Sunday, May 06, 2012

Bugs Meany, Master of the Universe

The Encyclopedia Brown series is the endless saga of a creative lad, Brian Ash, always coming up with a new plan to enrich himself & entertain his friends.

Then that snotnose Brown kid comes in and spoils everybody's fun.

The key to understanding investments in the modern world is to realize that Brown is sitting in his garage, hoping for business, but nobody comes to see him. That other story is wildly exaggerated.

That the thought leaders of finance are producing lore, unfettered by facts or analysis, has become fairly obvious. You can get that story from the Shrill One or any of the economists still trying to do reality based work.

Knowing that what's being sold is hooey, who is doing the buying?

I've been spending some time at Seeking Alpha lately, where the lower members of the Cult of the Hand gather to share the myths.

One of the contributors describes himself as a friend of Porter Stansberry. Stansberry, long ago exposed, is still chugging along, and in fact At the latest Casey Research conference, respected investment analyst Porter Stansberry stood at the podium .

Every now and then, people with basic math competence look at stock markets. The results are pretty consistent : Chart based analysis is bunk, investment advisors are useless.

But why listen to them when there's money to be made?!
Simply by using arcane sounding, but really simple & totally useless math, you can now fill page after page with worthless detailed computations. Consider the ever popular "Dividend value formula". According to this model, a dividend of 78 cents can make a stock worth $60!

Consider a common stock that paid a $.78 dividend per share at the end of the
last year and is expected to pay a cash dividend every year at a growth rate of
15 percent. Assume the investor's required rate of return is 16.5 percent.
The value of the stock would be:
D1 = Do (1 + g) = $.78(1 + 0.15) = $.90
P=D1/(r-g)= .9/(.165-.15)=$60

Now a sane person would say: You can assume dividend growth for a year or 2. Beyond that is nuts. (Which doesn't stop people from projecting WalMart to grow at 10% for 10 more years. A finite earth is not compatible with this religion.) A 78 cent dividend justifies a stock value of maybe $6-$7 if you want 15% returns. But that's not the formula, so hordes of drones memorize the formula. Other formulae are less obviously silly, but combine massive unknowns & silly assumptions about how the future will look like the pas in the background, with trivial arithmetic that the acolyte is supposed to supply in the foreground. Beta, anyone?

There are more powerful forces floating the cult, of course. It's not a coincidence that they're predominantly white males. Holding onto the runes of power, to which they know they were born, by means of belief in the creed? Can't beat that with a stick. Particularly when you were the kid who couldn't handle real math & had to take the Business type.

Want to take a dip into the chantings of the cult?

Rantings about "false prosperity", debt bombs, imminent currency collapse. I was going to do a bunch of quotes, but if you're here, you've seen it all in a hundred Megan McArdle posts and comment sections. Must clear head

Which is where this sort of turns into financial advice : Know that the people in charge of finance are mostly either believers in this bollocks or act as if they were. Mixed in with the rubbish, there's some solid work. In the Stansberry stuff, Katusa actually talked a lot of sense about why oil markets won't crash utterly. Oil fell about $8 last week. And Porter Stansberry is still a flim flam man.

No comments: