economic fundamentals Flashcards
what investors do
-predicting economy close to impossible
-understanding economy usefull for longterm
-better understand the vast amount of incomplete and disperse info in markets
-help decision making
-objectives
—>avoid investment errors
—>detect investment opportunities and take advantage of them
-human action: have the same object of study
understanding how humans act and what moves them for…
1.introspection process (getting to know ourselves better and what oushes us to act
2.try to understand how will economic agents behave in the future and how will that affect our companies
3.understand which are the economic patterns based in healthy economic growth vs the articial/erroneous growth
austrian economics vs mainstream
mainstream (neoclassical, keynesian)
-human behaviour is a relationship between given ends and scarce means which have alternative uses
main elements taught by mainstream economics
microeconomics:
-supply and demand
-market equilibrium
-utility function
-market structures
macroeconomics:
-aggregate indicators
-sources of market growth
-market flaws and economic cylces
-fiscal and monetary policies
WRONG: simplify to build those constructions
humans dont have all info when decisions and consider everything and maximize info
austrian economics vs mainstream (table)
-austrian: a theory of human action understood as dynamic process (praxeology)
2.methodlogical outlook
-austrian:subjective
- protagonist of social processes:
-austrian paradigm: creative entrepreneur (every person in market)
4.concept of information:
-austrian paradigm: knowledge and info are subjective and dispersend and change constantly, distinction between scientific and practical knowledge
5.possibilities of specific prediction
-austrian: impossible
homo economicus
-perfectly rational (resources given and scarce)
-perfect access to info (utility maximizing)
-selfish (goals given in advance)
entrepreneurship
inmate capacity of every human being to perceive profit opportunities that surround him and act consequently to take advantage of them
-essentially creative no costs –> profit arises out of nothing –> pure entrepreneurial profit
-consitently generating new info which is subjective, practical, disperse and difficult to articulate
–> create info, transmiss info in the market, coordiante socitey
dynamic disequilibrium
-agent continously detects from subjective point of view deficiencies or erros that induce him to act in pursuit of profit
-markets are in continous motion and change that is never interrupted
-
investment application
-markets are never in equilibrium
-value investors beat market if they discover opportunties and take advantage
-must act as entrepreneur
-entrepreneurship is always competitive
-signal sent by high return on return on capital employed will attract competitors, concept of mean reversion is valid for all sectors
-
uncertainty
-permantent uncertainty
-uncertainty cannot be quantified or measured
-concept of risk has absorbed the notion of uncertainty
-known unknowns: we know the event but we dont know whether it will happen, no probability –> risk
-unkown uknowns we know something unexpected can happen, really need to take into account as it is what can really destroy investment thesis
application in investment of uncertainty
deal with it by:
-margin of safety
-diversification(neg correlation of nr of companies and how well you know them)
-better than everage entrepreneurial skills and correct theoretical framework
socialism as theoretical error
-any institutional restriction or aggression on the free exercise of human action or entrepreneurship
-aggression/coercion: all physical violence or threats of physical violence which others initate
-socialims keeps a person from freely exercising his entrepreneurhsip
-intellectual error: defenders think it will improve system as agression is of governing body with more knowledge than individual
-intervention of external party generate an artifical discoordination which achievers worst results
-the higher the intervention the lower the eocnomic growth and lower interest to invest into country
–> avoid sectors with high gov intervention, invest in business with private property rights and contracts
dcf model criticism
main elements:
-Future earnings estimte (rev. exp. margins)
-discount rate –> WACC; CAPM
-growth rate to perpetuity g
-everything is subject to a big degree of error and consumes a lot of time
better ways:
-earnings power value (FCF normalization and capitalization factor)
-net asset value (reported assets and liabilities adjusted)
capital theory
-human action as a group of successive stages
-larger number of stages the longer the duration of the action and the higher the value of the goal (end) achieved
-law of time preference: under similiar circumstance the actor always prefers to satisfy his goal rather than tomorrow, Postponing will demand higher FV. in case of money time preference is interest rae
-negative i rates are antinaturam they imply that we would always prefer to postpone consumption to the future
-requisits for wealth:
—>saving
—> good capital allocation/investments
