Modigliani-Miller theorem

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ataloss
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Modigliani-Miller theorem

Post by ataloss »

in a thread on the hocus board, Wanderer indicated a preference for receiving dividends and was challenged by an apparent believer in the M-M theorem . I thought this (from W Bernstein in 2000) was interesting:
Thus, in a taxless world a company's dividend policy should matter not at all to the shareholder. Inside academia, this is known as the "Modigliani-Miller theorem." In the taxable world, of course, shareholders prefer capital gains to dividends. So why do companies pay them?

Because, to put it bluntly, corporate officers are often scoundrels and theives. They lie. They cheat. They steal. They invest in projects more on the basis of turf, prestige, and politics than cash flow. They run around in Learjets and eat fois gras on your nickel. Shareholders intuitively know this and insist on spiriting their cash away from these bad actors as fast as they can.

This dismal view of corporate finance falls under the rubric of "agency costs." In other words, the shareholder's priorities (e.g., maximizing return) are not at all the same as the officers' priorites (turf, prestige, high salaries, and luxurious surroundings, all removed from bothersome outside scrutiny).


http://www.efficientfrontier.com/ef/700/agency.htm

the Bernstein article is well worth reading and entirely convincing to me

ataloss
knowing nothing about accounting but listening when ex-auditors raise the issue of agency costs
Have fun.

Ataloss
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Post by wanderer »

ataloss -

:lol:

unless lives and livelihoods are at stake, i generally let comments like the one you referenced go.

What can I say? Maybe Bernstein will be more convincing. I think many would find the number of companies I audited that ended up being de-listed instructive. And, even among the investors at risk, that there are usually two very distinct classes of shareholders. Can you say, "immediate and substantial dilution"?

:wink:
regards,

wanderer

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Post by WiseNLucky »

knowing nothing about accounting but listening when ex-auditors raise the issue of agency costs


I agree entirely and have stated so several times. I haven't been to the hocus board and won't go, even to look for this, but am interested in where those on the other side of this argument are coming from.

One caveat I would have is in the case of small cap rapidly growing companies. Often there is big reward in letting them keep their earnings to keep doing what they have been doing, just doing it on a larger scale. But the big firms should pay out the cash.

On one of my Fortune 500 company audits, I was horrified by the arrogance and disdain for auditors (me!) and regulatory oversight (SEC in in this case) I witnessed. I must say this was NOT true of all of the F5 companies I audited although I still questioned the failure to pay substantial dividends.

I still say to large companies, make money doing what you do best and give it back to the owners. Now.
WiseNLucky

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Post by WiseNLucky »

As a PS:

One of the nicest experiences I had as an auditor involved an S&L in the go go days. They treated us wonderfully along with the federal regulators who were on site the same time we were.

In fact, we were permitted to participate in the "benefits" provided to employees including all-paid catered luxury meals every noon and evening. I'm talking the quality of food that you get in a fancy country club served by white-gloved attendants. I was in my first year on about my third audit of my life (the very junior person on the team) and thought this was really cool but wondered how they could afford this luxury (along with all the original artwork, marble counters, corinthian columns etc) but profits were substantial. This was a single-site small S&L in Texas.

One of my assignments was to mail letters (positive confirmations) to all the people who had loans payable to the S&L confirming the amount of the loan and that interest payments or accruals were current. All of the letters came back appropriately signed.

I was intrigued, however, that about half of the letters were signed by the same person who I thought must have been a big borrower from the bank. I noted this fact to my supervisor who recognized the name of the signer as someone on the board of directors. We then noticed that the name of the borrowers in each case was different but that all of the letters were mailed to the same address.

It turned out that when a borrower disappeared, the S&L would change the address on the account to a PO Box that this board member controlled. Needless to say, this audit was never completed and no report was issued. This S&L became one of the first to slide into the ocean in what became the great S&L scandal of the 1980s.

