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It was unseasonably warm for late September in Portfolia. It was the time of year when the leaves began to change, the harvest was in full swing, apple orchards thrived, and the Marble Movers would make their quarterly rounds to the homes of each and every villager.
You see, in Portfolia, currency came in the form of marbles, and the villagers kept their marbles in fanciful jars.
There were two types of jars. Everyone had a Spend Jar. This was the jar that provided for all of one’s basic needs and some luxuries, too, if a person had enough marbles to afford them.
There existed a second type of jar in Portfolia known as a Market Jar, and it held mystic marbles. These extraordinary marbles were remarkable in that their numbers would fluctuate from day to day. In fact, the number of marbles in one’s Market Jar could vary by the minute based on the perceived value of the businesses represented by these remarkable mystic marbles.
The Marble Movers: A Jarring Dividend Parable
The Spend jar was quite large in diameter and nearly an inch thick all around. It could hold a whole lot of marbles. Some people kept more than a year’s worth of necessary marbles in it, while others preferred to keep just enough marbles to purchase rations and other necessities for a month or two, opting to keep the rest of their marbles in their Market Jar.
Portfolians who paid close attention to their Market Jar would notice that the ebb and flow of the number of marbles it held, even when they didn’t add or subtract a single marble themselves. Fortunately, the level would tend to rise more often than it fell, and those who kept their Market Jars well stocked for many moons would tend to be rewarded handsomely.
How did one attain these mystic marbles? Many of the popular merchants and tradespeople both near and far throughout Portfolia would exchange their mystic marbles for ordinary marbles from villagers’ Spend Jars. The mystic marbles represented an ownership share in their business.
Portfolians could buy mystic marbles from the blacksmith, the butcher, and even the burro and yak sharing platform that had become popular in recent years. Eventually, a secondary market was formed where these mystic marbles were bought, bartered, and sold amongst the villagers.
The price people were willing to pay for these mystic marbles was the driving force behind the otherworldly way in which the marbles in the mystic jar would self-replicate or disappear on a continual basis.
Marble Management in Portfolia
Marbles were earned from ordinary work. Some trades paid better than others, of course. Chimney sweeps didn’t make a whole lot of marbles. Shoe shiners didn’t either, but occasionally they’d overhear some hot mystic marble tips!
The healers, the decree-makers, and those who interpreted the decrees brought home a heavy marble load. Oddly, people who helped other people manage their marbles also did rather well, and surprisingly, there was little correlation between marble managers’ skills and the number of marbles they took home.
Some villagers spent nearly every marble they earned on goods that were quickly consumed. For some villagers, this was merely out of necessity. They simply earned just enough marbles to provide for themselves and their families.
Others earned plenty, but spent just as lavishly, always procuring the artisanal apple varieties from the toniest orchards and dressing in the finest wools and linens. These villagers accumulated few mystic marbles in their Market Jars.
Other villagers made filling their Market Jars a priority. By working harder or smarter, being content consuming local fruits (often grown in their backyards), and comfortable in clothing most popular two harvests ago, they had plenty of earned marbles left over to exchange for mystic marbles, and their Market Jars held many.
Many Mystic Marbles
Mystic marbles came in many different sizes, shapes, and colors. They also varied in their levels of divinity.
What’s this, you ask? Divinity, you say?
Some of the mystic marbles were considered to be divine and were worshipped by certain villagers. Owners of divine marbles would see quarterly deposits in their spend jars, and that meant they had more money to spend!
Passive marbles, they liked to call them.
Some mystic marbles had no divine qualities. Baron Warren’s collection of companies was represented by one such mystic marble, as were many of the up and coming businesses across the land using new-faangled technology.
That is, owning the non-divine mystic marbles representing ownership in these non-divine companies did not result in any more marbles appearing in the owners’ Spend Jars.
This was really not much of an issue, though, as any mystic marble could simply be moved from the Market jar to the Spend jar by the villager, where it would become an ordinary marble, ready to be spent on whatever one desired.
The Role of the Marble Movers
Why would anyone choose a mystic marble with no divine qualities?
