Why is Berkshire Hathaway the only share to reach 6 digits? Other than of course that the other companies are not run by Warren Buffett.

When a company does well, it should reflect in the share price. By declaring dividends, splits or bonuses, companies are ONLY destroying value of the shareholders. When a company declares a dividend it is telling the shareholders: “We do not need your money BECAUSE we do feel that we do not know how to manage the money as well as you do”. So if there is a company with a very good ROE, RONW, and ROA (assets marked to market value) there is no justification at all for the company to pay out dividends. Also the government of India has made the dividend tax inefficient. You anyway had a dividend distribution tax and now they have made the dividend taxable at the individual level ALSO, albeit for dividends above Rs. 1 million.

In my view, companies should NOT declare dividends at all. I like Sun Pharma make a small beginning in this regard. Look at their piddly buy backs – clearly it is just a dividend form. This allows the company to concentrate on its cash flow and to buy back the shares every year depending on cash flow.

Bonus and splits are of course worse. The normal reason given for this is ‘to encourage the retail investor to be able to buy shares’ – I think this reason rocks. Have we not adjusted to paying more for everything? My father bought a second hand ‘fiat’ for a grand amount of Rs. 8,000 in 1963. I am sure that I cannot get a car today for a figure close to that.

Splits and bonuses are purely cosmetic. The answer lies in the give-and-take between dividends and share splits. Dividends raise a share’s returns without raising its price, as a company pays out excess earnings as cash or new shares to existing shareholders. Splits, on the other hand, reduce a share price; typically a company replaces every old share with two new ones, each at a fraction of the former price – the same fraction for which a ‘bonus’ or split is declared.

The price of a share should capture the history and its past performance. It will be so easy to compare shares and the IRR of the zcb!! ok ok…I was saying it would be easy to arrive at the price of the share treating it like a zero coupon bond (zcb). The problem is some people who do wealth studies keep forgetting that the returns in Dow Jones is made up of 2 things – dividends, bonus, splits and price appreciation. Most MNCs paid out huge dividends – and a wealth study which ignores dividends is hilarious. On the day the company pays out dividend…ASSUME that the money paid out was invested in the same share IMMEDIATELY. Only then can you claim to have done a good wealth study.

What would happen if the company did not give a dividend, split or bonus? Well no difference at all for the institutional shareholders, promoters, or the other biggies. The small set of shareholders will not matter…they would be forced to sell off as and when they needed money, and it would have made it a very concentrated small shareholder base. Is it too bad in itself? Well I personally do not think so. As and when the company wanted to reward the shareholders they could do a buyback. If the promoters did not participate in this, their holding percentage would go up and they could consolidate their holdings!

Why, then, do so many stocks trade in an almost permanent narrow range? I think it’s because, even for the “experts,” investing is partly about finding ways to feel good about yourself. Many investors look at the bonus as ‘free shares’ so they do not mind what happens to the shares once they get a bonus and they sell off the original shares – you see their ‘cost’ has been recovered, right?

Hanging on can make you feel even better!! I bought just 50 shares in 1977, but now I have 4000 shares – a proud shareholder of Colgate will tell you. However, it is Nestle which has created far more wealth!! Once you get a bonus, you can start dreaming about the next bonus…so go on.

This is a what psychologists call ANCHORING  — estimating what something is worth by seizing on an obvious number – and the obvious number NEED NOT BE RIGHT AT ALL. By keeping shares in a narrow price range, companies fool us into thinking the shares naturally belong at the high end of the range.

If you focus on rising share prices as your main hope for future wealth, you’re making two mistakes. If history is any guide, instead of rising, stock prices will more or less stand still. And dividends will make you richer than rising prices alone.  So if you’re not reinvesting dividends into your stocks or funds, you’re eating your OWN CAPITAL.