In defence of my firm, Ernst & Young, who became famous as a result of the S&L scandal, we performed what we knew to be quality work. This was no Enron with participation by the audit firm. No shredding took place. The level of deceipt on the part of S&L owners and officers along with unwitting valuation experts combined with a failing oil & gas industry caused the problem. I experienced the "bubble" of the O&G industry where vast amounts of money from oil proceeds were "invested" as rapidly as possible in real estate financed by the S&L industry. Properties were purchased as quickly as possible as prices spiralled upward. Yesterday's sale of a property supported the price of tomorrow's sale for valuation experts.

Then OPEC opened the floodgates, oil prices plummeted, and no one could make the payments on their real estate loans. The rest is history with auditors, property appraisers and, finally, taxpayers as scapegoats. Even in this small-firm environment, dividends would have benefitted shareholders.

My little place in history.
WiseNLucky

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Capital gains and corporate dividends, both taxed at 15%

Post by therealchips »

ataloss quoted:


http://www.efficientfrontier.com/ef/700/agency.htm

the Bernstein article is well worth reading and entirely convincing to me


The MM theorem does not seem to apply to the present situation. The copyright on that article is 2000. We have had a significant change in the taxation of corporate dividends and capital gains since then. Currently the maximum tax rate on most of those capital gains and dividends is 15%, down from 25% for capital gains and maybe 39.6% for dividends. (I don't know whether states with income taxes are following the new federal tax provisions. Some don't, I predict. The formerly golden state of California has taxed capital gains distributions on mutual funds as ordinary income. In California's conscious and continuing effort to drive out the middle class, it probably continues this tax policy.) The preference for capital gains over dividends based on lower tax rates for capital gains must be much weaker under the new federal tax law. One remaining reason I can see to prefer capital gains to dividends is a taxpayer's desire to postpone taxation. That may be outweighed by the stockowner's desire to get the cash away from the managers before they squander it.

It is the sum of capital gain and dividend that determines an investor's total (pre-tax) return. I recall reading recently that stocks that pay no dividends have had a higher total return this year than stock that do. I don't pay close attention to such matters because, as you know, I do not pick individual stocks.
He who has lived obscurely and quietly has lived well. [Latin: Bene qui latuit, bene vixit.]

Chips
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Recent total yields on dividend-paying stocks and non-payers

Post by therealchips »

Here is material from May, 2003, on recent underperformance of dividend-paying stocks: http://www.thestreet.com/_yahoo/markets ... 89532.html
Stocks that paid a dividend have posted a total return of just 6.23% since the start of the year, compared with an almost 21% climb for non-dividend-paying stocks, according to Howard Silverblatt, a quantitative strategist at Standard & Poor's. The average S&P 500 stock posted a total return of 10.5% during that time.

Last year, of course, high-yielding stocks were the place to be, with dividend payers down just 5.9% compared with an almost 20% drop for non-dividend-paying stocks. But this year the trend has reversed, with investors bidding up riskier assets amid hopes for an economic recovery.


The federal income tax rate on dividends is far more significant to me personally than the tax rate on capital gains since I (tentatively) plan on not having any net realized capital gains for decades. (LTBH, LBYM, don't spend your capital, preserve your maneuvering room, and all that. :wink:) For the next six years or so, my pension, Social Security, dividends, interest, and cash reserves should be more than enough to support me without selling anything. After that, those income streams should continue and I'll be legally compelled to make withdrawals from my IRA. The withdrawals will be taxed as ordinary income and further obviate any possible need to realize capital gains. YMMV.
He who has lived obscurely and quietly has lived well. [Latin: Bene qui latuit, bene vixit.]

Chips
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Seems MM is out of date since the tax law changed.

Post by therealchips »

My further search found this from the Detroit Free Press, August 4, 2003: http://www.freep.com/money/business/divi4_20030804.htm
And now, companies are boosting their payouts as a way to court investors. As of late July, there had been 163 dividend increases from stocks in the S&P 500, up from 113 a year ago. That could easily outpace the 197 increases for all of 2002. In addition, 12 more companies in the S&P 500 started paying dividends this year, bringing the total to 363.


So my plan to live on a withdrawal rate near the dividend yield is looking good (at the moment :)).
He who has lived obscurely and quietly has lived well. [Latin: Bene qui latuit, bene vixit.]

