The Lemon Fool

There's a new article on compounding on the FT, including an interesting take on earnings reinvested within the company as opposed to paid out as dividends and then reinvested by the holder.

This is not the same as the frequently uttered mantra that the majority of the return on equities comes from reinvestment of the dividends paid. Dividends which are reinvested have to be used to purchase shares at market value — at three times book value currently in the S&P — whereas each $1 of retained earnings gets reinvested at book value. It is the reinvestment of retained earnings, not dividends, which provide the majority of the growth in the value of equities.

.

To access the article on the FT enter:- The unique advantage of equity investment - Financial Times in your search arguments.

Users with an FT subscription can use this link.

No probs for me, straight in googling the red text.

Sorry for any trouble Mods.

Also available for free on the Fundsmith website.

https://www.fundsmith.co.uk/news/articl ... investment

Moderator Message:
I have pointed out that links to FT require the user to have paid subscription. To this end I will be editing posts so as to allow "all" users to access these articles by using their normal search facility. Raptor.

Not necessarily paid. I have a free registration and it gets me access to a few such articles per month

mc2fool wrote:

Moderator Message:
I have pointed out that links to FT require the user to have paid subscription. To this end I will be editing posts so as to allow "all" users to access these articles by using their normal search facility. Raptor.

Not necessarily paid. I have a free registration and it gets me access to a few such articles per month

They apparently do not do the free option anymore?

Raptor

Raptor wrote:They apparently do not do the free option anymore?

Huh, I didn't know that. That's a shame. Oh well.....

Fundamentally what T Smith is saying is that an advantage of equity investing not often cited is that the profit or free cash generated is used for paying dividends but typically not more than say 50%, with the balance being reinvested in the business. He says that it is this reinvestment that tends to give equities the edge over other forms of investment, especially if the business has a high rate of return on capital invested.

Nothing really more complicated than that.

That seems a reasonable argument but it does need for the reinvested revenue to be used profitably otherwise the exercise and argument is futile. See Tesco in the latter years of Leahy's reign where they were empire building for the sake of it rather than generating a high return on that capital reinvested.

Dod

Dod1010 wrote: See Tesco in the latter years of Leahy's reign where they were empire building for the sake of it rather than generating a high return on that capital reinvested.

It's just as well that people like Leahy present themselves as wide boys so that one can avoid investing in their companies.

For people interested in the Fundsmith philosophy the AGM is up on their website. Quite long and a bit self-congratulatory but he does explain himself quite well.

https://www.fundsmith.co.uk/tv

Nothing really more complicated than that.

Dod, I agree with the above: the problem really is the practical application.

The argument put forward is similar to those used by Warren Buffett, but if it isn't difficult to make the judgement, why is it that even this smart investor bought a big stake in Tesco at just the wrong time?


Arb.