I have, in my other blog more especially, attempted to outline a fairly a specific sociopolitical point of view. Why do I frequently still get the nagging feeling that this remains inadequate? For a few reasons, I suppose. But one major reason in particular is that one is still confronted with vastly opposing points of view that are unamenable to persuasion by reason. Why is this the case?
First of all, how rational is my own point of view? Classical liberalism and its modern variants are adequate to the task of good governance for the most part. One struggles find alternatives. The premodern monarchy or aristocratic institutions admired by some conservatives? The city-states of ancient Greece? Or can we still profit from Aristotle's taxonomy of polities?
But what does this even account for? Surely one must confront relevant cultural issues regardless of the system of government, even if government conditions their terms to one degree or another? Inter-ethnic relations, gender relations, family life, religion, education and knowledge are of course all matters that precede contemporary liberal society. What disposition must one have to these matters?
At some point ideological questions go back to metaphysical and philosophical commitments. These commitments are then at issue. To the degree that one takes seriously the implications of a particular commitment, one is led to form cultural bonds on this basis. In this way we see modern separation of church and state distorted. The public discourse of secularism is blurred with the private discourse of atheistic naturalism. Being as incoherent and underfocused as it is, however, this naturalism does not manifest itself culturally in all of the uniform (or relatively uniform) ways that Christianity or another religious faith tradition might. It is relatively open-ended. It can accomodate both the educated atheistic urban professional couple and the poverty-stricken broken family that nevertheless continues its condition of poverty with unrestrained sexual infidelity, teen pregnancies, drug use, etc. Because it demands no homogeneity of culture, it can be used by anyone for any purpose.
But on almost all legal issues, I am opposed to the religious right. I am, however, also opposed to the left's historical imagination, in White's metahistorical sense of the term. The Christian religion is perfectly respectable as a philosophical point of view. It certainly has a richer history than naturalism, and there's no reason to problematize it with precommitments to naturalist assumptions in the way that many have. The equal treatment of women is certainly a laudable social goal. How often has it been threatened? The typical social histories telling the story of women's oppression tend to overlook that rape, sexual harassment, and forms of disrespect towards women were duly chastized by traditional faith communities. Labor of many kinds has always been performed by women, especially in the late 19th and early 20th century. Has it ever been true that widespread disregard for the human rights of women has been uniquely problematic? Or in societies in which it has taken hold, are there generalized human rights concerns?
It is difficult to fight through the bogeymen set up by left-wing sensibilities in the intellectual establishment. The left may say that the right believes women are inferior to men and should be subordinated to them. When one attempts to dispell this notion by simply pointing out that there is a disagreement over certain historiographical and sociological contentions, such objections are usually thoughtlessly disregarded as pure propaganda in service of the stealth aspiration, pre-attributed to the disputant, to bolster assumed oppressive relationships. A bizarre scenario arises in which everyone agrees on the fundamental notion of social equality, but vitriol persists.
Liberal internationalism and world federalism are laudable as well. They are nevertheless dismissed by many on the left as fig leaves for neo-imperialist intentions and contrasted with the supposedly more authentic "proletarian" internationalism that will come about through eventual world revolution. Concentrations of business interests and power are also wrongly analyzed as emanating from endogenous features of capitalism (here conceived broadly as an all-pervasive social system and not simply an economic system).
The issue posed with respect to the capitalist/socialist dichotomy is actually much less starkly polarized than many conceive. The old ultraleft position that can only see in every quasi-socialistic insitution (from co-operatives to welfare provision to government ownership) the taint of capitalist string-pulling is simply untenable. The results of reform campaigns are never seen as simply an evolving social consensus, but rather the tenuous product of working class struggle under capitalistic constraints. This is of course backed by the pseudo-empirical evidence of the Reagan/Thatcher reaction or another misunderstood historical example. The post-war consensus broke apart because its institutions were no longer properly adapted to a post-industrial context. The idea that there could be a complex of social forces that does not yield easily to one-dimensional formulas escapes a great many people.
The consensus formulated by heavyweights like Noam Chomsky that, say, "right"-libertarianism (or capitalistic libertarianism) would be a virtual neo-feudal tyranny is nothing but overblown rhetoric. Anything that perpetuates the notion that all those don't agree with Chomsky's idiosyncratic anarcho-syndicalist position are really shilling for a system that is corrupt through-and-through is deemed admirable. It is astounding how narrow-minded the bulk of respected academics have become. Chomsky has himself proclaimed on prior occasions that he believes his own anarchism to be a post-industrial expression of classical liberal aspirations. That there could be no legitimate room for others who actually adhere more faithfully to classical liberal principles in the contemporary mileiu is an utterly flabbergasting insinuation.
Surely if a person is half-sane classical liberalism cannot be a totally reprehensible philosophy.