To understand some villagers preference for such marbles, one must first understand how owning divine mystic marbles leads to more marbles in the Spend Jar.
This is where the Marble Movers come into play.
The cloaked and hooded Marble Movers were both feared and revered for the power they held. They had keys to access every home, and the villagers were required to have their Market and Spend jars readily available to them as they went door to door every few months.
When they entered a home, the marble movers were all business. They walked straight to the Market jar, assessed the divinity of the mystic marbles it held, and moved the appropriate number of marbles from the Market Jar to the Spend Jar.
The end result was fewer marbles in the Market Jar, more marbles in the Spend Jar, and some oddly pleased villagers who rejoiced in gratitude that the Marble Mover performed this deed on their behalf.
Those who owned mystic marbles with fewer divine qualities did not celebrate the coming of the Marble Movers. In fact, some of them lamented the shadowy figures who came around every 6 to 7 fortnights.
For many of them, the movement of marbles only increased their taxes while doing nothing to improve their bottom line.
Portfolia Taxation
The roads in Portfolia didn’t build themselves, and someone had to pay for the education of young villagers. Even the Marble Movers themselves were funded by the Portfolian government, as they also played a role in collecting taxes.
The tax code was complicated, but we’ll focus on the taxes that applied to the movement of marbles.
Those who had a modest salary were not taxed at all when they chose to move marbles themselves or when the Marble Movers did it for them. Most that fell into this category were no longer among the workforce.
The working villagers whose earned wages qualified them for free marble movement didn’t have a whole lot left over to purchase mystic marbles, anyway, so few of them benefitted from being in the 0% marble movement tax bracket.
The skilled tradesman who could afford to make regular deposits in their Market Jars would have to give up about 1 mystic marble for every 4 marbles the Marble Movers transferred to appease both the King of Portfolia and the Earl of his local province.
In contrast, when the villagers moved their own marbles, only the extra marbles that represented growth within their Market Jar were subject to taxation. Marbles they had purchased could be moved to the spend jar without being taxed.
For example, if the healer had once put 10 mystic marbles in her Market Jar, and they had grown to be 14 marbles when she was ready to spend them, she would only lose 1 marble when she moved those 14 marbles to her Spend Jar, a quarter of the 4-marble growth, but only about 7% of the total number of marbles moved.
The Persistence of the Marble Movers
Certain savvy villagers who were once keen on divine mystic marbles realized that there was little benefit to having the Marble Movers transfer marbles for them. The total number of marbles between the two Jars combined did not actually increase when the Movers paid them a visit.
In fact, the Movers would almost always pocket a few marbles to cover the required taxation on the marble maneuvering. Remember, every marble transferred from the Market Jar to the Spend Jar by the Marble Movers was subject to taxation.
These frustrated villagers tried adding second locks on their doors to no avail. There was no lock the Marble Movers couldn’t pick.
They tried pleading with the Marble Movers. “Can you not see that my Spend Jar already overfloweth?” The Mover would not even acknowledge the request. If the marbles rolled off the top of the Spend Jar and onto the floor, so be it.
Whether the villager had a need to move marbles from the Market Jar to the Spend Jar or not, the marble transfer could not be prevented. The Marble Movers were undeniably persistent, and they did not give one hoot about your current needs or taxation situation.
Sometimes, movement of the marbles alone was enough to move a villager out of the 0% marble movement tax bracket. If fewer marbles had been moved, none of the marble movement would have been taxes. ‘Twas a cruel fate.
The Persistence of the Divine Marble Worshippers
In spite of the mathematical downsides that some villagers encountered with the divine mystic marbles, there were many staunch advocates of those little divine glass globes.
Some argued that the Marble Movers were not taking from their Market Jar, but rather depositing marbles in their Spend Jar that appeared from thin air. This argument held no water, as it could be easily understood and demonstrated that a distribution of marbles from the divine companies meant that these companies held fewer marbles by exactly the number distributed, and were worth that much less.
Others argued that the companies represented by the divine mystic marbles simply outperformed the other mystic marbles. This theory was debunked by realizing that any outperformance could be explained by the fact that most are quality value marbles that do not outperform similar marbles with a lesser degree of divinity.
