The main idea is that you shouldn't have any preference for how companies choose to return value to shareholders.
The bolded is my main concern.
Sorry, I failed to mention my implicit investing assumptions along with that quote. Here it is more completely:
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if you don't have any trust in your ability to know when a company is overvalued or undervalued (i.e., you aren't a stock-picker, which describes most people on this forum), then you shouldn't have any preference for how companies choose to return value to shareholders.
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if you're a stock-picker, then you absolutely should have a preference for how companies choose to return value to shareholders.
Those are two opposing positions, and this is a case where there is no logical middle ground between the two. You either believe you can't do any better than the company management at making capital decisions, or you believe that you can. The logical consequence of the former position is to just take what the companies (and the index) give you. The logical consequence of the latter position is to actively get out of a position whenever you think management is making bad decisions. Both defensible approaches.
What doesn't make a lot of sense is the middle ground: distrusting management enough to want them to pay you a direct dividend four days a year, yet continuing to trust them with a far larger portion of your capital for all the rest of the year. "Those guys don't know what they're doing, so I demand they give me 1% of my investment back in the form of cash so I can reinvest it properly. The other 99%? Oh, I'll totally keep invested with them." Huh?
Is that because you figure there's only a 1% chance that they're wrong, so you reduce your stake by only 1%? I guess that's possible, but it seems like an amazing coincidence. Why not reduce your stake by 10%? Or 100%? Otherwise it strongly suggests that you want to actively decide how to reallocate a portion of your capital and take the decision out of the hands of the company, but you paradoxically will let the company decide the
amount that they'll let you reallocate.
I do care how companies choose to return value to shareholders because some of them make poor decisions. A buyback may make sense if the stock is cheap, but often times management prefers buybacks because they have a lot of money in unvested stock at stake. A dividend does nothing for them considering the stock has not been vested or the option has not been exercised. But a buyback increases the value of their unvested shares. This is something that needs to be considered.
Sure. If you believe it's bad for the company to do a buyback at a particular time, then tender your shares rather than holding them. As an active stock-picker, you should probably be reexamining and reallocating your positions regularly, regardless of dividend or buyback announcements.
Similarly, capital investments back into the company don't always make sense and sometimes don't always pan out.
Of course. And if you're sure your own capital investment decisions will produce a higher return, then you should take
all of your capital out of the stock in question and redirect it more optimally, not just take out whatever small portion the company lets you have.
My main point on the doubling of a stock's value is to show the impact the law of large #s has on the ability to grow further. Index funds are set up to reward companies that did great last year. I looked at my index fund fact sheet. In 2014 Apple was the biggest holding at 2.53%, now it is the biggest holding at 3.4%. over double the size of the next largest holding.
Whoa, let me get this straight: your prime example of "the impact of the law of large #s on the ability to grow further" is to show that the largest number in 2014 went on to grow way
more than the smaller numbers that make up the rest of the index?
With market cap weighting it is essentially a "buy high" strategy as the holding % is reflective of the "new" market cap on the day the fund re-balances.
Cap-weighted funds don't need to "rebalance". If Apple grows faster than the market, that increased weight is automatically reflected in the index fund, because the underlying AAPL shares held by the fund also grow faster than the rest of the fund. Yes,
new money buying into a cap-weighted fund will buy at the ratios reflecting the most-recent weighting, but a dummy like me has no good reason to believe that the weighting at any one time is any more "correct" than the weighting at any other time. If you know enough to know which weighting would be "correct", then you shouldn't be investing in any mutual fund, much less index funds.