which was going down has stopped, and sit on it while it goes up.

Sure, if you buy something and it goes down for 10 years it might go up... but so what? It spent 10 years going down! Congratulations, you spent 10 years losing money. If you want to buy something from me now I'll guarantee to buy it back for less money in 10 years if you like. Pick any company on the stock market you like, I'll take you up on the offer any time.

Sure, if you spend 10 years making money, you might then lose some, but hey, get off when it starts falling and you've spent 10 years making money, then maybe lost money for one year. You can then buy for $10,000 what the other guy spent $100,000 on 10 years earlier.


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## Julia (26 January 2010)

"Money Morning" happen to have an article on yield today.


> Anyway, back to the point, what do yields tell you about an investment?
> 
> Well, in the good old days, the yield of a stock, bond or cash was a good indicator for investors about the relative risk of an investment.
> 
> ...


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## yonnie (27 January 2010)

I dont know what everybody is going on about....................leverage, yield, all eggs in 1 basket etc. etc. Posters seem to pounce on every word, but dont see the big picture.

he`s only saying he rather buys investments for the long term on the cheap (after research ofcourse). so what is wrong with that???


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## Sdajii (27 January 2010)

yonnie said:


> I dont know what everybody is going on about....................leverage, yield, all eggs in 1 basket etc. etc. Posters seem to pounce on every word, but dont see the big picture.
> 
> he`s only saying he rather buys investments for the long term on the cheap (after research ofcourse). so what is wrong with that???




It's great to buy things after they go down if you're sure they'll go back up, but why would you want something to go down after you buy it?

I tell you what, I'll spend $10,000 on a stock and he can spend $10,000 on a stock. If mine goes down and his goes up, and that bothers him, I am more than happy to swap. Things tend to go down if their value decreases, so in general, if you buy something and it goes down, you made a mistake.


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## yonnie (28 January 2010)

I am not investing this way, but I can see where he is coming from. Provided a lot of research has gone into this strategy, I cant see much wrong with buying stuff after a dip and buying more if they go even lower

Will it work every time: ofcourse not, but then every strategy is not likely to work 100% of the time and I`m quite sure most traders here have a few losing trades.

Ever heard of contrarians?


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## SmellyTerror (28 January 2010)

Look, if the return goes up, the price will go up. 

If the return stays the same, the price will stay the same. 

If the return goes down the price will go down.

Of course there are lots of conflicting factors, but overall you want the price to go up *because that tells you that you got good value*. That tells you that you're getting a "high" return on what you originally paid. Even if you never sell it. A "high" return means other people will want it. They will pay for it. The price will go up.

Why would you expect the return to go up and not the price?

You're right: *good returns are good*. And people will pay for them. And the price will go up. A price that goes up tells you that, when you bought the stock, it had a good return. And if it goes up again, that means it was even better. *Better is also good*.

Would I prefer it if the price just sat there while I bought a million stocks? Of course. But that's just a fantasy - this is a market for a reason. Instead, I "hope" for my stocks to go up because that tells me that I bought something that was good value. I choose to hope for something realistic, rather than hope for mana from heaven.

(Income from capital appreciation is also good, being _income_. I am not too fussed where it comes from).

Me:  "Hey, I sold my old car for ten grand!"

You:  "Awww, if only it had spontaneously turned into a giant gold nugget first!" You start a thread "Why do we want to sell our old cars for good prices?" with post saying "wouldn't it be awesome if your old cars turned into giant gold nuggets!"

Yes. Yes it would. But a bit pointless to worry about, yes?


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## Tysonboss1 (28 January 2010)

Sdajii said:


> I tell you what, I'll spend $10,000 on a stock and he can spend $10,000 on a stock. If mine goes down and his goes up, and that bothers him, I am more than happy to swap. Things tend to go down if their value decreases, so in general, if you buy something and it goes down, you made a mistake.




but if your plan was to put $10,000 in each month for the next twelve months and it started trending up right away you will end up with less stock than if it had stagnated or dropped for a few months.

