Five things I learned this week: Apr 21st 2013

Since I didn’t finish any books this week, back to “Things I learned this week” –

An interesting article I read in Barron’s was about how the Matthews China DIvidend fund looks at dividend paying companies in China, but not for reasons of yield, but because the dividend is an incentive signal to them. A lot of companies are majority-owned by the founders, which means that the minority shareholders’s concerns are not in their forefront of the managers’ thought. but if the company pays a decent dividend, this dividend stream is a material source of income for the shareholder-owners, and this aligns their interests with the minority shareholders.

On a similar note, I read that the company that compensates its senior managers in RSUs as opposed to options is more likely to give and raise dividends, again making the proxy statement one of the most important documents that need to be read.

This will only serve to highlight my ignorance, but I learned this week that Spain became a democracy only in the late 70s/early 80s. I had no idea that Spain was ruled by a dictator until 1975. As someone born in a country where universal suffrage is written in the Constitution (something not present in United States, where leaders have often claimed it to be the oldest democracy, even though it took the Voting Rights Act of 1965 to guarantee it too all the citizens), and has a history of pro to-democratic institutions dating back to the sixth century BC, and as someone exposed mostly exposed to the Western media, which tends to portray the undemocratic injustices that happen only in the other countries in modern times, my ignorance came as quite a shock to me.

I read summary of a study that showed that investors who were plugged into many social groups, but not too deeply into any of them, performed the best, even counting in the solitary investors. My arm-chair conclusion is that diverse social groups force one to reconcile divergent thought processes and conclusions, and forces one to challenge their assumptions more. Another reason could be that being so plugged helps one to better calibrate what the market as a whole is pricing in and then they can analyze better the traits on which their call on a security/basket is different from the market. The study doesn’t differentiate between the long-term investors and those who rely primarily on the short-term / medium-term pricing of the secondary market to ensure success of their calls, but either way lesson for investors is clear–listen to people who’re different from you to understand why they stand on the opposite end of the spectrum on the call.

I had heard multiple times about how divergence of DJ Transport index and DJ Industrials was a bad signal and seen Cullen Roche highlight the rail traffic in his blog multiple times, and understood the importance of transportation as an economic index, but had not fully grasped why. I was reading an report by the Association of American Railroads, and came across a phrase that said that freight rail traffic is a “derived demand” indicator, which makes a ton of sense to me. In some way it is analogous to Dr. Copper, where price of copper to signal the global economy, but there are marked differences. First, copper prices are financilazed, which means that the prices are often impacted as much by speculation (as indicated by the recent 20%+ fall of copper prices), but such is not that case with rail traffic. There is no financial instrument that affects the volume of freight rail traffic. Second, copper prices are a “level” measure whereas rail traffic is a “flow” measure, and flow measures are historically known to reflect the turning of economic cycles faster.


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