Sunday, October 11, 2009
Wednesday, September 30, 2009
Some Thoughts on Evolutionary Biology
I've recently decided to commit myself to skepticism concerning evolutionary theory. While I have been seriously religious for several years prior to this point, that actually hasn't been the primary motivating factor propelling my recent skepticism. In fact, for a time I was an atheist, and I personally mocked Intelligent Design advocate Michael Behe at a presentation he made during my time as an undergraduate. I'm by no means a hard-line dogmatic Creationist, and I don't particularly believe I have anything to gain by questioning evolutionary theory.
Why, then, the skepticism? For one, I haven't gotten the sense that most promulgators of evolutionary theory are actually honest about the epistemological hurdles one has to jump over to actually propose a coherent theory. Second, until recently I haven't had much contact with intellectually serious proponents of Intelligent Design and evolutionary skepticism. While I may change my position on this as I learn more, I'm very excited by the tradition out of which David Berlinski comes.
One thing that I've noticed as I've begun coming forward with many of my objections is that I am being too rationalistic. Evolution is defended precisely because it does not assume a rationally ordered world. This gives me some pause. The creationists are supposed to be the ones stewing in their irrational prejudices, not the evolutionary materialists.
Part of my philosophical project, as it will be articulated in greater depth, is to advance a form of Christian Neoplatonism. Plato's emphasis on the importance of the study of mathematics to the good life will be a feature of this project, and this will ultimately tie into the mathematical objections to evolutionary biology advanced by Schutzenberger, Berlinski, and others. For the record, I personally adhere to an Augustinian framework hypothesis with respect to the origin of the world and am supremely deferential to allegorical interpretations of scripture.
So more to come...
Why, then, the skepticism? For one, I haven't gotten the sense that most promulgators of evolutionary theory are actually honest about the epistemological hurdles one has to jump over to actually propose a coherent theory. Second, until recently I haven't had much contact with intellectually serious proponents of Intelligent Design and evolutionary skepticism. While I may change my position on this as I learn more, I'm very excited by the tradition out of which David Berlinski comes.
One thing that I've noticed as I've begun coming forward with many of my objections is that I am being too rationalistic. Evolution is defended precisely because it does not assume a rationally ordered world. This gives me some pause. The creationists are supposed to be the ones stewing in their irrational prejudices, not the evolutionary materialists.
Part of my philosophical project, as it will be articulated in greater depth, is to advance a form of Christian Neoplatonism. Plato's emphasis on the importance of the study of mathematics to the good life will be a feature of this project, and this will ultimately tie into the mathematical objections to evolutionary biology advanced by Schutzenberger, Berlinski, and others. For the record, I personally adhere to an Augustinian framework hypothesis with respect to the origin of the world and am supremely deferential to allegorical interpretations of scripture.
So more to come...
Saturday, April 11, 2009
Some Ramblings on Feminism
It's pretty hard to know what to do with feminism. Ideologues come up in the most random of places it seems, and usually the axes they grind have little if anything to do with reality.
Several weeks ago I was in a discussion with a "progressive theater" feminist talking about the pay gap. I pointed out that there are laws against pay discrimination, that in fact they have just become more strict, and that most of the observed pay differentials are due to career choice and number of hours worked. She never explicitly disputed these facts, but this didn't stop her from later making arrogantly off-handed comments about her boyfriend making twice as much money as her because he was a man.
Feminism doesn't seem to really have a point as a consciously espoused ideology, other than to bolster some kind of cultural predisposition that sees itself as diametrically opposed to whatever "traditional" family life has been caricatured as.
For the most part, it seems like feminism has most of its relevance autobiographically. The notion that there is a long-standing cultural prejudice that women are simply meant to be domestic servants doesn't have a terribly firm historical basis. For a significant part of American history (not to mention world history) when most of the economy was still agricultural, women participated in the activities of managing the family farm to no great extent less than men. Social life itself was primarily based around the domestic environment for both sexes.
It's true that women were not permitted to vote, for instance, but was this widely perceived as a travesty of justice? The public political sphere is now a locus of power to an extent that it was not in previous eras. Government bureaucracy and the state management of various aspects of personal life were never given a huge role in in the affairs of society until the 20th century. In an age in which there were many more loci of social life, much more decentralized into localities and based on the relations of private property (mostly in land at that), what was the purpose of political institutions?
It is hard to imagine politics having much more significance than that of a Property Owner's Association. That is, politics was perceived as the mutual agreements made amongst owners of property for its management insofar as those property owners had mutual concerns that could not be addressed individually. The public sphere, instead of being an end in itself, was thoroughly rooted in the affairs of the private sphere.
Indeed, examining the major demands of feminist movements, it is almost entirely clear that feminism has no basis apart from industrial/post-industrial society and state bureaucracy. In point of fact, the word "feminism" was never so much as coined until the 1880s. The movements in the 1970s to open up various spheres of employment to women that had previously been closed only existed because modern society had created those roles in the first instance. Significant municipal police departments, for instance, didn't exist until the industrial age. Demanding that the state intervene further in the institution to rationalize it according to the dictates of gender equality was only one further step in the state management of society that the police department was itself a product of. Nothing particularly radical was achieved by such a movement.