Everything you guys are saying about a stock only goes up if it's earnings go up and it only goes down if it's profits go down is BS.

Take Westfields for example, in the last 3 months it's traded as low as $11.70 and as high as $14.00

Last week it was 13.80 yesterday $13.20 today $13.60. And this is from a company whose profits are tied to long term leases. Westfields would be producing steady profits through, how ever it's share price swings up to 20%.

The same for most other stocks on the market, Aussie stocks will drop even due to unrelated bad american news


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## Tysonboss1 (28 January 2010)

Tysonboss1 said:


> Last week it was 13.80 yesterday $13.20 today $13.60. And this is from a company whose profits are tied to long term leases. Westfields would be producing steady profits through, how ever it's share price swings up to 20%.




Correction,... I mean't $12.80 $12.20 and $12.60.


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## SmellyTerror (29 January 2010)

> Everything you guys are saying about a stock only goes up if it's earnings go up and it only goes down if it's profits go down is BS.




Who said *only*?


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## Tysonboss1 (29 January 2010)

Sdajii said:


> Typically, the *only* reason a share price is going to go down is that people realise it's actually a crap investment,.






SmellyTerror said:


> Who said *only*?




and in your arguements you also give of the impression that it is impossible for good stocks to become unloved or shunned by the market for a period of time. when that is clearly untrue.


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## Sdajii (29 January 2010)

Tysonboss1 said:


> but if your plan was to put $10,000 in each month for the next twelve months and it started trending up right away you will end up with less stock than if it had stagnated or dropped for a few months.
> 
> Everything you guys are saying about a stock only goes up if it's earnings go up and it only goes down if it's profits go down is BS.
> 
> ...




Well, obviously if you are planning to buy something in the future it might be nice if it goes down first, but what kind of idiot says "I am committed to spending $10,000 every month on company x, regardless of the price at the time"? Anyone with half a brain will choose the best company(ies) to spend their $10,000 at the time they are spending it, not based on a decision they made a year earlier.

If the price has gone down, you got a bad deal on the money you have already spent and you might get a good deal on the money you are spending at the time, and who knows whether or not it will be a good deal in a few months?

Your argument only works if for some insane reason you are committing to a future purchase. If you want to choose your moves a month, year or decade in advance, power to you, and yes, if the company you have chosen goes down it might be a good thing! Hooray! 

The word "typically" in front of "only" means that it isn't always the case. Sometimes prices can go down for other reasons, and obviously I was referring to this, because otherwise I wouldn't have used the word "typically". Either way, it's splitting hairs to be focusing on the point.


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## Julia (29 January 2010)

Sdajii said:


> Well, obviously if you are planning to buy something in the future it might be nice if it goes down first, but what kind of idiot says "I am committed to spending $10,000 every month on company x, regardless of the price at the time"?




This is actually quite a widely recommended strategy, e.g. dollar cost averaging.  It has never made sense to me.


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## SmellyTerror (30 January 2010)

> and in your arguements you also give of the impression that it is impossible for good stocks to become unloved or shunned by the market for a period of time. when that is clearly untrue.




Errr, sorry, quite right re: only.

Re: my post, I certainly did not mean to create that impression, but I think my point is illustrated by your own words: *for a period of time*. That's what I've been saying. A share can be underpriced for a while, but it will go up. Hoping it won't is pointless.

In any case, that's a bit beside the point. We still like prices to go up because we make more money, as long as dividend returns are roughly correlated (and they generally are over the long term, if not "for a period of time").

----
I get 100 shares of ABC at $1 and a 100% annual return.

Next year I buy another hundred at $1.

A year after that, I've got $500 (assuming I took the dividends out, rather than reinvested). That is, $200 of shares, and $300 of dividend.
----

Now I buy 100 shares of XYZ at $1 and a 100% annual return *and a 100% appreciation*.

Next year I can only buy 50 shares at $2, but the return (100% = $100) is still the same as I would have got if the price hadn't gone up.

A year after that I've got $900. That is, the same $300 in dividends that I would have got with a stable price, but my original $100 is now worth $400, and my second $100 is now worth $200.

