A finance thread

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Hall of Fame
I’m starting this thread so that finance discussions that come up in other threads (on the odd occasions they do) can be directed here – if posters so choose – instead of threadjacking these other threads with discussions in which most others probably have no interest. This thread may die a quick death or it may survive… either way is ok. Obviously it would be helpful if the tone remains civil, opinions are noted as such, political discussions are avoided, and trolling is kept at a minimum. With that said…
 
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navigator

Hall of Fame
Spin Doctor asked about the difference between merchant banking (MB) and venture capital (VC). It’s probably helpful to explain private equity (PE) as well since they’re all similar in certain ways but different in others.

PE and VC are similar in that they involve pooled funds in which the manager ("general partner") is largely managing other peoples’ money (OPM) (with a sliver of their own capital, typically). In the case of VC the money is typically invested in the equity of private, early-stage companies. Generally not a lot of debt is used because these investments ("portfolio companies") are risky enough as they are. PE, on the other hand, typically involves investing in the equity of private, mature (as opposed to early-stage) companies. Most PE funds are really leveraged buyout (LBO) funds in which a lot of debt is used in the portfolio company’s capital structure (to, theoretically, increase the equity holders’ returns if things go as planned). So, the two big differences between VC and PE are (1) the stage in the corporate life cycle of the portfolio company (VC – early; PE- mature/late), and (2) the amount of leverage/debt applied to the portfolio company (VC – little/none; PE – a lot).

Then there are merchant banks (MBs). MBs are most similar to PE funds but with a several differences. As mentioned above, PE funds are funded largely with OPM – outside capital – while MBs are typically funded by the owners’/managers’ own capital. PE funds typically have a life span of 8-10 years. MBs are perpetual in nature. PE funds typically layer on a lot of debt to their portfolio companies; MBs typically use a lot less debt. Most PE funds don’t offer advisory services to their portfolio companies (although many do), while MBs typically do. PE companies are typically focused on internal rate of return (which sometimes leads to a short-term focus) while MBs focus on a multiple-of-capital (a longer term approach). Some MBs also offer debt financing, trade credit, and other financial products that PE funds do not. There are some other subtle differences but those are the big ones.
 
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Topspin Shot asked about the difference between merchant banking (MB) and venture capital (VC). It’s probably helpful to explain private equity (PE) as well since they’re all similar in certain ways but different in others.

PE and VC are similar in that they involve pooled funds in which the manager ("general partner") is largely managing other peoples’ money (OPM) (with a sliver of their own capital, typically). In the case of VC the money is typically invested in the equity of private, early-stage companies. Generally not a lot of debt is used because these investments ("portfolio companies") are risky enough as they are. PE, on the other hand, typically involves investing in the equity of private, mature (as opposed to early-stage) companies. Most PE funds are really leveraged buyout (LBO) funds in which a lot of debt is used in the portfolio company’s capital structure (to, theoretically, increase the equity holders’ returns if things go as planned). So, the two big differences between VC and PE are (1) the stage in the corporate life cycle of the portfolio company (VC – early; PE- mature/late), and (2) the amount of leverage/debt applied to the portfolio company (VC – little/none; PE – a lot).

Then there are merchant banks (MBs). MBs are most similar to PE funds but with a several differences. As mentioned above, PE funds are funded largely with OPM – outside capital – while MBs are typically funded by the owners’/managers’ own capital. PE funds typically have a life span of 8-10 years. MBs are perpetual in nature. PE funds typically layer on a lot of debt to their portfolio companies; MBs typically use a lot less debt. Most PE funds don’t offer advisory services to their portfolio companies (although many do), while MBs typically do. PE companies are typically focused on internal rate of return (which sometimes leads to a short-term focus) while MBs focus on a multiple-of-capital (a longer term approach). Some MBs also offer debt financing, trade credit, and other financial products that PE funds do not. There are some other subtle differences but those are the big ones.
Very interesting and well-written post though I don't recall asking about finance on TT. Maybe it was another poster?
 