Another villager found that obtaining mystic marbles with similar qualities of value and quality but with fewer divine qualities led to even greater growth in the Market Jar before considering the effects of taxation!
Furthermore, those that tout the performance of marbles that have seen increasing divinity over time fail to recognize the role of survivorship bias. The list of such marbles from ten or twenty years ago looked very different, and some of the represented businesses no longer exist, but all would have looked great at the time.
Nevertheless, there were villagers who would purchase specific mystic marbles, focusing more on the divinity of the marble than any other factor. Their primary goal was to have the Marble Movers scoop enough marbles out of their Market Jar and into their Spend Jar so that they’d never have to move marbles themselves.
There was another camp whose primary concern was seeing the combined value of their Market and Spend Jars grow. They owned some divine marbles, sure, but only to have a highly-diversified, well-balanced mystic marble portfolio in their Market Jars. The occasional marble transfer was a byproduct of owning such great variety.
What’s a Portfolian to Do?
First, understand that divine marbles do not grant you additional spending marbles from the ether. They come from your Market Jar. It may not appear to be a one-to-one transaction due to the intraday fluctuation in the number of mystic marbles in the Market Jar, but that’s what it is. Moving marbles from one Jar to another.
Second, understand the taxation of marble moving. Moving marbles oneself is a more favorable way to get more marbles in the Spend jar. It may be a non-issue for the retired villager in the 0% marble transfer tax bracket. That is, as long as the marble movement dictated by the divine marbles and carried out by the Marble Movers does not push them out of that bracket!
Third, invest across a wide variety of mystic marbles from businesses providing all kinds of different goods and services throughout Portfolia. Do not avoid the more divine marbles, as they represent an important sector of the total market, but do not focus solely on collecting them, either.
Rumor has it that some enterprising merchants in the capital city are putting together baskets containing many different types of marbles that can all be purchased together at once. How incredible would that be?
Finally, lobby your local elders, governors, and the king to create a new type of jar. Portfolia is long overdue for a third jar. Such a jar could be used to save for retirement, and would be off-limits to the Marble Movers. Divine distributions would remain in the same jar and no taxes would be levied upon them. This Retirement Jar would be an ideal place to keep one’s most divine mystical marbles.
Villagers, what type of marbles do you keep in your Market Jar? Do you place a premium on marbles with enhanced divinity? Do you avoid them when possible? Have you found a third jar in which they are better suited? Profess below!
19 thoughts on “The Marble Movers: A Jarring Dividend Parable”
Huge waste of time.
Your quality is way down.
Thank you for the feedback. This is probably the most creative post I’ve written; obviously, it’s not your style.
A waste of time? That depends. If you fully understand how dividends work and are taxed, you shouldn’t get more than a good chuckle out of a post like this. But there are millions of investors who focus so much on dividends that they lose the forest for the trees. I have tried educating on the topic with math, examples, and common sense. When those don’t work, sometimes you have to resort to a parable.
Cheers!
-PoF
POF, don’t take comments like that seriously. To have a blog like this I’m sure you don’t. You clearly enjoy your writing and it’s based on your belief system and experience. I appreciated the creativity a lot.
I’m sure you also understand is that there are many of us who are “rich”, and retired early, able to spend very liberally and have “everything” we want for our family and legacies. But we did it with the dividend-marbles approach. Sure, it was hard work but we were up to it. We live essentially “risk-free” (within reason) looking forward to a high perpetual income and cash flow without worrying about…anything the market has to offer us. We are happy to pay a few dollars in tax. What matters is cash in our hands to pay for our lives and risk-adjusted safety that goes with it.
Reading through that felt like a swift kick in the marbles!
Personal finance is personal and there’s no statistical argument that’ll say dividend stocks are better over the last fifteen years. Growth stocks have outperformed value for a long time now and provide a higher total return from reinvesting their capital internally instead of paying dividends. Many of the people championing dividends will also ignore survivorship bias, which is real with slower growth companies.