$900 is more than $500. I like more, as a rule.
----

Now obviously my numbers are nuts, but that was to make the numbers easier to read. Put in any positive appreciation you like, as long as the dividend return remains the same proportionally (which, in general and over time, it usually does for any particular stock).

The point here is that you have two sources of return from shares: dividends and appreciation. Why wouldn't we want one of those? *Why *wouldn't* we want share prices to go up?*


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## Tysonboss1 (30 January 2010)

Sdajii said:


> what kind of idiot says "I am committed to spending $10,000 every month on company x, regardless of the price at the time"? Anyone with half a brain will choose the best company(ies) to spend their $10,000 at the time they are spending it, not based on a decision they made a year earlier.




I don't know about you, But I don't currently have all the cash I will be investing in 2010 waiting in my bank account. Like most people Money flows into my bank account steadily throught they year.

I contstantly have money building up in my account on a monthly basis from all kinds of sources suchas wages, rent, interest, business earnings, dividends etc.etc.

So I have to constantly find some where to put this money that builds up in my bank accounts, At the moment I am putting about $10,000 a month into the share market, So on a monthly basis I am buying shares.

If the market rallies I will not make good buys, if it slips back I will make good buys, it's as simple as that.


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## Tysonboss1 (30 January 2010)

SmellyTerror said:


> The point here is that you have two sources of return from shares: dividends and appreciation. Why wouldn't we want one of those? *Why *wouldn't* we want share prices to go up?*




Yes you have two forms of return, Capital gain and dividends. 

But you only benefit from the capital gain once, and that could be years away when you finally sell your stock, but this is the only form of gain alot of people think about. So they end up chasing short term capital gains, and often trade regularly, this is not my stratergy.

The only day I care about higher prices is the day I plan to sell. And Some of my stocks I hope to never sell or at least not for a very long time.

Offcourse if things dramatically change at a company I would look at selling but if not I would be happy to continue to hold and accumulate more. but as long as I am accumulating I prefer the market to be a lower levels rather than higher levels.

we currently have heaps of good companys on the market trading a low P/E ratios, as the market rises, P/e's also rise which means any further funds you put in the market are not being used as effectively.

Today it is easy to find great companies on p/e's less than 10 some less than 5 , 3 years ago this was not as easy, in another 3 years it will probally just as hard.

If you are in the accumulation phase and you are regularly pumping funds into the market, you should be hoping the market stays cheap for as long as possible, not celebrating a shorterm capital gain at the expense of higher p/e's long term.


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## SmellyTerror (31 January 2010)

> we currently have heaps of good companys on the market trading a low P/E ratios, as the market rises, P/e's also rise which means any further funds you put in the market are not being used as effectively.




Then I would have thought that what's important to you is the P/E, not the price alone. So you have to admit that prices going up is perfectly ok for you as long as the P/E remains stable and good.

You could retitle the thread: *why do we want P/E to go up? *The answer to that is: *we don't*. But I guess that doesn't make much of a thread.

You can see, though, how lots of people are NOT holding shares forever, and who consider capital gain to be more important than you do. So given that the question was "Why do we want share prices to go up?" then I think we can say it's answered:

People eventually sell their shares.


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## Sdajii (31 January 2010)

Julia said:


> This is actually quite a widely recommended strategy, e.g. dollar cost averaging.  It has never made sense to me.




The only two reasons I can think of for making a decision like that are:
1) You got drunk and swore to your wife/friend/pet mushroom that you would use that strategy, and you are compulsively true to your word.

or

2) You are convinced that everyone else is stupid and incapable of making decisions or taking complicated orders, and you have a fixed income of $10,000 per month, and you are going on vacation to the moon for a year and will be uncontactable, thus you will be unable to change your investment strategy during that year.

There are plenty of very poor strategies wich are widely recommended, and also a lot which you will only be given if you pay big dollars for (go figure! A fool and his money, etc).