The upshot is that there were aspects of the way that society was organized in times past that account for previous gender norms and institutions in those periods far better than any insinuations of a haughtily contemptuous patriarchy. What does exist as evidence of its existence, as I said, appears to be mainly autobiographical and anecdotal. There is a video on youtube.com in which a female Rabbi is describing her "awakening" to feminist ideas. She mentions how, when she was a young girl, she and a friend gasped at an ad that showed a woman in a hammock with her husband hanging clothes on the laundry line. This is somehow supposed to be taken as evidence of the entrenched social prejudices they had internalized as a result of male dominance.
I myself have lots of stories from my childhood about misconceptions I had about the world and naive prejudices I developed that were purely the product of my own lack of life experience or understanding, having nothing to do with any grandiose cultural perjudice I had absorbed. Once when I was really young I saw my father receive change for a 20-dollar bill after purchasing a meal at a fast food restaurant. I noticed the smile on my dad's face as the cashier gave him his change. I thought for sure this was a great restaurant; afterall, they hand out money when they give you your food. The idea of making change had not occurred to me.
Why can't being floored at the idea of a woman relaxing while a man does a domestic chore be the same kind of thing? Are we to take it that there were no women in existence living in an "unconventional" life situation at the time this ad was published? No female business owners? What about Elizabeth II? Is it simply possible that these girls were just reacting from a prejudice developed from their own limited experience of sheltered middle-class domestic life at a particular phase of American history?
So, yes, it's hard to know what to do with feminism anymore. People say things like "feminism is the radical notion that women are people!" The first time I read that was on the door of the office of the Campus Women's Organization at my college. My first thought was "when did I say they weren't?" What were these people even referring to? Is it the fact that men want to have sex and try to go out and "get laid"? That's treating a woman as less than human? Well, come on, what is?
I used to struggle really hard to express just what it was about feminism that bugged me. In fact, I'm still struggling to express it now. I think what it comes down to is the desire to not be brow-beaten for everything I do that comes off as the least bit stereotypically male, the fundamental faith that men and women (while psychologically different in incredible ways) have the ability live with one another peacably in a loving relationship that doesn't involve constant sparing over the politics of domestic life. But for the most part I guess there's nothing I can do anymore but let these feminists go on their rants as the urge happens to hit them, secure in the knowledge that I don't have anything to prove anymore.
Several weeks ago I was in a discussion with a "progressive theater" feminist talking about the pay gap. I pointed out that there are laws against pay discrimination, that in fact they have just become more strict, and that most of the observed pay differentials are due to career choice and number of hours worked. She never explicitly disputed these facts, but this didn't stop her from later making arrogantly off-handed comments about her boyfriend making twice as much money as her because he was a man.
Feminism doesn't seem to really have a point as a consciously espoused ideology, other than to bolster some kind of cultural predisposition that sees itself as diametrically opposed to whatever "traditional" family life has been caricatured as.
For the most part, it seems like feminism has most of its relevance autobiographically. The notion that there is a long-standing cultural prejudice that women are simply meant to be domestic servants doesn't have a terribly firm historical basis. For a significant part of American history (not to mention world history) when most of the economy was still agricultural, women participated in the activities of managing the family farm to no great extent less than men. Social life itself was primarily based around the domestic environment for both sexes.
It's true that women were not permitted to vote, for instance, but was this widely perceived as a travesty of justice? The public political sphere is now a locus of power to an extent that it was not in previous eras. Government bureaucracy and the state management of various aspects of personal life were never given a huge role in in the affairs of society until the 20th century. In an age in which there were many more loci of social life, much more decentralized into localities and based on the relations of private property (mostly in land at that), what was the purpose of political institutions?
It is hard to imagine politics having much more significance than that of a Property Owner's Association. That is, politics was perceived as the mutual agreements made amongst owners of property for its management insofar as those property owners had mutual concerns that could not be addressed individually. The public sphere, instead of being an end in itself, was thoroughly rooted in the affairs of the private sphere.
Indeed, examining the major demands of feminist movements, it is almost entirely clear that feminism has no basis apart from industrial/post-industrial society and state bureaucracy. In point of fact, the word "feminism" was never so much as coined until the 1880s. The movements in the 1970s to open up various spheres of employment to women that had previously been closed only existed because modern society had created those roles in the first instance. Significant municipal police departments, for instance, didn't exist until the industrial age. Demanding that the state intervene further in the institution to rationalize it according to the dictates of gender equality was only one further step in the state management of society that the police department was itself a product of. Nothing particularly radical was achieved by such a movement.
