Mr. Wonderful Is Having A Change of Heart: From Dividend-Paying Stocks to Crypto
June 8, 2023
We continue to track the hypothetical SEC employee’s research efforts on investing and crypto. Remember, they started on June 1, and so far, picked a research subject every day: Warren Buffett/Charlie Munger on June 2, Aswath Damodaran on June 5, Jamie Dimon on June 6, and Bill Miller on June 7.
You come to work today, a little bit depressed. You feel like your research yesterday on Bill Miller didn’t give you much of a principled position to stand on. You glance at your notes. Him viewing investment as any money-making opportunity strikes you as somewhat curious.
You look at your screen and ponder potential subjects as you actually haven’t yet decided on a subject for today’s research. Who’s next? You need another pro-crypto “investor”. But who?
Investors… Your mind takes you to last night when you treated yourself to a couple episodes of Shark Tank. You always enjoyed that back-and-forth between the budding entrepreneur who is trying to get their first deal and the sharks themselves. Last night, one small business was so successful they had an incredible amount of early cash flow, so much so that all five sharks were circling!
You smile because you just realized what to do today. A shark who is constantly evaluating the cash flows of small businesses to make an investment decision would be a perfect subject. Do any of these sharks dabble with crypto?
A few clicks, and yes, one of them certainly does. Kevin O’Leary, the charismatic Mr. Wonderful, seems to be all over it.
What are his general views on investing? You come across this video:
You listen to it again:
Over the last 40 years, 71% of market returns came from dividends, and not capital appreciation. So Rule 1 for me is I’ll never own the stuff that doesn’t pay a dividend. Ever.
You breathe a sigh of relief. Sounds like Mr. Wonderful is on the same page as Buffett/Munger and Damodaran. Sounds like he is a cash flow-type of person. You keep watching, and see this at around the 5-min mark:
What’s the value of stock that never returns capital to its shareholders? I don’t know. Because the only way to make money is somebody else willing to buy that position at a higher price for some emotional reason perhaps, or some foresight that maybe the company will return capital one day.
You keep going:
What you learn as an investor over multiple decades is the only thing that matters is free cash flow. That’s it. There is no other reason to own a stock.
You feel good about today’s research. You like how this stuff is converging.
The interviewer makes a comment:
So a great company does not necessarily have to equal a great stock. They can be two very different things from your perspective.
Mr. Wonderful responds:
There is many companies where I buy their products and services. I would never touch their stock. We’re talking about real money here. The stuff that you need to preserve.
Yes, this was in your notes from yesterday. You smile again.
I view my portfolio and my trust and my positions as a chicken on a spit dripping cash. Everything has to generate yield, whether it’s a fixed income position or an equity.
O’Leary is wrapping up:
I can’t even imagine buying a stock that doesn’t pay a dividend. Why would you do that? What would be the reason you would do that? I don’t get it.
Here is the final blow:
To me, that means about 28% of the market, to me is just speculation. The stuff that doesn't pay a dividend is speculation. It’s not an investment.
Looks like Mr. Wonderful is in perfect alignment with Buffett/Munger and Damodaran. A true investor. He probably wouldn’t touch crypto. Why would he? “Everything has to generate yield.”
Then you come across this video, where he says 20% of his portfolio is in crypto and blockchain. You are taken aback. That uneasy feeling again:
Bitcoin is not a coin, Joe. It’s simply software. Ethereum is software.
Ahh, that technology thing again. You’ve seen this before.
If you own Microsoft, if you own Google, why don’t you own Bitcoin? It’s all software.
“Well, Microsoft pays a dividend,” you remind yourself. “Google doesn’t, but it has solid cash flow.” You reflect on what Ben Graham said in Security Analysis, 90 years ago (p. 104):
[I]t must be admitted that an investment in a common stock might conceivably be founded on its earning power, without reference to current dividend payments.
Thus, Graham correctly articulated that it was not about income but earning power. While Graham didn’t explicitly mention cash flow generation in his definition of investment, it was clear that cash flow generation was implied. Graham’s point was that cash flow generation does not need to be immediate; but it had to be there, so the analyst could perform “a thorough analysis,” and calculate the value. On that basis, Microsoft and Google can both be justified as investments (at the right price, of course). Bitcoin, on the other hand, cannot be justified. There are no cash flows!
You remember this great quote from John Maynard Keynes
When the facts change, I change my mind - what do you do, sir?”
“Have the facts changed?” You ask yourself. Or has O’Leary just changed his mind and decided to become a speculator?