Sure, if you have a disposable income of $10,000 per month and want to put that into the stock market every month, fantastic, good on you, and I would be doing the same (I wish I was earning enough to have $10,000 left over every month!) but what possible benefit is there to choosing your purchases months or years in advance? What type of moron would honestly say "Oh, dear, the choice I made six months ago turns out to have been a very bad one. I can now see, six months later, that spending $10,000 on company x is a terrible idea, while spending it on company y is excellent. Oh well, I suppose there's no escaping the decision I made back then, so here I go with my monthy routine of logging in entering my buy order for $10,000 at market of company x"?

If the above is your strategy, and towards the beginning of your lunar vacation the price of stock x goes down, it might be great, assuming that the company is still holding its original value (very unlikely).

Fortunately for me, I don't have anyone I am loyal to who would allow me to make investment promises to while heavily intoxicated, and I don't expect to be out of contact for a whole year at any time in my living future.

Why do I want share prices to go up after I buy? Because it makes me a profit, and I prefer that to a loss.


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## Tysonboss1 (1 February 2010)

Sdajii said:


> Why do I want share prices to go up after I buy? Because it makes me a profit, and I prefer that to a loss.




 Did you watch the Warren Buffett video I posted.

http://www.youtube.com/watch?v=9sgCYOeYrnw&feature=channel

What are your thoughts about what he says in the first 3 mins.


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## Sdajii (1 February 2010)

Tysonboss1 said:


> Did you watch the Warren Buffett video I posted.
> 
> http://www.youtube.com/watch?v=9sgCYOeYrnw&feature=channel
> 
> What are your thoughts about what he says in the first 3 mins.




I have just watched it, let me tell you what I thought during the first three minutes, and then the 30 seconds after that...

At eight seconds I was thinking "My goodness, is this the most stupid person ever to be featured on YouTube?"

At 45 seconds I thought "That's a good point, although it's something I already knew, and it has nothing to do with that stupid ASF thread" I also puzzled over why the audience was laughing, and deduced it consisted of stupid Americans (not that you would have trouble finding a more stupid group of Australians).

As 1.10 I was thinking "Yeah, this is the same crap we've already been through in that stupid thread. It's not necessarily bad, and often it's great if the price goes down BEFORE we buy something, duh".

At about 1.40 I was thinking "You must be kidding me. To my knowledge the necessary drugs have not been invented for me to take this seriously. What kind of lobotomised prokaryote would want to spend up on investments in the hope that prices would not increase for 20-30 years? And why is the audience still laughing? Was I incorrect earlier? Is it actually made up of lobotomised prokatyotes? Perhaps, but they must be on those drugs, which must actually have already been invented"

At 2.05 I was thinking "Gee, he really is waffling. If something is going to be revealed by 3 minutes the pace had better pick up, not to mention the direction"

At 2.30 I was thinking "Okay, so again he is saying that if things go down it might be a good time to buy. Old news. Someone should probably tell him about falling knives, and it's really not looking like anything worthwhile is going to be said in the next 30 seconds"

At 2.40 I concluded that the audience is drunk or drugged with something which induces laughter. Either that or they had been paid to laugh. I then thought that perhaps there was no audience and I was merely listening to canned laughted. I pondered the possibility that this was actually a c-grade American sitcom.

At 3.00 I wondered why I was not recommended to watch only up to 2.30, since the previous 30 seconds had contained nothing of any more substance than inane laughter due to the speaker's offer to let someone else choose which prokaryote asked the next question. I decided at this point "In for a penny in for a pound, I'll wait another 30 seconds just to be thorough, even though my suspicion is that I'm turning three minutes of my life I'll never get back into three and one half"

At 3.07 I thought "Wow, he actually told a joke, and even though it was painfully lame, I would have thought they would have hit play on the canned laughter for it.

At 3.20 I thought "Wow, he just admitted that he made his money by luck. Why is anyone listening to his strategy as useful model? Oh, that's right, they're lobotomised prokaryotes"

At 3.30 I thought "Three and one half minutes of my life I'll never get back. I wish my predictions about stock market movements could be as good as my analysis of forum threads", although of course, I knew that one was a challenge while the other could have been done by that prokaryotic audience, and probably even inanimate objects.


