MrFoolish wrote:I don't disagree with the bath analogy, though I feel it does miss some important details.
To start with, does the bath represent the underlying companies or the end-user's portfolio?
A bath is one company, with the water from the taps its earnings, the water leaving the plug its dividends , the efficacy, if you like of the plug determined by its Directors
MrFoolish wrote:At the company level, if the directors of that company can find no good use for their excess water then why hang on to it? Pass it on to be invested elsewhere. Otherwise they might waste it on big bonuses, jollies and unsafe ventures. Most directors are not as sensible as Buffett.
Yes Directors could, and investors should be wary and mindful of trusting Directors (whose motives might not be aligned with them). Most companies, and their Directors are more likely to be wasteful on poor acquisitions, or even overly paying dividends when reinvestment, or balance sheet management might be better. Bonuses and jollies, whilst they exist, are less of a cost in aggregate I would think.
MrFoolish wrote:At the portfolio level, the bath analogy assumes all water from the taps is equally priced. But all companies are not equally priced. Often those high yielding shares sit on a lower P/E ratio. So possibly you fill your tub more cheaply with the high yielders.
No. Each company is a bath. For a portfolio you (or the market) owns multiple baths - each of which could be differently valued (I haven't used market valuation anywhere in my description) what I call value is simply volume of water determined by how water flows from the taps, and how much leaves by the plug. If you (or the market) wish to value different baths at different prices as the taps have bigger flows, or plugs let out more water, or some other determinant, that's fine, even if that means similar volumes have different market prices.
MrFoolish wrote:I do agree that Total Return is what matters. But the bathtub analogy is too simplistic to explain it.
Its deliberately simplistic to illustrate the theory of what the world should look like. In practice we live in a complicated world populated by complicated, and less than perfectly rationale people.