Day of reckoning for Dexia

Dit is de dag om te rekenen voor Dexia, dat binnenkort opnieuw samengestelde dysfunctionele gezin.

Laat me de langetermijnbeleggers uit hun lijden verlossen, of ze minstens niet in bekoring te leiden: dat ons aller aandeel Dexia tijdens hun termijn nog 9,90 euro waard zal worden, is oneindig onwaarschijnlijk. → Read More

Valuation. The illusion of precision

I find it difficult to see how valuation could indeed evolve if it continues to revolve around the CAPM with its normal distributions, its quadratic utility, its homogeneous investor expectations and frictionless markets. The notorious surveys of Pablo Fernández (IESE) – “The equity premium in 150 textbooks” or “Betas used by professors: A survey with 2,500 answers” – expose the emperor as having no clothes and empowers skeptic clients to make a mockery of us all. → Read More

Is it worth the wait?

A company decides to invest in, say, an additional production line if the expected profit exceeds costs. In other words, the expected rate of return must exceed the company’s cost of capital. That is the theory, at least: fifty years ago.

In practice entrepreneurs have known for quite some time that the threshold to invest is markedly higher. According to a survey by former US Secretary of the Treasury Lawrence Summers CEOs discount project cash flows at rates amounting to three times the weighted average cost of capital!

Inversely, companies terminate loss-making projects only — and correctly — when revenue is far below (variable) costs. Textbook investment theory apparently deviates from entrepreneurial practice. Which crucial issue has been ignored? → Read More