How much math is really used in finance?
A little to a lot. A 'black box' algorithm has tons of predictive math theory such as Bayesian theory etc. Modelling and structuring options is also pretty math heavy.

Conventional analysis is not math heavy but still requires a math skill set at the level of a 16-17 year old (who actually understood what they were studying).
 

heninfan99

Talk Tennis Guru
I saw some docu that said most stocks are held for under 60 seconds due to the computerized algorithms written.
Probabilities/statistics are widely used in finance to try to assess potential risks.

How much math is really used in finance?
 
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sureshs

Bionic Poster
Simply put, what is the vehicle which gives maximum return with guaranteed preservation of principal? Are the only options multi-year CDs?
 
Simply put, what is the vehicle which gives maximum return with guaranteed preservation of principal? Are the only options multi-year CDs?
Long term treasury bonds issued today. Two caveats; capital values can change substantially during the value of the holding period, though at the end of the period will resort to par, secondly inflation could eat away the value of the investment in real terms. This assumes a rising yield curve environment.

Personally Sureshs I like to have my cake and eat it now, if you know what I mean;)
 
D

Deleted member 23235

Guest
Thx Nav, for the thread,...
Book suggestions for anyone interested in personal finance:
* Money, by Tony Robbins... breaks down finance for the lay person in the best way I've read to date
* Rich Dad, Poor Dad
* Millionaire Next Door
* Anything Dave Ramsey...
 

navigator

Hall of Fame
A little to a lot. A 'black box' algorithm has tons of predictive math theory such as Bayesian theory etc. Modelling and structuring options is also pretty math heavy.

Conventional analysis is not math heavy but still requires a math skill set at the level of a 16-17 year old (who actually understood what they were studying).
Very concise answer. I'd only add that even if you're an analyst doing the simpler math - say investment banking pitch books for transactions - you're around numbers so much that you'll struggle if you're not reasonably numerate.
 

navigator

Hall of Fame
Thx Nav, for the thread,...
Book suggestions for anyone interested in personal finance:
* Money, by Tony Robbins... breaks down finance for the lay person in the best way I've read to date
* Rich Dad, Poor Dad
* Millionaire Next Door
* Anything Dave Ramsey...
Almost any book that encourages a person to save/invest can't be too harmful. I have a small problem with books like "Millionaire Next Door" because the analysis suffers from survivorship bias. That is, the authors start with a group of "winners" and work backwards to see what they have in common, when instead they should start with all of the folks who followed a certain plan (and shared certain characteristics) and then see what proportion "won." Again, the themes of thrift and saving are good ones. But the notion that most people who follow their suggested plan end up millionaires is deeply flawed because the authors performed the analysis backwards.

I'd say my favorite book on finance is Nassim Taleb's "Fooled by Randomness," simply because it does a great job of articulating how much of a role luck - or randomness - plays in our lives. You'll view your successes and failures in a different light after reading it. And it will definitely affect how you think about investing.
 

heninfan99

Talk Tennis Guru
Nassim has great ideas but is a horrible writer.
I'd say my favorite book on finance is Nassim Taleb's "Fooled by Randomness," simply because it does a great job of articulating how much of a role luck - or randomness - plays in our lives. You'll view your successes and failures in a different light after reading it. And it will definitely affect how you think about investing.
 
D

Deleted member 23235

Guest
Almost any book that encourages a person to save/invest can't be too harmful. I have a small problem with books like "Millionaire Next Door" because the analysis suffers from survivorship bias. That is, the authors start with a group of "winners" and work backwards to see what they have in common, when instead they should start with all of the folks who followed a certain plan (and shared certain characteristics) and then see what proportion "won." Again, the themes of thrift and saving are good ones. But the notion that most people who follow their suggested plan end up millionaires is deeply flawed because the authors performed the analysis backwards.