The upshot is that there were aspects of the way that society was organized in times past that account for previous gender norms and institutions in those periods far better than any insinuations of a haughtily contemptuous patriarchy. What does exist as evidence of its existence, as I said, appears to be mainly autobiographical and anecdotal. There is a video on youtube.com in which a female Rabbi is describing her "awakening" to feminist ideas. She mentions how, when she was a young girl, she and a friend gasped at an ad that showed a woman in a hammock with her husband hanging clothes on the laundry line. This is somehow supposed to be taken as evidence of the entrenched social prejudices they had internalized as a result of male dominance.
I myself have lots of stories from my childhood about misconceptions I had about the world and naive prejudices I developed that were purely the product of my own lack of life experience or understanding, having nothing to do with any grandiose cultural perjudice I had absorbed. Once when I was really young I saw my father receive change for a 20-dollar bill after purchasing a meal at a fast food restaurant. I noticed the smile on my dad's face as the cashier gave him his change. I thought for sure this was a great restaurant; afterall, they hand out money when they give you your food. The idea of making change had not occurred to me.
Why can't being floored at the idea of a woman relaxing while a man does a domestic chore be the same kind of thing? Are we to take it that there were no women in existence living in an "unconventional" life situation at the time this ad was published? No female business owners? What about Elizabeth II? Is it simply possible that these girls were just reacting from a prejudice developed from their own limited experience of sheltered middle-class domestic life at a particular phase of American history?
So, yes, it's hard to know what to do with feminism anymore. People say things like "feminism is the radical notion that women are people!" The first time I read that was on the door of the office of the Campus Women's Organization at my college. My first thought was "when did I say they weren't?" What were these people even referring to? Is it the fact that men want to have sex and try to go out and "get laid"? That's treating a woman as less than human? Well, come on, what is?
I used to struggle really hard to express just what it was about feminism that bugged me. In fact, I'm still struggling to express it now. I think what it comes down to is the desire to not be brow-beaten for everything I do that comes off as the least bit stereotypically male, the fundamental faith that men and women (while psychologically different in incredible ways) have the ability live with one another peacably in a loving relationship that doesn't involve constant sparing over the politics of domestic life. But for the most part I guess there's nothing I can do anymore but let these feminists go on their rants as the urge happens to hit them, secure in the knowledge that I don't have anything to prove anymore.
Tuesday, November 13, 2007
Thoughts on Company Valuation
Since I graduated college I’ve taken quite a bit of interest in the stock market. I’ve done so primarily because I felt I owed it to myself to be financially educated. I’ve gone through a number of hair-brained and hackneyed theories about how to cash-in on the market during this time. For awhile I was enamored with the idea of quick money in the currency markets and loved using Excel to back test every technical indicator one could imagine.
Eventually, however, you fall back to earth. And when you do, names like Benjamin Graham and Warren Buffett start to float around with greater frequency. What is the intrinsic value of a company? How is the market valuing the company differently from it’s intrinsic value. Well, it turns out that this is calculated by a little method called discounted cash flow analysis. Basically this involves plugging in a few known (and unknown) company variables into an equation to produce the fair value that the company ought to be trading for.
Discounted cash flows are based on a principle called the “time value of money.” It’s the notion that the value of something now is higher than the value of that something in the future. So, for instance, (most rationally self-interested) people would prefer to have $1000 now than $1000 a year from now. So, if we are going to loan that $1000 now, we expect to be compensated by more than that amount a year from now. Depending on how badly the owner of the money wants to give it up and how badly the borrower needs it, they will eventually come to an agreed upon amount of future repayment a year from now. Let’s say this is $1050. We therefore now have what’s popularly called an interest rate of 5%.
Companies, according to discounted cash flow analysis, are worth the present value of the stream of future income that the company will produce. How you know what this future stream will be, of course, is a good question. This is why discounted cash flow analysis is necessarily an imprecise matter. However, it is possible to lock in certain assumptions in the equation to yield a fair value for the company identical to the prevailing market price. In other words, we can ask ourselves, “if the market price was decided by a consensus on discounted cash flow, what variables would the market be plugging in?” In other words, if market price was always identical to intrinsic value, how would the market be determining intrinsic value right now? We can then ask the more important question, “were those assumptions correct?”
Moneychimp.com has a discounted cash flow calculator. There are five variables one needs to plug in to produce intrinsic value: annual earnings, annual growth rate for the forecast period, length of forecast period, perpetuity growth rate, and the discount rate. Let’s break these down. Earnings are simple. It is how much the company profited the last year. It is generally recommended to use cash flows instead of earnings in the equation, but generally they converge over the long run. Company growth is divided amongst a forecast period and a perpetuity period (in other words, the entire time after the forecast period). If you wanted, you could plug projected earnings for each individual upcoming year into the equation. This particular calculator simplifies matters by asking for an average growth over a certain period of time, followed by a general prediction of the growth thereafter. Typically, this perpetuity growth will be assumed to be very modest.
