Buy and hold, how do you earn?

Discussion in 'Share Investing Strategies, Theories & Education' started by nitro-nige, 1st Nov, 2007.

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  1. nitro-nige

    nitro-nige Active Member

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    Hi

    I've been reading some of the Buffett books lately.
    They talk about buy and hold forever (okay I can see the logic) and reinvest any dividends back into the business or your share holding.

    If you do that how do you earn any money from holding the shares?

    Sorry if this is a stupid question but I'm new to investment/share ownership.

    Nige.
     
    nitro-nige, 1st Nov, 2007
    #1
  2. bundy1964

    bundy1964 Well-Known Member

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    Helps to do that when your a director of the company pulling a wage from it. Franking credits can be claimed as they don't reinvest.

    In the real world you either use LOE or you direct some/all of the dividends for personal use, I do suck some cash out to pay IP bills wich keeps the draw down tax deductable and pocket some dividends as well as the rent money.
     
    bundy1964, 1st Nov, 2007
    #2
  3. AsxBroker

    AsxBroker Well-Known Member

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    Hi Nitro-nige,

    Buffett receives dividends from the companies which he invests in, however he (Berkshire Hathaway) does not pay dividends. He did once and hated this.

    His reasoning for this is along the lines of re-invest the money if the business is using the money efficiently rather than paying it to shareholders who cannot invest the funds as efficiently/profitably as the company who paid it.

    Buffett's view is that he is buying into a business and not individual shares, hence he wants to buy and hold rather than trade.

    Hope this helps,

    Dan
     
    AsxBroker, 1st Nov, 2007
    #3
  4. Simon Hampel

    Simon Hampel Founder Staff Member

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    It doesn't work quite so well when you're talking about $100,000 worth or even $1m ... but if you start talking about sums of $5m - $10m (or in Buffett's case, billions) ... then there's plenty of room to extract living costs from the proceeds while reinvesting the rest.

    In the meantime, you work your job while building up the portfolio - and carefully use leverage to magnify your gains.

    Down the track, you can also use equity to fund cashflow if you have enough growth in the portfolio to cover the debt growth, rather than just relying on income.
     
    Simon Hampel, 1st Nov, 2007
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  5. Rod_WA

    Rod_WA Well-Known Member

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    I might be wrong, but I think Warren Buffett still drives his 1970s car and lives in the same house in Omaha that he lived in forty years ago. Clearly he doesn't pull much out to fund an extravagant lifestyle!
     
    Last edited by a moderator: 1st Nov, 2007
    Rod_WA, 1st Nov, 2007
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  6. bundy1964

    bundy1964 Well-Known Member

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    Still lives in the same house now worth 700k and pulls a 100k wage.

    Warren Buffett - Wikipedia, the free encyclopedia
     
    bundy1964, 1st Nov, 2007
    #6
  7. nitro-nige

    nitro-nige Active Member

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    Okay so all I need is a portfolio worth a few billion and the couple of million I take off to live on is insignificant.:)
    Right, better get to work on building a good portfolio.:p
     
    nitro-nige, 2nd Nov, 2007
    #7
  8. Rob G

    Rob G Well-Known Member

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    The Australian law allows negative gearing, which often makes dividend reinvestment difficult as you are often short of cash flow.

    Note that ASX published long term movements often assume full dividend reinvestment - which might not be a good idea if the security is not so great.

    Also, published property value movements ignore all your holding costs as an investor !!

    Cheers,

    Rob
     
    Rob G, 3rd Nov, 2007
    #8
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