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Approaches to asset valuation: the castles in the air approach and the firm foundations approach

Approaches to asset valuation: Castles in the air and firm foundations

How do we decide what something is worth? How might a new pair of sneakers be worth $1,000 while the pair next to them, perhaps better made, longer lasting and just as comfortable, be less than $100? With the castles in the air approach, a thing is worth what others will pay for it. If you can sell it to someone for twice the price then it’s worth that. You’ll often see this in bubbles (dot com, tulip, bitcoin…). It was described by John Maynard Keynes using the analogy of a beauty contest where you have to select the prettiest faces out of 100, and the prize goes to the selection closest to the group as a whole. Whether or not they’re actually pretty doesn’t matter if you can guess which faces others think are pretty. If you can predict what the crowd will do, then you can get there first and make a profit. The firm foundations approach, on the other hand, is about finding solid reasons for assessing value based on analysis of the fundamentals of an asset, a firm anchor, its intrinsic value. If you can value something through this approach then a good bet is simply if the current asking price is less than the intrinsic value. The market will eventually correct for it and you’ll make money. See A Random Walk Down Wall Street, by Burton Malkiel for more. Also see Veblen goods…How do we decide what something is worth? How might a new pair of sneakers be worth $1,000 while the pair next to them, perhaps better made, longer lasting and just as comfortable, be less than $100? With the castles in the air approach, a thing is worth what others will pay for it. If you can sell it to someone for twice the price then it’s worth that. You’ll often see this in bubbles (dot com, tulip, bitcoin…). It was described by John Maynard Keynes using the analogy of a beauty contest where you have to select the prettiest faces out of 100, and the prize goes to the selection closest to the group as a whole. Whether or not they’re actually pretty doesn’t matter if you can guess which faces others think are pretty. If you can predict what the crowd will do, then you can get there first and make a profit. The firm foundations approach, on the other hand, is about finding solid reasons for assessing value based on analysis of the fundamentals of an asset, a firm anchor, its intrinsic value. If you can value something through this approach then a good bet is simply if the current asking price is less than the intrinsic value. The market will eventually correct for it and you’ll make money. See A Random Walk Down Wall Street, by Burton Malkiel for more. Also see Veblen goods

23 Dec 2015

Person typing their password and reliving a fond memory at the same time

Choose passwords that make you happy

Update: for times when you really need to remember a password I still like this technique, for all other times — which is to say, ideally every time — I suggest using a password manager. Use a password manager to generate unique passwords for every service so long and complex that you couldn't possibly be bothered to type it and that will force you to always use the manager instead. However, for the few passwords that you can't avoid typing they might as well remind you of something good. I have found this makes me happier. Also see: Two Factor Authentication Types of Phishing…Update: for times when you really need to remember a password I still like this technique, for all other times — which is to say, ideally every time — I suggest using a password manager. Use a password manager to generate unique passwords for every service so long and complex that you couldn't possibly be bothered to type it and that will force you to always use the manager instead. However, for the few passwords that you can't avoid typing they might as well remind you of something good. I have found this makes me happier. Also see: Two Factor Authentication Types of Phishing

17 Dec 2015

Animals that regenerate

All of these guys can grow back major parts of their body, even limbs, and in the case of the flatworm a new head. Crazy.…

9 Dec 2015

Homo sapiens. Our place in the order of things

animalia not a plant chordata backbone of sorts mammalia warm blood, fur, milk, birth primates humans, monkeys, apes hominidae great apes homo man sapiens wise…

2 Dec 2015

Bycatch

Bycatch is other stuff you caught when trying to catch something else. Bycatch makes me sad. Any fish or sea creatures can be caught unintentionally during fishing, and it also affects larger animals such as sharks, turtles and of course dolphins. When learning from a whale shark expert on the island of Utila in Honduras he told us one of the simplest ways to help is to give up eating prawns. As London’s Maritime Museum puts it: “For every kilo of tropical prawns you buy, 15 kilos of unwanted sea-life may be thrown back dead as ‘by-catch’. Trawling for prawns can also trap turtles, unless a special device keeps them out of the nets. Farming prawns is often no better, since mangrove swamps may be destroyed to make room for prawn ponds.” Prawns are particularly bad as they are often caught with bottom trawling. I once read a description of it as wanting to catch a cow, and choosing to drag a net by helicopter over the entire farm, and so also catch the tree in the garden, the dog, the pigs and the farmer’s wife in the process. So we gave up prawns. Sadly. Check out the WWF bycatch page for more including a bottom trawler in action.…Bycatch is other stuff you caught when trying to catch something else. Bycatch makes me sad. Any fish or sea creatures can be caught unintentionally during fishing, and it also affects larger animals such as sharks, turtles and of course dolphins. When learning from a whale shark expert on the island of Utila in Honduras he told us one of the simplest ways to help is to give up eating prawns. As London’s Maritime Museum puts it: “For every kilo of tropical prawns you buy, 15 kilos of unwanted sea-life may be thrown back dead as ‘by-catch’. Trawling for prawns can also trap turtles, unless a special device keeps them out of the nets. Farming prawns is often no better, since mangrove swamps may be destroyed to make room for prawn ponds.” Prawns are particularly bad as they are often caught with bottom trawling. I once read a description of it as wanting to catch a cow, and choosing to drag a net by helicopter over the entire farm, and so also catch the tree in the garden, the dog, the pigs and the farmer’s wife in the process. So we gave up prawns. Sadly. Check out the WWF bycatch page for more including a bottom trawler in action.

25 Nov 2015

Ape index

The length of your arms relative to your height. Typically: ape index = arm span / height Da Vinci’s classic Vitruvian man has an arm span equal to his height and therefore an ape index of 1. An ape index greater than 1 (arm span longer than height) seems to be helpful for rock climbers, swimmers (Michael Phelps = 1.06), boxers, professional basketball and goalkeeping. It’s also known as the gorilla index though I couldn’t actually find a measure for gorillas remarkably. A quick calculation shows for an average male gorilla at 1.75m tall and arm span of 2.45m that the gorilla index for a real gorilla would be = 2.45 / 1.75 = 1.4. I’d definitely fancy the gorilla in rock-climbing and boxing… It’s sometimes calculated as arm span minus height, that would give gorillas a ridiculous: +70 I have not been able to figure out if your ape index changes from a child to adult though it seems like it might. Quite fun to measure your own… HT: Si Wannop…The length of your arms relative to your height. Typically: ape index = arm span / height Da Vinci’s classic Vitruvian man has an arm span equal to his height and therefore an ape index of 1. An ape index greater than 1 (arm span longer than height) seems to be helpful for rock climbers, swimmers (Michael Phelps = 1.06), boxers, professional basketball and goalkeeping. It’s also known as the gorilla index though I couldn’t actually find a measure for gorillas remarkably. A quick calculation shows for an average male gorilla at 1.75m tall and arm span of 2.45m that the gorilla index for a real gorilla would be = 2.45 / 1.75 = 1.4. I’d definitely fancy the gorilla in rock-climbing and boxing… It’s sometimes calculated as arm span minus height, that would give gorillas a ridiculous: +70 I have not been able to figure out if your ape index changes from a child to adult though it seems like it might. Quite fun to measure your own… HT: Si Wannop

18 Nov 2015

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