I’m trying to build up a small archive of articles that explain important things about financial markets in clear language to an educated liberal audience. This article in the Guardian by Edmond Warner is worth ten minutes of your time.
nice project, something i have been meaning to do for several years now. do you have any other articles in your collection?
Surely the easiest answer to this is to recommend John Kay’s book Culture and Prosperity?
I guess to be fair that covers economics in the real world, as opposed to finance in the real world.
I don’t think I’ve read that one (unless it was published under a different title in the UK), but would recommend almost anything by Kay on economics. He is often a bit vague about specific institutional details, though, which is where I thought the Guardian article was excellent.
ME: how does anything get valued anyway? who made up these values?
whats that great big sucking sound?
disappears into a relativistic black hole
As a rule of thumb, I generally think of assets as having two values; one based on NPV of an income stream, the other being purely speculative. I wonder if anybody else has adopted this slightly weird approach?
“I remember this much of what he told me: a stock can be valued at the dividend it is paying now; it can be valued at the profit it’s making now; it can be valued at the increased profit you think that it will make in the future; it can be valued at the increased price that you think that others will pay for it. Marketers call the last, ‘total return.’ The dividend plus the increase in price is the ‘return’ on the investment. Economists call it a bubble or the ‘greater fool theory.”
From http://www.asstr.org/~Uther_Pendragon/brennan/fat_c.htm, the most intellectual porn you’ll ever read.
Was this news? Did it contain any new ideas? Did it contain any ideas at all?
Yes! It did! That’s why I posted it!
It’d be a lot more useful if they didn’t bury the single paragraph explanation two-thirds of the way down:
‘Buyers and sellers circle one another in the market for shares as in any other. Stockbrokers and market makers, taking their own views of corporate prospects and with an eye to making money from trading volumes, do adjust prices displayed on trading screens in an attempt to find the price levels that will clear the market. They put their own trading capital at risk in this process - they are often the marginal buyer or seller themselves, hoping they know where the “real” business might ultimately be.’
Almost all stock markets are a sham. If the company had a sound business plan for a new production plant they could take it to a banker, get a loan, and after paying of the loan keep all the profit.
The banker will look at the plan, look at the companys ability to cary out the plan, and assign an intrest rate that is approprate to the risk.
If the plan won’t pass the banker test, the company goes to the market and asks you to purchse stock. You do and they get money to use any way they want. You have no promiss of payment of intrest on your loan to the company or repayment of principle. Your hope is that the company will pay you dividends and the stock will go up in value. The dividend is almost never enough to cover principle and intrest.
So to break even and posibly make a profit you last hope is that some idiot comes along and wants to pay you more than this under preforming investment is worth.
He purchases it from you hoping that he can sell it to an even more gulible idiot who can’t figure out that it’s just not paying a return suficant to cover it’s purchse cost.
Unless the company discovers oil in their back parking lot, some one at some point has to take the hit on this stock, because…. because it ain’t returning enough to cover it’s orignal cost.
Remember they promised you all the profit from this investment because… because it did not pass the banker test!
The banker test: Is the business plan sound enough to pay of the loan?
If the company had a sound plan they would not have to give the profit away to you. They would have used a bank or bond to rase the money and keep the profit for them selves.
Why would you give away the profit to an investor if you started with a sound busines plan? Why not just borrow the money at a resonable rate and then keep the profit for your self?
Think of it like your house. You go to the bank and say I make xx and therfor can pay yy and I would like a loan of zzz. The banker looks at your plan and if it is reaasonable he lends you the money.
You don’t go to all your friends stock to purchase the house because if you did, and you made money on it, then your friends would get the profit and you would just get the janitors fee.
You only need stock investors when you want money but don’t have a good way to repayit. In exchange for this extensive risk you promiss them the proft, if by chance you get lucky and there is one.
À Gauche
Jeremy Alder
Amaravati
Anggarrgoon
Audhumlan Conspiracy
H.E. Baber
Philip Blosser
Paul Broderick
Matt Brown
Diana Buccafurni
Brandon Butler
Keith Burgess-Jackson
Certain Doubts
David Chalmers
Noam Chomsky
The Conservative Philosopher
Desert Landscapes
Denis Dutton
David Efird
Karl Elliott
David Estlund
Experimental Philosophy
Fake Barn County
Kai von Fintel
Russell Arben Fox
Garden of Forking Paths
Roger Gathman
Michael Green
Scott Hagaman
Helen Habermann
David Hildebrand
John Holbo
Christopher Grau
Jonathan Ichikawa
Tom Irish
Michelle Jenkins
Adam Kotsko
Barry Lam
Language Hat
Language Log
Christian Lee
Brian Leiter
Stephen Lenhart
Clayton Littlejohn
Roderick T. Long
Joshua Macy
Mad Grad
Jonathan Martin
Matthew McGrattan
Marc Moffett
Geoffrey Nunberg
Orange Philosophy
Philosophy Carnival
Philosophy, et cetera
Philosophy of Art
Douglas Portmore
Philosophy from the 617 (moribund)
Jeremy Pierce
Punishment Theory
Geoff Pynn
Timothy Quigley (moribund?)
Conor Roddy
Sappho's Breathing
Anders Schoubye
Wolfgang Schwartz
Scribo
Michael Sevel
Tom Stoneham (moribund)
Adam Swenson
Peter Suber
Eddie Thomas
Joe Ulatowski
Bruce Umbaugh
What is the name ...