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## Tysonboss1 (1 February 2010)

Sdajii said:


> "My goodness, is this the most stupid person ever to be featured on YouTube?"




Well He is the worlds second richest man, Having turned $10,000 of investment funds into over $40 Billion over his life. So I would say that he knows what he is talking about.

See I don't think you get what I having been trying to say, I don't invest in stocks that I know are going to go down. I invest in great companies that I know will most likly go up. What I am saying though is I don't sit here wishing and hoping for capital gains to arrive asap, and I don't live in fear of market down turns either.

I can't stop the stocks I invest in rising, and it is good to see my portfoilio grow in value. But I know the higher my stocks rise the less I can buy, So I actually don't care if my stocks stagnate for a while.


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## MITCH027 (1 February 2010)

i still dont get the point of this thread

of course buyers want to buy at cheaper prices. but they want the price to go up afterwards

sellers want to sell at higher prices (but they want the price to go down afterwards, otherwise they will have felt that they've sold at the wrong time)

you only need to look at market depth to see buyers vs sellers

"why do we want share prices to go up" - we want share prices to go up to make money????

if you don't care about what happens in the short term, that is called long-term investing. you haven't created a new form of investing. warren buffet has not created a new form of investing either

i still don't get the point of this thread


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## So_Cynical (1 February 2010)

Tysonboss1 said:


> but if your plan was to put $10,000 in each month for the next twelve months and it started trending up right away you will end up with less stock than if it had stagnated or dropped for a few months.
> 
> Everything you guys are saying about a stock only goes up if it's earnings go up and it only goes down if it's profits go down is BS.




I'm with ya Tyson...i think most ASF members are just not comfortable with believing in a stock and buying in with a falling or stagnant SP, and that's why your getting some bemused comments in this thread.

I liked the Buffet video and didn't realise how funny, practical and honest he was....first time ive ever seen him on video and surprised at how similar we think re Markets.


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## bellenuit (2 February 2010)

So_Cynical said:


> I'm with ya Tyson...i think most ASF members are just not comfortable with believing in a stock and buying in with a falling or stagnant SP, and that's why your getting some bemused comments in this thread.




The reason for the bemused comments is that everyone knows that what Tyson wants is undervalued stocks and he wants them to remain undervalued as that allows him to accumulate at a lower cost. Undervalued means that they are mispriced by the market. That is also what Buffet looks for.

But there is a huge difference between stock prices falling or remaining static because they are mispriced and hence undervalued and stock prices falling or remaining static but are fairly valued. The latter implies that the earnings are also falling or remaining static (assuming risk is constant). Clearly that is not what you want.

Undervaluation is usually only a temporary aberration and over time stocks should trend to their fair value. If fairly valued, you should want stocks to go up in value not down. In the former case, your earlier purchases now earn more per share than what they earned when you first bought them. In the latter case, your earlier purchases now earn less per share than what they earned when you first bought them. It should be obvious which is preferable.


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## Sdajii (2 February 2010)

Maybe we're all just playing with words.

Obviously if we want to buy something and its intrinsic value won't change, we will be happy if its price goes down before we buy. If we want to accumulate something specific over a period of time we won't want it to go up until after we have finished buying.

The apparent stupidity probably comes from the (perhaps deliberate) implication that the "I want my investments to depreciate" crowd that they want their investments to depreciate after they have purchased them, rather than before.

You're right, Tyson, he isn't the most stupid person on YouTube, but a lot of clever people have given out bad/stupid advice for a lot of reasons, and generally if people have strategies that work spectacularly well they're not going to share them.

The argument probably comes primarily from the deliberate attempt to misrepresent the message for sensationalistic value; if the original very obvious message was put forward unambiguously everyone would agree.


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## skc (2 February 2010)

Sdajii said:


> Maybe we're all just playing with words.
> 
> Obviously if we want to buy something and its intrinsic value won't change, we will be happy if its price goes down before we buy. If we want to accumulate something specific over a period of time we won't want it to go up until after we have finished buying.
> 
> ...




