Forum Archive Index - June 2000

["Jeremy" <jardley@electrosilk.net>]

>
> Second point: you don't buy on borrowings.  Shares are typically a
long-term
> investment and a fundamental of finance is YOU DON'T BORROW SHORT TO
INVEST
> LONG.

The standard model of investment is set in terms of borrowings.  It doesn't
matter if it is your money or someone elses.  You could quite easily use
your money for something else - say cash on deposit or buying a rental
property - so you are forgoing other income in order to purchase shares.

Think in terms of a loan of your own money for three possbile uses,
investment in the money market, a loan to yourself to buy shares, or a loan
to yourself to purchase a rental property.  The investments/loans return
income and capital during the investment term.  All should be assessed
objectively in terms of return on investment.

The cost to yourself of forgone income - say missing out on interest from
the overnight money market order to buy shares - is identical in treatment
to the cost of borrowing money from the bank to buy shares. Hence you can
always think in terms of borrowings, subject of course to interest rate
differentials and taxation treatments.

> In any case, if you do borrow, you sell you shares.  If the share price
> drops, then you can't repay in full obviously, but my point again is that
if
> the share price drops and you get a dividend, the share price would not
have
> dropped by as much had you not received the dividend.  You are no better
off
> now that you have a dividend.  Apply the theory (without your flaw
addressed
> in point 1) and you can calculate the result yourself.

In a flat market you end up at the end of the investment period with the
same shares, worth the same amount, PLUS a dividend to pay your borrowings
interest and perhaps some income.  Red herrings about transaction timings in
the company financial cycle not withstanding.

In a growing market, you've still got to pay for your investment money. So
you need dividends to pay your interest bill, or you have to sell shares.

Right now the market is flat or declining, so you need good dividends to pay
for the shares because the capital gains won't do it.

Jeremy



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