Chips
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Post by JWR1945 »

WiseNLucky
I haven't been to the [SWR Research Group] board and won't go, even to look for this, but am interested in where those on the other side of this argument are coming from.

The thread is Tobin's q as an estimator dated Tuesday, Aug 19, 2003 at 5:02 pm CDT.

wanderer's comments:
http://nofeeboards.com/boards/viewtopic ... 350#p10350

JWR1945's reply:
http://nofeeboards.com/boards/viewtopic ... 442#p10442

My comments have been misrepresented. I do not appreciate that.

wanderer's complaint was based on his dissatisfaction with the results of my analysis. He wanted Tobin's q to be the best indicator when calculating Safe Withdrawal Rates. It didn't turn out that way. His complaint was far from justified.

Have fun.

John R.
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Re: Recent total yields on dividend-paying stocks and non-pa

Post by peteyperson »

Thanks to the Chiperoo and John R., I'm now actively including dividends in planned cashflow during FIRE and return calculations. I'm currently struggling with a w/d rate of 2.74% and avg dividends and bond coupons of 2% which would require modest share selloffs (the factor being that some of the return is in price growth and some in yearly dividends, interest on cash etc). I haven't quite matched up the amount I can take out given certain returns on stocks, bonds and cash and the desire to not sell stock positions vs. the need to make sales to cover the difference between overall planned real return of 2.74% vs. dividends/coupons of 2% at present. I suppose it may depend if the forward dividends are more in the 3-4% range to avoid share selloffs.

Are your w/ds low enough to avoid this, Chips, I forget?

Any thoughts, John R?

Petey
therealchips wrote: Here is material from May, 2003, on recent underperformance of dividend-paying stocks: http://www.thestreet.com/_yahoo/markets ... 89532.html
Stocks that paid a dividend have posted a total return of just 6.23% since the start of the year, compared with an almost 21% climb for non-dividend-paying stocks, according to Howard Silverblatt, a quantitative strategist at Standard & Poor's. The average S&P 500 stock posted a total return of 10.5% during that time.

Last year, of course, high-yielding stocks were the place to be, with dividend payers down just 5.9% compared with an almost 20% drop for non-dividend-paying stocks. But this year the trend has reversed, with investors bidding up riskier assets amid hopes for an economic recovery.


The federal income tax rate on dividends is far more significant to me personally than the tax rate on capital gains since I (tentatively) plan on not having any net realized capital gains for decades. (LTBH, LBYM, don't spend your capital, preserve your maneuvering room, and all that. :wink:) For the next six years or so, my pension, Social Security, dividends, interest, and cash reserves should be more than enough to support me without selling anything. After that, those income streams should continue and I'll be legally compelled to make withdrawals from my IRA. The withdrawals will be taxed as ordinary income and further obviate any possible need to realize capital gains. YMMV.
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Post by wanderer »

I think JWR may have been struck by the frying pan that seems to have glanced offa hocus' dome. :lol:

My comments have been misrepresented. I do not appreciate that.

wanderer's complaint was based on his dissatisfaction with the results of my analysis. He wanted Tobin's q to be the best indicator when calculating Safe Withdrawal Rates. It didn't turn out that way. His complaint was far from justified.

JWR is right: I was so torqued about Tobin's Q that I drowned myself in 4 hours of haggling over 560SELs at the car souk off King Faisal Road. boohoohoo. ;)

I'm not certain (strangely, JWR is[!]), but I think ataloss and I were referring to the exchange which started sometime around here:

http://www.nofeeboards.com/boards/viewt ... 655#p10655

John, I'll be at the Fujairah Intercontinental this weekend wrestling with my conscience. Enjoy your 'investigations.'
regards,

wanderer

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Post by therealchips »

Hi, Petey,

You asked if my withdrawals will be low enough that I can avoid making any sales in the taxable account. According to my plan, the answer is yes, very nearly so. According to information from Vanguard just now, the dividend return on my TSM investment is 1.5%. I need that to grow a little over the years to keep from having to sell anything. 2% would be great. Here, for various age ranges, are my planned annual withdrawal rates:

