Tuesday, April 27, 2010
Link to Excellent Analysis of What Caused the Recent Financial Crisis
Sorry this isn't exactly on topic for my eZine, but I wanted to share with you an excellent analysis of why the 2007 economic crisis, and a number of others, occurred. It is by Timothy M. Koller in the McKinsey Quarterly:
My assessment is he really is talking about proper valuation of an equity or credit instrument vs. speculation. However, there is a certain amount of speculation when you assume a continued growth in cash flow or equity for a stock. Koller suggests you can hedge that speculation by assessing whether the company in question has a strong, sustainable competitive advantage.
In the case of credit instruments, he applies the idea of conservation of capital.
It is sort of the Warren Buffet/Benjamin Graham approach of buying because there is inherent value in the stock is the right way to do things, and the dot.com buy because share prices are going through the roof (or real estate prices just keep going up) approach is the wrong way.