The hottest Investment Theory Substack posts right now

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The Strategic Bitcoin Reserve

Points And Figures • 612 implied HN points • 20 Jan 25
🔮 Crypto Cryptocurrency Market Regulation Investment Theory Blockchain Technology Financial Policy
  1. Creating a Strategic Bitcoin Reserve is a bad idea. Bitcoin doesn't prove to be essential for national security like the Strategic Oil Reserve.
  2. Currently, Bitcoin and cryptocurrencies are more about speculation than real value. They haven't significantly impacted daily life yet.
  3. The government should not get involved in the crypto market. It should just monitor and regulate lightly without interfering, to let it evolve naturally.

Alternatives to the CAPM: Part 3: Connecting cost of debt to cost of equity

Musings on Markets • 0 implied HN points • 30 Apr 11
💰 Finance Capital Markets Investment Theory Risk management Corporate Finance Investment Risk management Capital Markets Financial Analysis Corporate Finance
  1. It's easier to figure out the cost of debt because you can see the interest rate when borrowing. This makes it a more straightforward number to use when looking at a company's finances.
  2. You can estimate the cost of equity by comparing it to the cost of debt and factoring in the volatility of both stocks and bonds. If the cost of debt is 8%, the cost of equity might be higher, like 12%, if stocks are riskier.
  3. This method works best for big companies with significant debt. However, it has limits because equity risk and bond risk are different, so care is needed in using this approach.

Alternatives to the CAPM: Part 2: Proxy Models

Musings on Markets • 0 implied HN points • 29 Apr 11
💰 Finance Investment Theory Market behavior Statistical Analysis Financial Metrics Investing Risk management Economic Theory Market Analysis Quantitative Analysis
  1. Proxy models move away from traditional finance theories like CAPM, focusing instead on how markets actually price investments. They try to explain returns based on observable factors rather than assumptions about investor behavior.
  2. Research by Fama and French found that factors like market capitalization and price-to-book ratios are better at explaining stock returns than the original CAPM betas. This means smaller companies and those with lower price-to-book ratios tend to have higher returns.
  3. While proxy models can improve expected return calculations, they come with risks like data mining and standard error problems. This means the results may not always be reliable or may misrepresent the true risk involved.

Alternatives to the CAPM: Part 1: Relative Risk Measures

Musings on Markets • 0 implied HN points • 28 Apr 11
💰 Finance Investment Risk management Asset Pricing Market Analysis Corporate Finance Asset Pricing Investment Theory Risk management Corporate Finance Market Analysis
  1. The CAPM model has flaws and many people have shifted to using better methods for measuring risk and estimating returns. It's criticized for being too simple and for its dependence on past market prices.
  2. Multi Beta Models and Market Price based Models offer alternatives to CAPM by considering multiple factors or standard deviations instead of relying on a single market beta. These models are intended to improve return estimates but have their own complexities.
  3. Accounting information based models use a company's financial health as a measure of risk. They connect risk to fundamental business factors but can be misleading due to the way accounting numbers are reported.

Behavioral finance and corporate finance

Musings on Markets • 0 implied HN points • 12 Jul 09
💰 Finance Corporate Finance Behavioral Finance Investment strategy Market Analysis Behavioral Finance Corporate Finance Investment Theory Market behavior
  1. Behavioral finance studies how people's behavior affects financial decisions. It shows that both investors and managers can be overconfident, leading to poor decision-making.
  2. Even though traditional finance often ignores human behavior, combining insights from behavioral finance can improve corporate decision-making. It's important to understand why managers may deviate from financial principles.
  3. Recent developments in behavioral finance focus on improving systems and processes instead of just highlighting mistakes. This shift may help managers make better choices and minimize costs for shareholders.
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