You should really do some background reading on Warren Buffet...


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## brty (2 February 2010)

Many people here have the mindset that holding "good companies" long term is a smart thing to do, without defining what longterm is, nor bothering to look at the historic performance of the universe of companies over the long term.

Historically, there is a very great chance, think 90% probability that any one company will disappear over the long term. Technologies change over time and companies that may seem too big to ever fail, fall away as they concentrate on their competences, think the railway companies of the nineteenth century. Nothing is too big or unique to fail over the long term.

Shares bought on dividend payouts alone, seems a fantastic idea until a few of them start not paying dividends, then the share price collapses as the company reorganises (or goes bust). The only logical way to make money from the stockmarket is to trade shares, be it short, medium or long term. 

If/when share prices don't move, then companies/new issues find it very difficult to raise money for expansion and as a result the economy suffers

brty


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## Tysonboss1 (2 February 2010)

brty said:


> Many people here have the mindset that holding "good companies" long term is a smart thing to do, without defining what longterm is, nor bothering to look at the historic performance of the universe of companies over the long term.
> 
> Historically, there is a very great chance, think 90% probability that any one company will disappear over the long term. Technologies change over time and companies that may seem too big to ever fail, fall away as they concentrate on their competences, think the railway companies of the nineteenth century. Nothing is too big or unique to fail over the long term.
> 
> ...




Hey Brty,

In regards to 90% of companies disappearing, I have heard a similar number be throwen around when some people (property investors mainly) try and discredit the share market.

It's true almost 90% of the companies listed today won't exist in 50 years if you searched for them by name or asx code. But alot disappear due to mergers. take overs and buy outs.

for example, Westfield holdings, westfield america trust and westfield property trust have been merged in "Westfield group", Coles Myer.ltd have been split and sold off. BHP LTD and Billiton were merged into BHP Billiton.

Offcourse many companies do go bust, speccy miners especially. that all part of investing really.

also,

I note on investing for dividends, By all means management can cut dividends for many reasons, as long as the underlying earnings are not affected a cut in dividends can be good, the company can choose to lower dividends to retain cash for many reasons such as fund expansion, clear debt, fund a share buy back etc etc.

When I calculate the fair value of a company I use the companies cash flow profit not the dividend yeild or the report able profit.

the reportable profit does not usally give a clear idea of a companies cash profit, it is quite i distorted number.

P.S - I am not taking a cheap shot at property investors in the first paragraph, I invest in property myself, I am just talking about the crowd that bag that share market with out ever taking the time to understand it.


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## Sdajii (2 February 2010)

Looking at companies going bust, are they more likely to be on the up, or on the decline, in the years prior to ceasing to exist?


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## brty (2 February 2010)

Tyson,



> But alot disappear due to mergers. take overs and buy outs.




The problem with "a lot" is that many that are taken over are taken over with scrip, the punters keep the scrip and the new company eventually goes bust, think FAI insurance taken over by HIH as an example of this.

Warren Buffett, who has been bandied about in this thread, often quotes the DJIA performance throughout the 20th century as having a performance of 6.5%  pa, and how much that would make for long term investors. However what he fails to mention is that if your great grandfather had bought $10,000 of each component of the DJIA on 1/1/1900, and handed those shares down (and all splits) from father to son, the combined value today would be precisely nothing.
None of the original companies of 1/1/1900 exist today. Several were taken over by others that subsequently went bust.

I am a share trader as well as a property investor, amongst other things, however I like to know about the realities of investing in anything. I made the mistake of buying good, solid, high earning, high yielding blue chips in 1982. None of those companies exist today, I was a slow learner and did my dough on them, rode them to oblivion.

brty


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## Tysonboss1 (2 February 2010)

Sdajii said:


> Looking at companies going bust, are they more likely to be on the up, or on the decline, in the years prior to ceasing to exist?




Possibly going through the roof actually, think enron, the many dot com stocks, babcock and brown, abc, centro etc etc.

