The reality of models

Models are useful abstractions of reality.  The "correctness" of a model is simply is usefulness for a particular purpose.

Instrinsic Value and Target Prices

When I was recently reviewing Empire Investing, I luckily stopped at the "value" step of their investment strategy, as this gave me time to reflect on a couple of things.

The first is the concept of intrinsic value, which most value investors will know well, as the traditional texts of Benjamin Graham and Warren Buffett refer to it often.  I, however, don't subscribe to it.  I simply don't believe that anything has an "intrinsic value" - the only "value" that can be placed upon something is someone's desire to have it.

A long term investor will value certain properties of a company very differently than a short term investor would value those properties.

Consider the example of a house.  I could describe a house as "2 bedrooms, 1 bathroom, modern and in a nice suburb" to a room full of people, and ask each of them to create a baseline valuation of this house.  It doesn't matter what valuation they come up with.  I could then ask "and what is the change in value if I add a double-car lock-up garage on".  To some people, this might de-value the house, (if for example they didn't have a car, didn't want one, and didn't need the storage space) and to others, like myself, it would add value to the house.  So, what is the "intrinsic value" of the garage?  It doesn't make sense.

So, what Buffett et al are referring to when they refer to intrinsic-value is actually value-to-them, as long term investors.

Empire Investing Strategy Review - Part 1

This blog is supposed to be about investing strategies, and to date, I haven't spent too much time talking about them (other than the magic formula).  Luckily for us, there is an investment company called Empire Investing that publishes their investing strategy, and so today I'd like to review it. 

Let me start by saying that I have no affiliation with Empire or any of it's staff, other than that The Prince has chanced across this blog before.  Not that it matters though, as it seems that they are not currently accepting any new clients or funds.

So, to start off, I'd say that one of the reasons that I'm looking forward to this review is that their investing strategy is quite similar to my own, but with some interesting differences.  Let's look at their strategy in a nut shell:

The stock market side pot

Here's another thought experiment for you.

Suppose the government (or the stock exchange) changed the rules on investing to ban short-term trading.  The mechanism for how they do this is not important, but it could be implemented, for example, by changing the capital-gains tax rules to tax short term trades at 100%, making them pointless.  Let's say that they effectively prevented anyone from owning stocks for less than 3 years.

What would happen to the market?

Friday on my mind - continued

I hope that you've had some time to think about the original thought experiment.  Please read it if you haven't, or else the rest of this post will make no sense whatsoever.

Friday on my mind

Here's a thought experiment for you.

Suppose that you own a regular house in a regular suburb.  One Sunday, you wake up, and you think to yourself - "I like this house, I think it's worth $500,000.  Yes, I wouldn't sell it for any less than that."

On Monday morning, for whatever reason - it doesn't actually matter why - your next door neighbour, who's house is practically identically to yours, comes over to your house and says "Today I am leaving, and I'm giving you my house. Here's the title.  It's yours".

On Tuesday morning, a man appears at you door, and offers you $500,000 for your house.  You seriously consider it, and tell him that you'll think about it, and get back to him.  You also point out that you own the house next door.  He leaves you with his offer.