The last component is the discount rate. This is the minimum required rate of return. A good way to think about how the discount rate works is by assuming 0% growth and running the calculations. You find that for a constant earnings stream of $10, a discount rate of 10% will produce a value of $100. $10 being 10% of $100, the discount rate indicates a baseline for what earnings should be in relation to value. If you were dealing with 5% interest on treasury bonds, you would expect that that $10 “earnings” to produce a bond worth $200 ($10/$200 = 0.05 = 5%). You expect stock to produce at least the same return (if not greater) as a bond, which is presumably risk free.
As a matter of fact, you should expect more than that. You should expect a company to return at least the same as its Weighted Average Cost of Capital (WACC). This is the amount it costs to finance the company through debt and equity. Cost of debt is the rate the company can borrow at. Cost of equity is more complex. It includes not only dividends, but also expected appreciation on share values. Because of this, cost of equity is generally higher than cost of debt. The higher the WACC (and by extent, the higher the discount rate), the more conservatively you are valuing the company. A 10% WACC on $10 earnings means a $100 company. 20% WACC means a $50 company.
At this point, it is safe to start introducing some of the assumptions I am going to put into the equation. For forecast period, I chose 10 years. Basically this is the period for which one would desire to hold the stock. Perpetuity growth rates are assumed to be 3%, roughly the rate that GDP expands. The discount rate I am using is 15%. I arrived at this figure by basing it totally on the higher cost of equity, which was calculated according to the Capital Asset Pricing Model. The primary company specific variable involved is the Beta coefficient, a measure of share volatility. The equation is R = Rf + B( Rm – Rf ). R is rate of return (cost of equity), Rf is the risk-free rate of return (treasury bond yield), Rm is the market rate of return (historic S&P500 growth rates), and B is the Beta Coefficient. So R= 5% + B (11%-5%). For R=15%, B is roughly 1.67, which is a fairly high amount, resulting in a conservative value estimate. According to Yahoo’s stock screener, only about one fifth of the securities in the S&P500 have a Beta higher than 1.5.
This leaves forecast period growth and earnings. Earnings have been normalized to $1. The reason for this is that ultimately I am looking to compare price/earnings ratios. The major concern is not so much to gauge company value directly as it is to estimate how much company value there is for each dollar of earnings, whatever actual earnings figure may be. Therefore, earnings have been put at $1 so as to produce a price/earnings ratio in the final value solution.
This leaves growth rate as the only remaining independent variable. Zero growth in the forecast period means a P/E of 7.14. There is an upward limit on acceptable P/E, governed by maximum sustainable growth. Return on equity (ROE) caps the growth rate, since growth higher than that requires borrowing more money or floating new shares. Because ROE is affected by leverage, and because we want to look at companies will lower debt, we will cap the debt/equity ratio at 1, so at most ROE can be twice Return on Assets (ROA.) Only 1% of the S&P500 has a reported ROA higher than 25% (hypothetical ROE of 50%).This would yield a P/E of over 179! A more reasonable upper limit seems like 30% ROE, which yields just over 50 P/E. Anyhow, we can produce a table correlating various P/E ratios to expected growth rates:
Growth P/E
0 7.14
1 7.59
2 8.07
3 8.58
4 9.14
5 9.73
6 10.36
7 11.05
8 11.78
9 12.56
10 13.40
11 14.30
12 15.26
13 16.29
14 17.40
15 18.58
16 19.85
17 21.21
18 22.66
19 24.21
20 25.87
21 27.64
22 29.54
23 31.56
24 33.73
25 36.04
26 38.50
27 41.13
28 43.94
29 46.93
30 50.12
Then there’s the final question: is the market right? I screened for companies with P/Es below 7 but had historical growth rates above 10%, the assumption being that there will likely not be a steep drop in growth over the coming period, and it produced a few results. There are other factors to consider of course, but this seems like an interesting and promising angle on P/E ratios. Perhaps more on that to come.
Eventually, however, you fall back to earth. And when you do, names like Benjamin Graham and Warren Buffett start to float around with greater frequency. What is the intrinsic value of a company? How is the market valuing the company differently from it’s intrinsic value. Well, it turns out that this is calculated by a little method called discounted cash flow analysis. Basically this involves plugging in a few known (and unknown) company variables into an equation to produce the fair value that the company ought to be trading for.
Discounted cash flows are based on a principle called the “time value of money.” It’s the notion that the value of something now is higher than the value of that something in the future. So, for instance, (most rationally self-interested) people would prefer to have $1000 now than $1000 a year from now. So, if we are going to loan that $1000 now, we expect to be compensated by more than that amount a year from now. Depending on how badly the owner of the money wants to give it up and how badly the borrower needs it, they will eventually come to an agreed upon amount of future repayment a year from now. Let’s say this is $1050. We therefore now have what’s popularly called an interest rate of 5%.