Matt Weiner
Will Wilkinson
Jessica Wilson
Young Hegelian
Richard Zach
Psychology
Donyell Coleman
Deborah Frisch
Milt Rosenberg
Tom Stafford
Law
Ann Althouse
Stephen Bainbridge
Jack Balkin
Douglass A. Berman
Francesca Bignami
BlunkettWatch
Jack Bogdanski
Paul L. Caron
Conglomerate
Jeff Cooper
Disability Law
Displacement of Concepts
Wayne Eastman
Eric Fink
Victor Fleischer (on hiatus)
Peter Friedman
Michael Froomkin
Bernard Hibbitts
Walter Hutchens
InstaPundit
Andis Kaulins
Lawmeme
Edward Lee
Karl-Friedrich Lenz
Larry Lessig
Mirror of Justice
Eric Muller
Nathan Oman
Opinio Juris
John Palfrey
Ken Parish
Punishment Theory
Larry Ribstein
The Right Coast
D. Gordon Smith
Lawrence Solum
Peter Tillers
Transatlantic Assembly
Lawrence Velvel
David Wagner
Kim Weatherall
Yale Constitution Society
Tun Yin
History
Blogenspiel
Timothy Burke
Rebunk
Naomi Chana
Chapati Mystery
Cliopatria
Juan Cole
Cranky Professor
Greg Daly
James Davila
Sherman Dorn
Michael Drout
Frog in a Well
Frogs and Ravens
Early Modern Notes
Evan Garcia
George Mason History bloggers
Ghost in the Machine
Rebecca Goetz
Invisible Adjunct (inactive)
Jason Kuznicki
Konrad Mitchell Lawson
Danny Loss
Liberty and Power
Danny Loss
Ether MacAllum Stewart
Pam Mack
Heather Mathews
James Meadway
Medieval Studies
H.D. Miller
Caleb McDaniel
Marc Mulholland
Received Ideas
Renaissance Weblog
Nathaniel Robinson
Jacob Remes (moribund?)
Christopher Sheil
Red Ted
Time Travelling Is Easy
Brian Ulrich
Shana Worthen
Computers/media/communication
Lauren Andreacchi (moribund)
Eric Behrens
Joseph Bosco
Danah Boyd
David Brake
Collin Brooke
Maximilian Dornseif (moribund)
Jeff Erickson
Ed Felten
Lance Fortnow
Louise Ferguson
Anne Galloway
Jason Gallo
Josh Greenberg
Alex Halavais
Sariel Har-Peled
Tracy Kennedy
Tim Lambert
Liz Lawley
Michael O'Foghlu
Jose Luis Orihuela (moribund)
Alex Pang
Sebastian Paquet
Fernando Pereira
Pink Bunny of Battle
Ranting Professors
Jay Rosen
Ken Rufo
Douglas Rushkoff
Vika Safrin
Rob Schaap (Blogorrhoea)
Frank Schaap
Robert A. Stewart
Suresh Venkatasubramanian
Ray Trygstad
Jill Walker
Phil Windley
Siva Vaidahyanathan
Anthropology
Kerim Friedman
Alex Golub
Martijn de Koning
Nicholas Packwood
Geography
Stentor Danielson
Benjamin Heumann
Scott Whitlock
Education
Edward Bilodeau
Jenny D.
Richard Kahn
Progressive Teachers
Kelvin Thompson (defunct?)
Mark Byron
Business administration
Michael Watkins (moribund)
Literature, language, culture
Mike Arnzen
Brandon Barr
Michael Berube
The Blogora
Colin Brayton
John Bruce
Miriam Burstein
Chris Cagle
Jean Chu
Hans Coppens
Tyler Curtain
Cultural Revolution
Terry Dean
Joseph Duemer
Flaschenpost
Kathleen Fitzpatrick
Jonathan Goodwin
Rachael Groner
Alison Hale
Household Opera
Dennis Jerz
Jason Jones
Miriam Jones
Matthew Kirschenbaum
Steven Krause
Lilliputian Lilith
Catherine Liu
John Lovas
Gerald Lucas
Making Contact
Barry Mauer
Erin O'Connor
Print Culture
Clancy Ratcliff
Matthias Rip
A.G. Rud
Amardeep Singh
Steve Shaviro
Thanks ... Zombie
Vera Tobin
Chuck Tryon
University Diaries
Classics
Michael Hendry
David Meadows
Religion
AKM Adam
Ryan Overbey
Telford Work (moribund)
Library Science
Norma Bruce
Music
Kyle Gann
ionarts
Tim Rutherford-Johnson
Greg Sandow
Scott Spiegelberg
Biology/Medicine
Pradeep Atluri
Bloviator
Anthony Cox
Susan Ferrari (moribund)
Amy Greenwood
La Di Da
John M. Lynch
Charles Murtaugh (moribund)
Paul Z. Myers
Respectful of Otters
Josh Rosenau
Universal Acid
Amity Wilczek (moribund)
Theodore Wong (moribund)
Physics/Applied Physics
Trish Amuntrud
Sean Carroll
Jacques Distler
Stephen Hsu
Irascible Professor
Andrew Jaffe
Michael Nielsen
Chad Orzel
String Coffee Table
Math/Statistics
Dead Parrots
Andrew Gelman
Christopher Genovese
Moment, Linger on
Jason Rosenhouse
Vlorbik
Peter Woit
Complex Systems
Petter Holme
Luis Rocha
Cosma Shalizi
Bill Tozier
Chemistry
"Keneth Miles"
Engineering
Zack Amjal
Chris Hall
University Administration
Frank Admissions (moribund?)
Architecture/Urban development
City Comforts (urban planning)
Unfolio
Panchromatica
Earth Sciences
Our Take
Who Knows?
Bitch Ph.D.
Just Tenured
Playing School
Professor Goose
This Academic Life
Other sources of information
Arts and Letters Daily
Boston Review
Imprints
Political Theory Daily Review
Science and Technology Daily Review