In order to calculate whether an asset is under- or overvalued, it makes sense to compare the price of the asset to the average earnings it generates. That’s why we always looked at the price to earnings ratio, or P/E.
The problem is our misconception: Owning an asset does not only give you a contingent share on earnings the company accumulates over time. It also gives you a contingent share on all the handouts the company will receive in the future.
Mistakenly, we calculated the P/E ratios, where the earnings were estimated as the average net income of the company from operations in the past. WE WERE WRONG.
The correct ratio to look at is the P/(E+H) ratio. Price / (Earnings + HANDOUTS). We missed the HANDOUTS.
Handouts have *nothing* to do with the ordinary profit opportunities of the company. It has nothing to do with whether the business is run properly. Business performance means nothing. Handouts are completely outside the domain of business. Handouts are the domain of politics.
Too Big To Fail? You get a handout, because we cannot have you to fail! We could have asked for your shares in return for the handout, but we won’t, because no one holds us accountable!
Too Connected To Fail? No one would give a flying f*** if you failed, but oh, you know my friend? You lobbied with the right people? You get a handout! You don’t deserve it, but no one holds us accountable!
Too Cute To Fail? The cruise industry? It has zero value-added and most even have HQ’s abroad to evade taxes, but our president finds your industry cute, so why don’t you get all this handout?
Too Lucky To Fail? You weren’t even connected or large, but by pure dumb luck, your stocks and bonds ended up in the portfolios of the rich and connected. They don’t want to lose money, so even you get a handout!
Everyone gets a handout except the people who lose their jobs. Because it just makes sense. They aren’t rich, so they aren’t connected. Ergo, they get nothing.
Even a rigged casino is not a good analogy here. It is as if someone lost in roulette, and the house decides to move the fucking ball to another number in front of everyone’s eyes. Even riggers have more dignity than changing the results after the fact and in front of everyone’s eyes. Because even they would be held more accountable than what the Fed is doing right now.
tl;dr: We’ve been had and miscalculated. It isn’t how profitable your operations are. It is how much handouts you will get in each crisis. Not P/E, but P/(E+H).
A New York investment firm pitched wealthy investors in recent days on a way to make returns of 22% to 175% using U.S. government programs designed to help Americans keep their jobs and boost the coronavirus-stricken economy, according to a marketing document seen by Reuters.
Following questions posed by Reuters, Arcadia Investment Partners LLC, which has about $1 billion under management, said it had put its plans on hold.
The idea was in “formative stages” and the firm was not “presently moving forward with this strategy given reasons that include uncertainty surrounding the regulations,” Dahlia Loeb, managing director at Arcadia, told Reuters in an email on Wednesday. She did not elaborate further.
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.