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If you have been reading my posts, you know that I have an obsession with equity riskpremiums, which I believe lie at the center of almost every substantive debate in markets and investing. That said, I don't blame you, if are confused not only about how I estimate this premium, but what it measures.
Investors all talk about risk, but there seems to be little consensus on what it is, how it should be measured, and how it plays out in the short and long term. In closing, I will talk about some of the more dangerous delusions that undercut good risk taking. What is risk?
The rise in rates transmitted to corporate bond market rates, with a concurrent rise in default spreads exacerbating the damage to investors. As a result of these rate changes, the term structure which started the year as upward sloping, ended the year downward sloping, giving rise to the usual talk of an imminent recession.
I also start thinking about my passion, which is teaching, the spring semester to come, and the classes that I will be teaching, repeating a process that I have gone through every year since 1984, my first year as a teacher. Face up to uncertainty, rather than avoid or deny it : Uncertainty is a feature of investing/ business, not a bug.
As we start 2024, the interest rate prognosticators who misread the bond markets so badly in 2023 are back to making their 2024 forecasts, and they show no evidence of having learned any lessons from the last year. The Fed Effect: Where's the beef?
I took this estimation process for granted until 2008, when during that crisis, I woke up to the realization that no matter what the text books say about risk-free investments, there are times when finding an investment with a guaranteed return can become an impossible task. What is a risk free investment?
In my last post, I talked about the ritual that I go through every year ahead of my teaching each spring, and in this one, I will start on the first of a series of posts that I make at the start of each year, where I look at data, both macro and company-level. That is not true!
In my last three posts, I looked at the macro (equity riskpremiums, default spreads, risk free rates) and micro (company risk measures) that feed into the expected returns we demand on investments, and argued that these expected returns become hurdle rates for businesses, in the form of costs of equity and capital.
That may reflect the concern that once a person or entity starts borrowing to fund its needs, it is easy to overuse debt, and risk its wellbeing in the process. An Optimizing Tool In my second and third data posts for this year, I chronicled the effects of rising interest rates and riskpremiums on costs of equity and capital.
The second was that, starting mid-year in 2020, equity markets and the real economy moved in different directions, with the former rising on the expectations a post-virus future, and the latter languishing, as most of the world continued to operate with significant constraints.
To start the year, I returned to a ritual that I have practiced for thirty years, and that is to take a look at not just market changes over the last year, but also to get measures of the financial standing and practices of companies around the world. Happy New Year, and I hope that 2022 brings you good tidings! Sometimes, less is more!
In my last post, I looked at the Biden Administration's proposal to increase corporate taxes, to provide funding for an infrastructure bill, and concluded that while there is room for raising corporate taxes, it would be more efficient and fairer to do so by reducing the tax credits and deductions in the code, than by raising the tax rate.
In particular, there are wide variations in how risk is measured, and once measured, across companies and countries, and those variations can lead to differences in expected returns and hurdle rates, central to both corporatefinance and investing judgments. Analysts often try to bring company-specific components, i.e,
First, these categorizations were created close to twenty years ago, when I first started looking a global data, and many countries that were emerging markets then have developed into more mature markets now. Equity RiskPremiums 2. Financing Flows 5. Dividends and Potential Dividends (FCFE) 1. Buybacks 2. Lease Effect 2.
It is the end of the first full week in 2025, and my data update for the year is now up and running, and I plan to use this post to describe my data sample, my processes for computing industry statistics and the links to finding them. In the table below, we compare the changes in regional market capitalizations (in $ millions) over time.
In the first five posts, I have looked at the macro numbers that drive global markets, from interest rates to riskpremiums, but it is not my preferred habitat. A few years ago, I wrote a paper for practitioners on the cost of capital , where I described the cost of capital as the Swiss Army knife of finance, because of its many uses.
I am going to start this post with a confession that my knowledge of the architecture and mechanics of AI are pedestrian and that there will be things that I don't get right in this post. Along the way, the the AI story picked up supercomputing companies, as passengers, again on the belief that Ai systems would find a use for them.
After the 2008 market crisis, I resolved that I would be far more organized in my assessments and updating of equity riskpremiums, in the United States and abroad, as I looked at the damage that can be inflicted on intrinsic value by significant shifts in riskpremiums, i.e., my definition of a crisis.
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