63 to 69 1.46%
70 to 79 1.61%
80 to 89 1.79%
90 to 94 1.91%

The increases in withdrawals are solely to cover increasing federal income tax as mandatory minimum withdrawals from my IRA grow with age. The planned after-tax real standard of living is level. These results use an assumption I think is absurdly low: an average real return of only 2% for the next thirty years on the S&P 500 and TSM. I also plan on 3% annual inflation in that time, which will just about destroy my already meager corportate pension. After age 70½, sales in the IRA may not be optional, since the minimum required distribution (MRD) must be in cash. The MRD starts at more than 3.8% (at age 70) and rises rapidly. There is no law that says I must spend the mandatory IRA distributions, only that I have to pay income tax at regular rates on them. (IRA's have become a mechanism for turning long-term capital gains into ordinary income, while delaying the tax bite.) I expect to re-invest the excess (whatever is left after income tax and living expenses) in my taxable account.

In retirement planning for returns on your equity investment, you have three streams: unrealized capital gains, realized capital gains, and dividends. I have never done a good job predicting what these will be, given the volatility of the market, the performance of the actively managed funds still a small part of my portfolio, and the inadequacy of my crystal ball. Changes in tax laws and regulations further complicate the estimates and predictions. IRS did me a great and unexpected favor recently (under Clinton!) when it changed the law to allow a bachelor to compute his MRDs using a joint life expectancy as if he had a wife ten years younger than himself. (Care and maintenance expenses for phantom wives are zero.) Congress may do me a further favor by pushing back the age at which MRD's start. All this is predicated in US tax law so it may not apply to you.
He who has lived obscurely and quietly has lived well. [Latin: Bene qui latuit, bene vixit.]

Chips
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Post by ataloss »

JWR, wanderer is correct about which of your posts/comments I was misrepresenting today. I will get to misrepresenting your comments about Tobin q when time permits.

WNL, great audit story. I agree that companies should do what they do best and pay the investors. I think there is a natural human tendency to attribute success to skill and try to extend that into other lines of business.

Chips, if you have a good run in the market and you feel like taking profits you could get one of these:


http://www.cadillac.com/cadillacjsp/mod ... ?model=xlr

Bernstein quoting Graham:
The customary reasoning on this point may be stated in the form of a syllogism, as follows:

Major premise - Whatever benefits the company benefits the shareholders.

Minor premise - A company is benefited if its earnings are retained rather than paid out.

Conclusion - Stockholders are benefited from the withholding of corporate earnings.

The weakness of the above reasoning rests of course in the major premise. Whatever benefits a business benefits its owners, provided the benefit is not conferred upon the corporation at the expense of the shareholders . . . An inductive study would undoubtedly show that the earnings power of corporations does not in general expand proportionately with increases in accumulated surplus.
Have fun.

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Post by wanderer »

JWR, wanderer is correct about which of your posts/comments I was misrepresenting today. I will get to misrepresenting your comments about Tobin q when time permits.

:lol: Maybe, rather than debating what the two former auditors say, JWR will focus on why a relatively benign and useful person like W&L won't even look at hocus' board.

WNL, great audit story. I agree that companies should do what they do best and pay the investors. I think there is a natural human tendency to attribute success to skill and try to extend that into other lines of business.

I agree W&L! Will you please come speak to my class?? BTW, if I was not clear, allowing a small growing company whose top ideas are fabulously better than the average company's or individual's ideas keep the money to grow is a very smart idea in some cases. The most successful company I audited was an example of that. Ultimately the founders cashed out and one bought one of the marquee sports franchises.
regards,

wanderer

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Post by peteyperson »

Hey Chips,

Thanks for that. I had a recollection of sub 2% w/ds which seemed over the current dividends (but several articles draw attention to the fact that they are rising considerably from recent levels). I suspect they may rise enough to make it possible for you to live entirely from them shortly.