The above mentioned stocks price rises had nothing to do with real earnings.

What I am talking about is companies that have strong "REAL CASH" earnings and for what ever reason become unloved.

But the essence of my original arguement remains the same, it takes along time for real value to build inside a company, But alot of investors want quick returns. to the point where they check the market constantly.

they want the speculation of other investors paying higher prices to generate their returns rather than the underlying assets generate their returns.

Lets take a real world example, Westfield group creates it's return by building and leasing shopping centres. a large chunk of it's profits come from longterm leases.

Using your example that shares mainly rise and fall along with the fortunes of the underlying company suggests that it's share price should be relativly stable. But it's not, it's share price moves all over the place for many reasons.

The westfield share price along with the market in general is often dragged up or down on data and news from around the world that has little affect of their day to day earnings.


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## Tysonboss1 (2 February 2010)

brty said:


> Warren Buffett, who has been bandied about in this thread, often quotes the DJIA performance throughout the 20th century as having a performance of 6.5%  pa, and how much that would make for long term investors. However what he fails to mention is that if your great grandfather had bought $10,000 of each component of the DJIA on 1/1/1900, and handed those shares down (and all splits) from father to son, the combined value today would be precisely nothing.
> None of the original companies of 1/1/1900 exist today. Several were taken over by others that subsequently went bust.




I don't know what stocks make up the djia, But if one of those stocks was coca cola, and not $10,000 worth but just a single coke stock was handed to you along with all it's dividends and splits, you would have about $5,500,000.00.

But anyway I don't really want to get into a dicussion about the long term viabillty of the stock market in general. You and I have completely different strateries, I prefer to trade as little as possible.


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## Tysonboss1 (2 February 2010)

brty said:


> I made the mistake of buying good, solid, high earning, high yielding blue chips in 1982. None of those companies exist today, I was a slow learner and did my dough on them, rode them to oblivion.
> 
> brty




May I ask what those companies were,


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## brty (2 February 2010)

Tyson,

Kemtron and Kern Corp are two that I remember, but if I had bought Woolworths  or Carlton United Breweries the result would have been no different.

Coca-cola was added to the DJIA on 12-3-1987.

brty


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## Tysonboss1 (2 February 2010)

brty said:


> Tyson,
> 
> Kemtron and Kern Corp are two that I remember, but if I had bought Woolworths  or Carlton United Breweries the result would have been no different.
> 
> ...




I don't no that much about the history of woolworths, What happened to them between 1982 and the present. did they go bankrupt and then get reborn as a new entity or somthing


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## brty (2 February 2010)

Woolworths was taken over by Adelaide Steamship during the '80's in a paper take-over. Adelaide steamship went bust, the administrators sold off Woolworths in a new float. Likewise for Carlton United Breweries that were taken over by Elliot's IXL, which went bust and the company Fosters was created/sold off to new (and existing)  investors.

brty


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## Tysonboss1 (3 February 2010)

brty said:


> Woolworths was taken over by Adelaide Steamship during the '80's in a paper take-over. Adelaide steamship went bust, the administrators sold off Woolworths in a new float. Likewise for Carlton United Breweries that were taken over by Elliot's IXL, which went bust and the company Fosters was created/sold off to new (and existing)  investors.
> 
> brty




That would be the kind of thing I was talking about when I said I am happy to hold forever unless somthing changes dramatically at the company,

Even though, if you had a portfolio of 10 companies, you would only really be down 10% or 15% of your total portfolio, so in the grand scheme of things you have only lost about 1 or 2 years growth in a 1 in 20 year incident.

no biggy really.


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## SmellyTerror (7 February 2010)

> ...I would have thought that what's important to you is the P/E, not the price alone. So you have to admit that prices going up is perfectly ok for you as long as the P/E remains stable and good.
> 
> You could retitle the thread: why do we want P/E to go up? The answer to that is: *we don't*. But I guess that doesn't make much of a thread.
> 
> ...




Any response to that? I'd figured the thread was over.
:


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