I'd say my favorite book on finance is Nassim Taleb's "Fooled by Randomness," simply because it does a great job of articulating how much of a role luck - or randomness - plays in our lives. You'll view your successes and failures in a different light after reading it. And it will definitely affect how you think about investing.
big fan of nassim's work... read "fooled...", "black swan", and "anti fragility" - the last being my favorite
 
All you need to know: money can't buy love and you can't take it with you so spend it all on others and be kind to one another.
 

navigator

Hall of Fame
In what numbers and to whom?
Have dirty energy been receiving for a long while and overall in great numbers?
How would subsidies cover Loss and Damage?
I'm not "moderating" this thread and I'm not telling you what to do - it's a free site - but it sure would be nice if you could move this discussion over to that global warming thread instead of turning this into a political debate. I've furthered my own share of threadjacks - we're all guilty to some degree - but it would be nice if we could avoid one here. But, again, just a civil request - obviously you can do whatever you like.
 

sureshs

Bionic Poster
All you need to know: money can't buy love and you can't take it with you so spend it all on others and be kind to one another.
Why? If I can't take it with me, that is the more reason I should be obsessed with it, no? Like going to Indian Wells and making sure to see all the pros because you don't know when you will be back?

And why should I spend it on others? They are not going to take it with them either.

What I am trying to point out with these remarks is that these cliches don't make sense and have never made sense. They exist just to make middle class working stiffs feel good about themselves.
 
Why? If I can't take it with me, that is the more reason I should be obsessed with it, no? Like going to Indian Wells and making sure to see all the pros because you don't know when you will be back?

And why should I spend it on others? They are not going to take it with them either.

What I am trying to point out with these remarks is that these cliches don't make sense and have never made sense. They exist just to make middle class working stiffs feel good about themselves.
They make perfect sense actually, but thank you for proving my point. Most people are indeed truly obsessed with finances, specifically making money, money, money. It's a bittersweet symphony....you're a slave to money then you die. I prefer the star trek John Lennon future, a time in the future where the accumulation of things is not a priority, but rather the common good of humanity, peace and love.
 

navigator

Hall of Fame
They make perfect sense actually, but thank you for proving my point. Most people are indeed truly obsessed with finances, specifically making money, money, money. It's a bittersweet symphony....you're a slave to money then you die. I prefer the star trek John Lennon future, a time in the future where the accumulation of things is not a priority, but rather the common good of humanity, peace and love.
Nice Verve reference (seriously). My view echoes that of philosopher David Lee Roth: "Money can't buy you happiness, but it can buy you a boat big enough to sail right up next to it." Some people - make that, plenty of people - will never be content regardless of how much money, or anything else, they have; they're not wired for it and/or haven't had sufficient life experiences to gain perspective and appreciate what they have. But... if you're capable of finding contentment and have a sufficient degree of introspection, then money is valuable for affording you the freedom to pursue those things that will result in contentment. Just my two cents, of course.

[Also, just as a related observation, more than a few folks in finance view the accumulation of resources as a game, not altogether unlike any other game or hobby that some folks take (too) seriously (tennis?). In that respect, you could level your disapproval at a lot of different folks who are obsessed with a lot of different things, money being just one.]
 

sureshs

Bionic Poster
They make perfect sense actually, but thank you for proving my point. Most people are indeed truly obsessed with finances, specifically making money, money, money. It's a bittersweet symphony....you're a slave to money then you die. I prefer the star trek John Lennon future, a time in the future where the accumulation of things is not a priority, but rather the common good of humanity, peace and love.
You will find that you can do a lot of the common good if you have money, and on the flip side, without money you will not be able to stand up to the forces of evil. Your wrong assumption is that everyone will follow your path. They won't.
 

Midaso240

Hall of Fame
[Also, just as a related observation, more than a few folks in finance view the accumulation of resources as a game, not altogether unlike any other game or hobby that some folks take (too) seriously (tennis?). In that respect, you could level your disapproval at a lot of different folks who are obsessed with a lot of different things, money being just one.]
"The year I turned 26 I made $49 million,which really pissed me off because it was 3 million short of $1 million a week"
 

Bartelby

Talk Tennis Guru
The reality is that if you assert the role of randomness then the whole morality play that justifies wealth falls apart and although thrift and saving are necessary if you start poor, the reality is that inheritance forms the foundations of more fortunes even if it too requires a degree of saving and hard work as many have indeed wasted their inheritance.