Petey
therealchips wrote: Hi, Petey,

You asked if my withdrawals will be low enough that I can avoid making any sales in the taxable account. According to my plan, the answer is yes, very nearly so. According to information from Vanguard just now, the dividend return on my TSM investment is 1.5%. I need that to grow a little over the years to keep from having to sell anything. 2% would be great. Here, for various age ranges, are my planned annual withdrawal rates:

63 to 69 1.46%
70 to 79 1.61%
80 to 89 1.79%
90 to 94 1.91%

The increases in withdrawals are solely to cover increasing federal income tax as mandatory minimum withdrawals from my IRA grow with age. The planned after-tax real standard of living is level. These results use an assumption I think is absurdly low: an average real return of only 2% for the next thirty years on the S&P 500 and TSM. I also plan on 3% annual inflation in that time, which will just about destroy my already meager corportate pension. After age 70½, sales in the IRA may not be optional, since the minimum required distribution (MRD) must be in cash. The MRD starts at more than 3.8% (at age 70) and rises rapidly. There is no law that says I must spend the mandatory IRA distributions, only that I have to pay income tax at regular rates on them. (IRA's have become a mechanism for turning long-term capital gains into ordinary income, while delaying the tax bite.) I expect to re-invest the excess (whatever is left after income tax and living expenses) in my taxable account.

In retirement planning for returns on your equity investment, you have three streams: unrealized capital gains, realized capital gains, and dividends. I have never done a good job predicting what these will be, given the volatility of the market, the performance of the actively managed funds still a small part of my portfolio, and the inadequacy of my crystal ball. Changes in tax laws and regulations further complicate the estimates and predictions. IRS did me a great and unexpected favor recently (under Clinton!) when it changed the law to allow a bachelor to compute his MRDs using a joint life expectancy as if he had a wife ten years younger than himself. (Care and maintenance expenses for phantom wives are zero.) Congress may do me a further favor by pushing back the age at which MRD's start. All this is predicated in US tax law so it may not apply to you.
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Post by therealchips »

I had a recollection of sub 2% w/ds which seemed over the current dividends (but several articles draw attention to the fact that they are rising considerably from recent levels). I suspect they may rise enough to make it possible for you to live entirely from them shortly.


Thanks, Petey. Hold that pleasant thought! As I recall, dividends can rise, even with present earnings, by payout ratios returning to earlier levels, or dividends can rise with rising earnings in a growing economy. I'm betting on both.

I am not absolutely determined to live without eroding the purchasing power of the retirement stash. It's not an article of religious faith with me. I take stability of the capital as my goal to see if I can achieve it, in spite of social pressures to spend rather than invest, market volatility, and the problems caused by inflation and taxation. Most of my retirement assets come from my own salaried efforts, so there is no compelling reason to think of that money as family capital. It pleases me to do so anyway.
He who has lived obscurely and quietly has lived well. [Latin: Bene qui latuit, bene vixit.]

Chips
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Post by peteyperson »

Well Chips, living partly off principle is no bad thing and doesn't have to erode the value. If growth rates were to be 5%, you could sell off enough shares to reduce the retained value of 3% inflation and still maintain your purchasing power. Planning to only live off income is very restrictive and doesn't allow you to benefit from growth rates above inflation.

Always worth keeping in mind.

Petey
therealchips wrote:
I had a recollection of sub 2% w/ds which seemed over the current dividends (but several articles draw attention to the fact that they are rising considerably from recent levels). I suspect they may rise enough to make it possible for you to live entirely from them shortly.


Thanks, Petey. Hold that pleasant thought! As I recall, dividends can rise, even with present earnings, by payout ratios returning to earlier levels, or dividends can rise with rising earnings in a growing economy. I'm betting on both.

I am not absolutely determined to live without eroding the purchasing power of the retirement stash. It's not an article of religious faith with me. I take stability of the capital as my goal to see if I can achieve it, in spite of social pressures to spend rather than invest, market volatility, and the problems caused by inflation and taxation. Most of my retirement assets come from my own salaried efforts, so there is no compelling reason to think of that money as family capital. It pleases me to do so anyway.
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Post by therealchips »

petey said
Planning to only live off income is very restrictive and doesn't allow you to benefit from growth rates above inflation.