How did I learn about dividends? I learned about dividends after watching my grandfather’s broker put his retirement savings in a single tech stock concentration at 140/share in 1999. It wasn’t making money and therefore paid no dividends. That stock currently trades at $14 share. I then watched another relative swear off the market after he put all his money in a concentrated telecom stock that also paid no dividend while convincing other family members this was “the next big thing”. In hindsight those are really lessons about concentration risks, but the lesson I took away at the time was was “buy real businesses with real cash flow and then post-Enron, have those businesses prove the cash flow is real by paying dividends to me”.
Now that the Index is getting heavy in technology with plenty of companies trading at “non-traditional valuations”, I’ve trended more towards value stocks and those companies often pay dividends. It may not achieve a higher return, but it should provide a lower risk portfolio in exchange for the lower return.
“In hindsight those are really lessons about concentration risks”
I agree 100%!
If dividends are a byproduct of choosing to invest in quality, value companies, I’ve got no qualms with that, either. Even better if you can make those investments in your tax-advantaged accounts.
The impetus for this post is the misunderstanding or straight-up denial that some dividend-focused investors have regarding the way the NAV drops ex-dividend. It’s just “marble moving,” which at best, offers no benefit beyond the psychological, and for many, creates unnecessary taxation.
Cheers!
-PoF
This is a good post. I’ll poke a few holes in it but they are minor nitpicks.
With rental income you are dealing with more wear and tear on your property in exchange for rent paid. It is not completely “free” in this regard so a wise landlord will factor that in and should reflect on their planned expenses and perhaps resale value of the property.
I agree that dividends are tax efficient for those who must report a high AGI each year (a nice problem to have by the way). There are many others who have their own business, live abroad, or both and can manage the “profit” of their business to be below the foreign earned income exemption, currently at approximately $105k per year. This is true even if your top line is at multiple six figure and fits in with my situation.
For those, dividends are taxed at a very low rate or even 0% and there is no tax drag.
Lastly companies that don’t pay dividends and have accumulated a huge cash horde can suffer from acquisitions that are too expensive and not effective and other means to waste shareholder capital. A growing dividend policy at the better run companies encourages more discipline in how cash is deployed.
Best regards,
Mike
Interesting side note: Most of Baron Warren’s collection of companies pay a handsome dividend. He likes to receive them, making his own decision on how best to allocate some profits.
By receiving some dividends, you are able to make your own decisions on how to be re-allocate those funds. Not every decision a manger makes turns out well. If none are paid out, it may be quite a while before you see any increase in your Market Jar.
You don’t have to put all of your marbles in one basket, nor one type of basket. Nothing wrong, with spreading them around across industries and across companies that pay out some profits routinely vs. those that don’t.
cd :O)
Indeed! The linked white paper from Meb Faber addresses this quite nicely.
“So why does Buffett – someone who regularly invests in dividend-paying companies
– avoid paying dividends to his own Berkshire shareholders?
In answering, let’s start with a different question – what does Buffett seek?
Buffett’s focus is on creating “value” for himself and his shareholders. His letters to
shareholders are filled with practical advice on how managers create value – and
destroy it. (They create it by buying mispriced, quality assets… They destroy it by
repurchasing company shares at prices above intrinsic value, and so on. You can
read one of his, and my, favorite investing books on managing cash flows in The
Outsiders.)
Through this “value” lens, dividends appear different to Buffett than they do most
investors. While the common opinion is that dividends are always valuable, to Buffett
they can fall into the value-destroyer camp if there is a better use of that capital
elsewhere.
The reason largely reduces to opportunity cost. Dividends are highly tax-inefficient.
That’s the Achilles heel. So, when compared with the other ways in which a company
might use its free cash flow to generate greater value for investors (buying back
shares, acquiring a cash-generating business, reducing debt and its carrying costs…)
dividends can come up short.”
Cheers!
-PoF
Company Stock in the Past
————————————
In the past long long ago when a person helped to buy a ship to go fishing, and bought part ownership in the endeavor, they bought a literal share of the profits and ship. The easiest way to tell a business had a “real” value to investors was if it distributed its profits to its owners. This was especially in the time before SEC regulations.