Almost any book that encourages a person to save/invest can't be too harmful. I have a small problem with books like "Millionaire Next Door" because the analysis suffers from survivorship bias. That is, the authors start with a group of "winners" and work backwards to see what they have in common, when instead they should start with all of the folks who followed a certain plan (and shared certain characteristics) and then see what proportion "won." Again, the themes of thrift and saving are good ones. But the notion that most people who follow their suggested plan end up millionaires is deeply flawed because the authors performed the analysis backwards.

I'd say my favorite book on finance is Nassim Taleb's "Fooled by Randomness," simply because it does a great job of articulating how much of a role luck - or randomness - plays in our lives. You'll view your successes and failures in a different light after reading it. And it will definitely affect how you think about investing.
 

Bartelby

Talk Tennis Guru
I think your assertion of randomness in the creation of wealth is correct and it does have implications for the customary narrative that personal finance books spruik.

It is also important to recognise the importance of inheritance in the creation of wealth despite the fact that it doesn't follow the fairytale rags to riches narrative.

In any event, the thread should make up its mind as to whether it is about finance or personal finances.
 

esgee48

Legend
Simply put, what is the vehicle which gives maximum return with guaranteed preservation of principal? Are the only options multi-year CDs?
The US Treasury issues a sort of index bond that is tie to the CPI Index. The interest rate cannot be lower than this rate. That's assuming that the US Government is a zero risk issuer. This will guarantee return of capital tied to inflation. If you want to maximize return, you have to identify several issues before a manager will even talk to you. What is your appetite for risk (volatility or returns), what's your investment horizon and if you have any personal issues such as investing in the ARMs industry. You then move into non risk free investments like Corporate Bonds, Bond Funds, Index Funds, Mutual funds that have sector emphasis, Individual stocks, Options (buying and selling). Risk goes up from left to right. You can mitigate some of these risks by buying options to off load some of the risk.
 

esgee48

Legend
I saw some docu that said most stocks are held for under 60 seconds due to the computerized algorithms written.
Probabilities/statistics are widely used in finance to try to assess potential risks.
You're talking about automated trading programs. What these programs do is look for imbalances in pricing of securities in real time. Say the price of shares in X is $1.00 in Exchange Y, but trading for $1.01 in Exchange Z. The program will quickly buy X for $1.00 and sell it for $1.01 on Exchange Z. The time for transaction will be in milliseconds. Alternatively, the price of options for shares also gets out of synch and the same type of arbitrage occurs to rebalance the prices. The models appear to be sophisticated, but they're not. They're right out of Quantitative Finance or Financial Engineering. What's sophisticated is the level of programming to have the real time data pumped into the systems and models to identify these inbalances.

Risk is quantified as volatility. Risk is zero if volatility is zero, that is in the case of a Treasury bill or note. Anytime volatility or uncertainty arises about expect returns, then you get into statistics. They use the Standard Deviation as a measure of volatility. Even here, the situation is fluid because the level of volatility should be measured commenserate with your investment horizon. If you plan to hold the security for 1 week, you should be using numbers based on weekly data, 1 month should be based on monthly data and so forth.
 
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Bartelby

Talk Tennis Guru
What I've read about automated trading is that the closer you are to the main server/router/whatever the more time advantage you have, so trading glory might also be based on real estate.
 

esgee48

Legend
You are absolutely correct. These companies try to colocate inside the DNS main hubs or along the main routes between exhanges.
 

Bartelby

Talk Tennis Guru
One of my favourite quotations about wealth from Balzac:

"The secret of a great success for which you are at a loss to account
is a crime that has never been found out, because it was properly
executed."
 
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