Companies, according to discounted cash flow analysis, are worth the present value of the stream of future income that the company will produce. How you know what this future stream will be, of course, is a good question. This is why discounted cash flow analysis is necessarily an imprecise matter. However, it is possible to lock in certain assumptions in the equation to yield a fair value for the company identical to the prevailing market price. In other words, we can ask ourselves, “if the market price was decided by a consensus on discounted cash flow, what variables would the market be plugging in?” In other words, if market price was always identical to intrinsic value, how would the market be determining intrinsic value right now? We can then ask the more important question, “were those assumptions correct?”
Moneychimp.com has a discounted cash flow calculator. There are five variables one needs to plug in to produce intrinsic value: annual earnings, annual growth rate for the forecast period, length of forecast period, perpetuity growth rate, and the discount rate. Let’s break these down. Earnings are simple. It is how much the company profited the last year. It is generally recommended to use cash flows instead of earnings in the equation, but generally they converge over the long run. Company growth is divided amongst a forecast period and a perpetuity period (in other words, the entire time after the forecast period). If you wanted, you could plug projected earnings for each individual upcoming year into the equation. This particular calculator simplifies matters by asking for an average growth over a certain period of time, followed by a general prediction of the growth thereafter. Typically, this perpetuity growth will be assumed to be very modest.
The last component is the discount rate. This is the minimum required rate of return. A good way to think about how the discount rate works is by assuming 0% growth and running the calculations. You find that for a constant earnings stream of $10, a discount rate of 10% will produce a value of $100. $10 being 10% of $100, the discount rate indicates a baseline for what earnings should be in relation to value. If you were dealing with 5% interest on treasury bonds, you would expect that that $10 “earnings” to produce a bond worth $200 ($10/$200 = 0.05 = 5%). You expect stock to produce at least the same return (if not greater) as a bond, which is presumably risk free.
As a matter of fact, you should expect more than that. You should expect a company to return at least the same as its Weighted Average Cost of Capital (WACC). This is the amount it costs to finance the company through debt and equity. Cost of debt is the rate the company can borrow at. Cost of equity is more complex. It includes not only dividends, but also expected appreciation on share values. Because of this, cost of equity is generally higher than cost of debt. The higher the WACC (and by extent, the higher the discount rate), the more conservatively you are valuing the company. A 10% WACC on $10 earnings means a $100 company. 20% WACC means a $50 company.
At this point, it is safe to start introducing some of the assumptions I am going to put into the equation. For forecast period, I chose 10 years. Basically this is the period for which one would desire to hold the stock. Perpetuity growth rates are assumed to be 3%, roughly the rate that GDP expands. The discount rate I am using is 15%. I arrived at this figure by basing it totally on the higher cost of equity, which was calculated according to the Capital Asset Pricing Model. The primary company specific variable involved is the Beta coefficient, a measure of share volatility. The equation is R = Rf + B( Rm – Rf ). R is rate of return (cost of equity), Rf is the risk-free rate of return (treasury bond yield), Rm is the market rate of return (historic S&P500 growth rates), and B is the Beta Coefficient. So R= 5% + B (11%-5%). For R=15%, B is roughly 1.67, which is a fairly high amount, resulting in a conservative value estimate. According to Yahoo’s stock screener, only about one fifth of the securities in the S&P500 have a Beta higher than 1.5.
This leaves forecast period growth and earnings. Earnings have been normalized to $1. The reason for this is that ultimately I am looking to compare price/earnings ratios. The major concern is not so much to gauge company value directly as it is to estimate how much company value there is for each dollar of earnings, whatever actual earnings figure may be. Therefore, earnings have been put at $1 so as to produce a price/earnings ratio in the final value solution.
This leaves growth rate as the only remaining independent variable. Zero growth in the forecast period means a P/E of 7.14. There is an upward limit on acceptable P/E, governed by maximum sustainable growth. Return on equity (ROE) caps the growth rate, since growth higher than that requires borrowing more money or floating new shares. Because ROE is affected by leverage, and because we want to look at companies will lower debt, we will cap the debt/equity ratio at 1, so at most ROE can be twice Return on Assets (ROA.) Only 1% of the S&P500 has a reported ROA higher than 25% (hypothetical ROE of 50%).This would yield a P/E of over 179! A more reasonable upper limit seems like 30% ROE, which yields just over 50 P/E. Anyhow, we can produce a table correlating various P/E ratios to expected growth rates:
Growth P/E
0 7.14
1 7.59
2 8.07
3 8.58
4 9.14
5 9.73
6 10.36
7 11.05
8 11.78
9 12.56
10 13.40
11 14.30
12 15.26
13 16.29
14 17.40
15 18.58
16 19.85
17 21.21
18 22.66
19 24.21
20 25.87
21 27.64
22 29.54
23 31.56
24 33.73
25 36.04
26 38.50
27 41.13
28 43.94
29 46.93
30 50.12
Then there’s the final question: is the market right? I screened for companies with P/Es below 7 but had historical growth rates above 10%, the assumption being that there will likely not be a steep drop in growth over the coming period, and it produced a few results. There are other factors to consider of course, but this seems like an interesting and promising angle on P/E ratios. Perhaps more on that to come.