There is more than a whiff of optimism in your comment there, Petey. I like it a lot. :D

The plans I have been talking about make assumptions about real returns that I think are minimal. In fact, my assumption of a 2% real annual return in the US market over the next thirty years strikes me as absurdly pessimistic. I am just being cautious.

I plan to let my standard of living rise (or, if necessary, fall) with the market's performance, although with damped volatility. My calculations show about a 5% rise (or fall) in after-tax standard of living for me if the market rises (or falls) 10%. This resembles gummy's ideas on sensible withdrawal rates, although my derivation is independent of his.
He who has lived obscurely and quietly has lived well. [Latin: Bene qui latuit, bene vixit.]

Chips
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Post by peteyperson »

Hey Chips,
therealchips wrote: There is more than a whiff of optimism in your comment there, Petey. I like it a lot. :D


Not sure if you meant optimism towards my own aspirations of FIRE or toward the market as a whole. I'll respond with some thoughts on my situation as that might be more illuminating for you and others reading. Besides, you've added quite a bit about you situation of late so I thought it good to reciprocate.

I am in a very tough spot here currently. FIRE presently is but a distant dream. Reading what I have lately (Bernstein's Four Pillars and now Gillette Edmunds's Retire Early and Live Well) have really given me a taste for it. The tools to do it are coming together, the knowledge is amassing and I feel I know how to accomplish it if only I had the money! Edmunds's book particularly lays things out in a much more rounded fashion with so many sections that are worth re-reading that I gave up marking the good sections four chapters in.

My motivation is partly to FIRE at some distant point but also to layer in the freedom to travel (the kind where you arrive in America and have the time to travel around rather than two weeks on a beach in one location). If I build my business sufficiently I may be able to take extended leave to do so which wouldn't be possible for employed folks. This comes back to Paul Terhorst's book on travelling continuously. I don't think I'd want to FIRE with only enough to pick from a limited range of locations and be forced to move when the economy of an emerging market nation slides, I think I would want enough to buy a place somewhere like Spain and have a modest lifestyle like now with enough to travel. Then should I wish to spend six months travelling or work on a volunteer trip or whatever, I have that flexibility rather than not having enough money to have the choice. The Terhorsts may well have more options now but I wouldn't want that life per se. Freedom to choose, sufficient amounts of money can buy that.

So I'm enthusiastic now that I have enough tools to feel I have a better idea than most at what to do. I enjoy knowledge and learning new things. I've found lately that it gives me a lot of pleasure where in school it was the opposite.

My current plans call for 2.5% to 2.8% real across a global allocation on multiple non-correlated asset classes. I too think it will be a point or two better over the long term but I think it seems like a good place to start. It is less than historical performance by a sensible margin and respects the high valuation of some asset classes and their expected poor performance over the coming few years. This is the sort of area where you want to use some prudence in your numbers. I have a bare-bones FIRE figure now ($640,000) which I'm comfortable with in so much as the withdrawal side is reasonable and the sum is not so large that it seems impossible to achieve over the next 20 years. If I can reach there, then it becomes how long do you want to keep on working to add the non-essential items like books, music, dining out, transportation and travel. I will need a sizeable and substained amount hard work and luck to achieve it however. The goal of building my business allows for the dual goal of being able to travel more flexibly before FIRE and increase my ability to save for FIRE.

I just don't want to fail. My previous employment was not particularly well paid and property to buy costs so much now that returning to similar employment would likely doom any ideas of FIRE. The money would just not be there to do it. A successful business however removes the set salary for a set job restriction and opens up more possibilities if you are willing to take the gamble. The jury is out currently on whether the gamble was worth it.

Petey
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Post by WiseNLucky »

The thread is Tobin's q as an estimator dated Tuesday, Aug 19, 2003 at 5:02 pm CDT.


I read a little about this but don't think it's the topic we're discussing. I don't know anything about Tobin's Q so I'll back out.
I'm not certain (strangely, JWR is[!]), but I think ataloss and I were referring to the exchange which started sometime around here:

http://www.nofeeboards.com/boards/viewt ... 655#p10655


OK, this one fits. I found the dialog interesting and pretty even until I ran into the "police". I guess this is my (over emotional) problem with the other site. I didn't see any reason for the police post. The discussion seemed fair and thoughtful until that point.
Maybe, rather than debating what the two former auditors say, JWR will focus on why a relatively benign and useful person like W&L won't even look at hocus' board.