What Support’s a Stock’s Value?
——————————————-
What gives a stock value? How does a company transfer value to its owners? If we only get that value from market valuation, then the only thing that actually gives the share any value at all is your ability to vote on company leadership, and your share of liquidation proceeds.
When a company is to be liquidated it usually has lost its value and competitive edge……so that leaves voting rights as the primary value. Any shareholders with a large percentage that can silence smaller holder’s votes would effectively destroy that value, if that is what makes a stock valuable. So what really gives a stock its real value in this case, imagining that the company would never pay a dividend or engage in a buy-back, is the fact that you can find someone else to pay you more for it.
What makes a stock a productive asset is the income it pays out, it is what drives investors to want it in the first place. The only way a stock can directly pay its investors(ignoring money from other investors that want to buy them) is through a buy-back or dividend. A company that never pays out a dividend(or buyback) and never plans to do so in the future, is unlikely to have real value.
Lets say for the sake of argument that a company never paid out a dividend and never preformed a buy-back……..furthermore lets say that company retained 51% of its shares so you could never hope to buy enough to force a dividend payment, management change, or liquidation……… What benefit does that share give to you? Does it pay you interest? Does it pay rent? Does it pay a dividend? Does it preform a buy-back? Nope, it just sits there, but unlike gold it has no shine. Its only value is a greater fool wanting to buy it.
(Note there is a key exception, if there is a reasonable expectation that in the future the company will pay a dividend or preform a buyback, then it does in fact return value to its investors)
The old-school partnerships for mining and shipping operations were for a share of the proceeds or loot. The value of a share, and a test of its validity in the absence of the SEC and transparency, was its dividend. Today taxes make buy-backs a smarter move than dividends. But in the absence of both the business transfers nothing to its owners.
Personally I prefer index funds and ETFs, generally total market ones. I know most of the companies will preform buy-backs, and some will pay dividends. I own a few dividend stocks, and I intend to keep most of those stocks in my tax deferred accounts. I also don’t mind a company not paying a dividend or engaging in a buy back……so long as it is re-investing that money in a meaningful way with a viable plan to benefit its investors later.
TL/DR, it got confusing in a hurry. Also, where’s the promised Portlandia?
If it’s confusing, that’s all the more reason to read it again. I could make a glossary, but it should be quite apparent what’s going on in
PorlandiaPortfolia.Cheers!
-PoF
can you include in the story of the villager who instead of spending the divine marbles which have been moved, retains them (after taxes) immediately the market jar (not in a sweep jar…never miss a day in the market jar…) At some point, divine marble reinvesting over let’s say 20-40 years must be able to outpace some market jar marbles (assume same number of marbles was held for those) ? even after taxes…… Yes? No?
I linked out to several articles that address that possibility. If you’re allowed to cherry-pick dates and ignore survivorship bias, absolutely.
Rigorous studies suggest that any outperformance is likely due to quality and value factors.
Best,
-PoF
“Marble Manager” here (though I will be a retired MM shortly.). Many marble managers are hired for their charming personalities and sales skills and not their job performance.
Same with Doctors who are beloved for their bedside manager and not their skill level- which is harder to evaluate. I wouldn’t know which physicians not to use either except that my BFF is a Doc and she kindly advises me.
It is trickier to evaluate physicians, but as you and your friend know, a lot more goes into becoming a board-certified physician than a marble manager. But there is obviously a range in quality and ability that’s not easy to discern.
Cheers to being FIREd!
-PoF
Your intro in the email describes Portlandia, but the post itself describes Portfolia. I kept waiting for a cameo from Fred Armisen dressed as a militant vegan trans marble mover. Imagine my disappointment.
Imagine my disappointment when I took great care not to use the word Portlandia throughout the post, then carelessly slipped up in the e-mail. 🙂
I should find a way to work Fred into the story. Maybe I’ll write a second chapter some day.
Cheers!
-PoF
I guess Portfolia must have been the Origin story of the phrase “lost his marbles.”
RMD or Required Marble Distribution can be a killer if it does bump you into an undesirable tax bracket.