Wednesday, November 7, 2007
Unitarianism Redux
I've written on Unitarianism in a previous blog, but sometimes you have a flight of inspiration to make a few more comments.
The biggest problem with Unitarianism is that it takes liberal social values and turns them into a matter of theological certainty. That is not something Unitarians themselves would like to hear, as they pride themselves on forsaking any claims to absolute knowledge in matters of theology. The problem, however, is that often times dogmas exist not primarily due to contrived indoctrination of this or that orthodoxy, but because of the prejudices developed in the course of familiarity to a particular community. That is, the church organization itself has a tendency to inculcate dogma via groupthink. As a matter of fact, this is actually worse than traditionally conceived overt dogma as it is not even out in the open and available for scrutiny.
Unitarianism is geographically strongest in Massachusetts (approx. 35,000 members), and with Episcopalism shares the distinction of being a religion of Blue Bloods and Boston Brahmins. The Unitarian population is also somewhat larger in the Seattle metro area, but outside of those areas the Unitarian community does not extend beyond a few thousand per state, usually varying with how liberal that particular state is. At least in America, it grew out of the influence of Enlightenment ideas in the already notoriously independent Congregational churches of New England.
In other words, it is primarily a northeastern WASP religion with enclaves of social liberals elsewhere that move in and out of the church in revolving-door fashion. According to one study, it has a higher percentage of members with incomes over $100,000 (21%) than any other historic American religion except Judaism (with 29%). It is fair to characterize UUs as bourgeois liberals.
This is important because there is a sort of faux magnanimity that pervades Unitarian culture. Any multicultural gesture or nod to social progressivity is welcomed with praise. And there are even a few middle-class posterchildren for such causes that are warmly embraced by the church. It is rare, however, to find tolerance that which falls outside the tacit morality of the privileged environment in which UUs operate.
For instance, Unitarians have been strongly associated with the civil rights movement in the past. They appear, however, to be unsympathetic to both the social conservatism of the black community and to its more extreme expressions of militant radicalism, favoring instead cool-headed reformism. Both black conservatism and radicalism come from the same necessity of negotiating underprivileged status, the first in desiring what little social cohesion can come through moral uprightness alone, the second in sheer desperate reaction to the conditions of urban poverty. In either case, it goes beyond the scope of UU respectability.
It's easy enough to point these things out to UUs and allow them to go through a bout of critical self-reflection. At the end of the day, however, there is only a new strategy developed to attempt to make the church appear more accessible to this demographic or to be more deferential to that alien attitude. Nothing can ever fundamentally question the Unitarian disposition in the first instance. There is a cozy yet superficially thoughtful and earnest sense of superiority.
This is the kind of thing to which I refer when speaking of Unitarian dogmatism. It is especially grotesque when examing cultural trends. Any leftward shift in popular sentiment is not perceived on the terms in which the average American experienced it, but rather as a groping towards the prior existing wisdom possessed by the small vanguard of enlightened religious liberals.
It can almost be likened to the gay-dar gone berserk of some in the gay community that sees homosexuality or the seeds of it in anyone and everyone. Which makes me think, can we speak of "U-dar"? Hmm, perhaps it could stick...
The biggest problem with Unitarianism is that it takes liberal social values and turns them into a matter of theological certainty. That is not something Unitarians themselves would like to hear, as they pride themselves on forsaking any claims to absolute knowledge in matters of theology. The problem, however, is that often times dogmas exist not primarily due to contrived indoctrination of this or that orthodoxy, but because of the prejudices developed in the course of familiarity to a particular community. That is, the church organization itself has a tendency to inculcate dogma via groupthink. As a matter of fact, this is actually worse than traditionally conceived overt dogma as it is not even out in the open and available for scrutiny.
Unitarianism is geographically strongest in Massachusetts (approx. 35,000 members), and with Episcopalism shares the distinction of being a religion of Blue Bloods and Boston Brahmins. The Unitarian population is also somewhat larger in the Seattle metro area, but outside of those areas the Unitarian community does not extend beyond a few thousand per state, usually varying with how liberal that particular state is. At least in America, it grew out of the influence of Enlightenment ideas in the already notoriously independent Congregational churches of New England.
In other words, it is primarily a northeastern WASP religion with enclaves of social liberals elsewhere that move in and out of the church in revolving-door fashion. According to one study, it has a higher percentage of members with incomes over $100,000 (21%) than any other historic American religion except Judaism (with 29%). It is fair to characterize UUs as bourgeois liberals.