I must be getting old. I just can't seem to focus on the really long posts anymore, especially if I don't see where they're coming from or why they are even there.
I agree W&L! Will you please come speak to my class??


LOL :DI'm sure you've got plenty of war stories of your own to tell!
I am in a very tough spot here currently. FIRE presently is but a distant dream.


I know the feeling exactly, petey. I am fortunate in my employment now and am making as much hay as possible while the sun shines!
WiseNLucky

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Post by therealchips »

A successful business however removes the set salary for a set job restriction and opens up more possibilities if you are willing to take the gamble. The jury is out currently on whether the gamble was worth it.

Thanks for the information, Petey. I'm not part of that jury. Have you read The Millionaire Next Door? As I recall, far more of the millionaires made it your way -- as independent business men -- than my way, as a <strike>poor salaried slob.</strike> dedicated professional employee. :DI have read some accounts of people who made it big with one business of their own who sold that business and went for a second fortune in another new business, but didn't make it. We can speculate whether this is because they were no longer young, hungry, or vigorous enough to put in enough effort the second time, or whether the first success had a largely fortuitous component, i.e., they got lucky. Certainly Bill Gates was enormously lucky that IBM did not see the potential in DOS and let him keep the rights to it.

Of course, I wish you success.

PS: http://inventors.about.com/library/weekly/aa033099.htm
Microsoft bought the rights to QDOS for $50,000, keeping the IBM deal a secret from Seattle Computer Products.

Gates then talked IBM into letting Microsoft retain the rights, to market MS DOS separate from the IBM PC project, Gates proceeded to make a fortune from the licensing of MS-DOS.


Here is another story for your consideration:
http://www.techtv.com/screensavers/prin ... 61,00.html
All geeks know the story on how the first graphical user interface (GUI) was delivered to the masses. (If you don't know the story, shame on you, and read on.) The legendary tale goes something like this. Apple co-founder Steve Jobs visited the Xerox Palo Alto Research Center (PARC), which was developing the GUI. Jobs saw PARC's work interface and used it to develop the Macintosh operating system, the first ever OS for the masses based on a GUI. The rest is history.

This version of the story does not emphasize the fact that the Xerox management, being devoted to the copier business, did not see the value of the intellectual property that PARC had developed and simply gave it Steve Jobs, who did see that value. Some brave and insightful employee of PARC refused to give Jobs the initial briefing until she was given a direct (written?) order from her uncomprehending bosses.

In thirty years of corporate employment, I saw my bosses make many mistakes based on their underestimating the significance of computer power, but none of their mistakes are even remotely as significant as these errors of IBM and Xerox. To extend the story, consider this irony:

http://www.ecotopia.com/webpress/futures.htm
The story describes how, in 1956, after some years of struggling, Dessauer was able to build the prototype of the 914 plain paper copier. Lacking the money to take the copier to market to build factories and so forth, he decided to take it just down the road to IBM. He told IBM, "Take this, build factories, go out and sell it. I just want a small royalty." And IBM did what all companies do when they can't make up their minds: They went out and hired some consultants.

After an exhaustive study that took 18 months, the consultants came back with a very thick report which conclusively proved that there was no market for a plain paper copier. They had two chief reasons and a host of minor ones. Number one: there wasn't enough copy volume. That was a big problem. The other was that the xerography process cost more than ten-times as much per copy as the AB Dick mimeograph process, which was the technology they compared it against. The consultants figured no one would spend ten times as much to copy anything. So based on their report, IBM turned down the copier offer, and that was several hundreds of billions of dollars ago.
That is, Xerox got its start in life because IBM management did not appreciate the potential of a new technology and, even with that history, Xerox gave away the technology that Jobs exploited.

I trust you are amused. :lol:
He who has lived obscurely and quietly has lived well. [Latin: Bene qui latuit, bene vixit.]

Chips
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