Andy Kessler

I Still Hate Dividends, Professor Siegel

Wharton Professor Jeremy Siegel is much revered. His students sing his praise, his books are best sellers, the press adores him. I’ve heard him speak and he is very engaging, even convincing. He is also totally wrong. About dividends. About ETFs based on dividends. Enough to lose you money.

A few years back I wrote an op-ed for the Wall Street Journal Op-Ed page about dividends. Specifically, that I hate dividends. You can read it here. Stocks trade on their prospects for earnings. Dividends are just a bribe to get you interested in slow growing companies who can’t be bothered to reinvest their earnings in something useful. In the past, when companies paid out 100% of their earnings to shareholders, well then dividends mattered. Today, no one pays 100%, so dividends have limited say in the value of a company. In fact, they sucker you in with attractive “yields” right before they consider cutting the dividend. Citigroup anyone?

as persuasive as arguments may sound, the hard evidence proves otherwise.

Sadly, to academics such as Professor Siegel, this is heresy. He was nice enough to write a letter to the editor about my piece saying that I was completely wrong. He is entitled to his opinion, of course, as I am entitled to hold a grudge. He even took a swipe at me in his March 2005 book, The Future for Investors: Why the Tried and the True Triumph Over the Bold and the New, (although he called me Arthur Kessler, nice fact checking, Professor Seagull). And I quote,

“As persuasive as Kessler’s arguments may sound, the hard evidence proves otherwise…Average returns on older firms surpassed the returns on the newer firms…Technology stocks, which pay the lowest dividends have scarcely been market beaters.”

Like, say, Apple. Don’t bother with the book, it is backwards looking twaddle.

Email exchange with Milton Friedman

My friend Peter Robinson at the Hoover Institute at Stanford was kind enough to pass along a copy of my book The End of Medicine to his colleague, Nobel Laureate and father of free market thinking, Milton Friedman, who sadly passed away yesterday at the age of 94.

 

 

From: "Peter Robinson" To: "Andy Kessler" Subject: A great man wants your home address.... Date: Mon, 17 Jul 2006

 Could you remind me of your mailing address?  See below.  Best, Peter

----- Original Message -----

From: Milton Friedman
To: Peter Robinson
Sent: Monday, July 17, 2006 10:59 AM

 Dear Peter:

I am delighted to have Andy Kessler's The End of Medicine. I appreciate his suggesting that you send me a copy. But one good turn deserves another. If you will let Gloria know the mailing address for Andy Kessler, she will send him a reprint of my venture into the medical field published in The Public Interest about two years ago.

It goes in a very different direction but it is entirely complementary to Kessler's idea.

Cordially,

Milton

A few days later, I received a Xerox copy in the mail of a piece by Milton Friedman titled “How to cure health care”. It is a terrific piece, found here and some of it discusses Gammon’s Law, best summarized by this:

He observed that in "a bureaucratic system . . . increase in expenditure will be matched by fall in production. . . . Such systems will act rather like ‘black holes,’ in the economic universe, simultaneously sucking in resources, and shrinking in terms of ‘emitted production.’"

Trying to have good manners, I fired off a quick thank you note:

 

Media 2.Uh-Oh in a single file

 

Here is the entire Media 2.Uh-Oh series in a single file.

Media 2.Uh-Oh Part 4: Go Wide

Here is Part 4, the final piece in the series, the others are here:
Intro
Part 1: Pipe
Part 2: Layer Cake
Part 3: Virtual Pipes

So what is a Media Mogul to do? They control pipes in a world of zero margin costs. It costs virtually zero to sell one more digital song, or run one more digital ad or post one more digital classified. As chips and bandwidth get cheap, digital distribution crumbles the quaint old days.

Media 2.Uh-Oh Part 3: Virtual Pipes

Intro
Part 1: Pipe
Part 2: Layer Cake

Yup, Media is about controlling pipes and Technology is (now) about horizontal layers, and on the Web, with all those packets whizzing around like bumper cars, there are no natural end to end pipes to be found. So, can you construct a virtual pipe and actually create a media company on the Internet?

Media 2.Uh-Oh Part 2: Layer Cake

Intro
Part 1: Pipe

I had a college roommate, Franz, who after taking business classes would come back to our house, pound a few beers, proclaim, “Dude, when in doubt, get horizontal” ­and then proceed to pass out in front of the TV. (I still can't believe Forbes let me write this back in 1998!)

The point I was making is that both the computer and communications businesses have transformed over the last 20 years from a vertically integrated business to a horizontal layer cake. 

This may provide a clue as to what will happen with the (mostly) vertically integrated media mess.

Media 2.Uh-Oh Part 1: Pipe

With all this talk of new media, web media, Google as a media company (read the intro to this series) - it's time to go back to basics. According to answers.com, media is defined as:

me·di·a - Channels of communication that serve many diverse functions, such as offering a variety of entertainment with either mass or specialized appeal, communicating news and information, or displaying advertising messages.

That's pretty lame. Even Katie Couric is confused. Like the elephant and the seven blind guys, some think of media as content, others as distribution, aggregating viewers attention, user generated content, ad sales, keepers of our culture, public trust and on and on. How can you lump TV, radio, movies, newspapers, music, cellphones, cable, satellite into one phrase?

My definition is quite simple: Media is about control of a pipe.

Media 2.Uh-Oh: Intro

There is always hidden meaning to deals - the Google-YouTube deal is no exception. Why YouTube sold is pretty easy - $1.65 billion ain't bad for 20 months work and it would have taken at least $50-100 million from Sequoia Capital, their venture backers, to build the infrastructure and salesforce to build a real company. That's real money.

But what about Google? Why do it?