Tuesday, January 29, 2008
Does Business Confuse Economists?
by Ken Houghton
Why would this be confusing? Tax rates may change, but they are fairly stable for planning ROI. Confusion—additional uncertainty—makes rudimentary ROI calculations more problematic (if not more difficult).
It seems evident that, at the margin, a firm would feel more secure making an investment decision based on a known, say, 30% effective tax rate than making a decision that depends on subsequent rangling, even if the most probable effective tax rate is slightly lower than 30%).
What am I missing?
Thorsten Beck is smarter than I am. But he appears to be surprised by something I would consider intuitive:
Fourteen percent of firms in this sample rely exclusively on informal finance and the percentage goes up as corruption, complexity of taxation (but interestingly not tax rates) and property registration increase. [emphasis mine]
Why would this be confusing? Tax rates may change, but they are fairly stable for planning ROI. Confusion—additional uncertainty—makes rudimentary ROI calculations more problematic (if not more difficult).
It seems evident that, at the margin, a firm would feel more secure making an investment decision based on a known, say, 30% effective tax rate than making a decision that depends on subsequent rangling, even if the most probable effective tax rate is slightly lower than 30%).
What am I missing?
Labels: Economic Development, investment strategies, Tax Incentives
Sunday, January 20, 2008
How to Turn about $600 into $60 - First of A Series?
by Ken Houghton
The standard question of economics is "Is that a consumption or an investment" purchase?
The problem is that even things originally believed to be investments eventually turn into consumption in an environment where storage costs != 0. And I have gradually come to allow that, while several of the NYAS volumes are still relevant (and not likely to be readily available, even in a large library), maintaining them in a reasonable state is beyond our current ability.
So I have to view the outcome as a gain: at least $600 (in 198x-199x US$) has become about $60 in 2008 dollars. But the question remains: was an Investment that (by any economic reasoning) has a large, negative NPV really "investment"? And if it was not at the time, what would have made it so?
(Yes, I'm going somewhere with this, but—unlike the democracy posts—I'm not yet certain where.)
Following the tradition of Patri Friedman, I have been attempting to downsize my (large majority) portion of our home library. And sorting meant that Round One was several dozen Scientific American and New York Academy of Sciences volumes.
The standard question of economics is "Is that a consumption or an investment" purchase?
The problem is that even things originally believed to be investments eventually turn into consumption in an environment where storage costs != 0. And I have gradually come to allow that, while several of the NYAS volumes are still relevant (and not likely to be readily available, even in a large library), maintaining them in a reasonable state is beyond our current ability.
So I have to view the outcome as a gain: at least $600 (in 198x-199x US$) has become about $60 in 2008 dollars. But the question remains: was an Investment that (by any economic reasoning) has a large, negative NPV really "investment"? And if it was not at the time, what would have made it so?
(Yes, I'm going somewhere with this, but—unlike the democracy posts—I'm not yet certain where.)
Labels: conspicuous consumption, Economics, investment strategies
Monday, June 25, 2007
These May Be the Same Book
by Ken Houghton
A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation by Richard Bookstaber.
Lempriere's Dictionary by Lawrence Norfolk*
Two books attempting to make sense of a world in which the underlying reality often is difficult to see.
*Yes, it's an additional copy. One can never have too many, especially when there are daughters who should learn how prose can be written.
Bought at Strand Books today:
A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation by Richard Bookstaber.
Lempriere's Dictionary by Lawrence Norfolk*
Two books attempting to make sense of a world in which the underlying reality often is difficult to see.
*Yes, it's an additional copy. One can never have too many, especially when there are daughters who should learn how prose can be written.
Labels: hedge funds, investment strategies, just life
Friday, June 22, 2007
Why You Shouldn't Buy a Hedge Fund's Stock Offering
by Ken Houghton
Good basic rule. And more detail about why there is a severe principal/agent problem in the making:
Read the whole thing, and think carefully about what it means when a Mutual Fund invests in a Hedge Fund.
Working on a longer rant, but why not leverage Mark Cuban at Blog Maverick?
I'm far from a sophisticated investor, although I guess I am an accredited investor because of my networth. As I have written before, I'm a big believer that whenever you do a business deal with people you don't know, particularly buying and selling stocks, you always look for the sucker. If you don't see the sucker, then you are the sucker.
Good basic rule. And more detail about why there is a severe principal/agent problem in the making:
Appeasing hedge fund investors is a very, very different business than making shareholders happy.
If a shareholder sells their share of stock, the hedge fund wont really care. Sure, they want the stock price to go up. They own shares of stock in the fund, and as the stock price goes, so goes some percentage of their networth. That should be enough for them to do whatever it takes to increase the stock price, right ? Maybe
Increasing the price of a share of stock is as much marketing to create demand for the stock as it is earnings of the fund.We also call this increasing the P/E of a stock. There are dozens of ways to increase the PE of a stock that is showing a profit. Hedge fund investors care about 1 thing. Cash. Money that is returned to them. Shareholders care about the price of the stock. One is capital returns, the other is capital appreciation.
That difference is just common sense, but its significant....
They can't be responsive to shareholders and investors with the same story
Read the whole thing, and think carefully about what it means when a Mutual Fund invests in a Hedge Fund.
Labels: Economics, hedge funds, investment strategies, Moral Hazard, principal/agent problems
Monday, April 16, 2007
What Investment Bank Professionals Do for Fun at Work
by Ken Houghton
"You know what someone should do? Launch a takeover bid for Barclay's."
"Aren't they bidding to take over ABN Amro?"
"Exactly. So most of the hedge funds are short Barclay's."
"And long ABN."
"So they would get squeezed on both sides."
As it turns out, that might have been the right strategy. Wonder how much exposure Jim Hamilton's pension fund has??
Conversation a few days ago:
"You know what someone should do? Launch a takeover bid for Barclay's."
"Aren't they bidding to take over ABN Amro?"
"Exactly. So most of the hedge funds are short Barclay's."
"And long ABN."
"So they would get squeezed on both sides."
As it turns out, that might have been the right strategy. Wonder how much exposure Jim Hamilton's pension fund has??
Labels: banking, hedge funds, investment strategies