This is important because there is a sort of faux magnanimity that pervades Unitarian culture. Any multicultural gesture or nod to social progressivity is welcomed with praise. And there are even a few middle-class posterchildren for such causes that are warmly embraced by the church. It is rare, however, to find tolerance that which falls outside the tacit morality of the privileged environment in which UUs operate.
For instance, Unitarians have been strongly associated with the civil rights movement in the past. They appear, however, to be unsympathetic to both the social conservatism of the black community and to its more extreme expressions of militant radicalism, favoring instead cool-headed reformism. Both black conservatism and radicalism come from the same necessity of negotiating underprivileged status, the first in desiring what little social cohesion can come through moral uprightness alone, the second in sheer desperate reaction to the conditions of urban poverty. In either case, it goes beyond the scope of UU respectability.
It's easy enough to point these things out to UUs and allow them to go through a bout of critical self-reflection. At the end of the day, however, there is only a new strategy developed to attempt to make the church appear more accessible to this demographic or to be more deferential to that alien attitude. Nothing can ever fundamentally question the Unitarian disposition in the first instance. There is a cozy yet superficially thoughtful and earnest sense of superiority.
This is the kind of thing to which I refer when speaking of Unitarian dogmatism. It is especially grotesque when examing cultural trends. Any leftward shift in popular sentiment is not perceived on the terms in which the average American experienced it, but rather as a groping towards the prior existing wisdom possessed by the small vanguard of enlightened religious liberals.
It can almost be likened to the gay-dar gone berserk of some in the gay community that sees homosexuality or the seeds of it in anyone and everyone. Which makes me think, can we speak of "U-dar"? Hmm, perhaps it could stick...
Monday, November 5, 2007
Wait a Gersh-Darn Minute...
As a fresh-faced and gullible student at the University of Pittsburgh, I was drawn into the campus leftist milieu, an environment that seemed to valorize my indignation about my youthful economic insecurity and the general lack of respect I received from the adult world. In the process, I learned quite a bit about both domestic and foreign affairs, which helped to sustain the illusion that there wasn't real debate or disagreement in politics, just misunderstanding between the enlightened left-leaning community and the prejudicially ignorant patriotic jingoists of America that could be overcome with enough education. Unfortunately, it made sense especially since most of the professors were some stripe of left-liberal and the only conservative voices you typically heard were from that barely articulate segment of the student body that had yet to fully assimilate itself.
I've been living in Washington DC for a little over 2 years currently, and I realize a lot more about the nuance required to have a serious political discussion. I am roundly convinced that on most campuses, one simply cannot have such a discussion. The culture of most do not exist to cultivate a sense of civic virtue so much as to outdo one another with how self-righteously radical one can be. And no one was better at that at Pitt than John Lacny.
Lacny gained a reputation as a leader of the student left for the work he did in founding the labor solidarity organization Students in Solidarity. (Its initials were SIS, but many people thought they were resurrecting the spirit of another student leftist organization with three-letter initials, two of which were also 'S.') It is difficult to recall in one sitting the full breadth of the cacophony of distorted, paranoid conceptions of the world that this man could bark. Perhaps it was his utterly unironic, pompous demeaner that attracted so much respect in individuals who were separated from the serious moral authority of their parents for the first time in their lives. No one ever seemed to speak with John as an equal, he was always in the role of mentor.
On one occasion, he was going on that in the 1980s foreigners looked at workers in the United States as simply victims of capitalist fat cats, but in the early 21st century workers are perceived as just as culpable for American crimes as the ruling class. I casually asked, "what would you attribute that to?" His only response was an impatient grimace.
So, a few years out of college and with a different perspective on the world, I decided (just for kicks) to revisit Mr. Lacny's cognitive processes at work. He currently runs a blog entitled "It's No Accident," in which he makes Marxist commentary on a variety of current affairs. Most recently, he posted a letter to the editor of the Pittsburgh Post-Gazette concerning the public reception of Michael Vick's dog-fighting charges. He alleges that there is a racist double standard in the public mind, constasting the "vituperation" of Post-Gazette readers to the apparent lack of condemnation of Florida boot camp guards for the death of Martin Lee Anderson or the dearth of sympathy for the Jena Six. He ends the letter asking rhetorically, "could it be that some of white America puts a higher value on the lives of dogs than on the lives of young black men?"
My question in all of this is, how would it have been possible to express any legitimate revulsion at Vick's acts, according to Lacny? Would it have been possible at all? There appears to be no such thing as simply condemning Vick's actions in isolation. They immediately have to be compared and contrasted to other events that have no particular relation to what Michael Vick did to construct the image of "some of white America" (who may or may not have even been following those other events) as vile dehumanizers of blacks. Does anyone really believe that the readers condemning Vick wrote their denunciations calculatingly ignoring this or that offense against American blacks? Are we really expected to accept the implied conclusion that those readers value the lives of dogs over human beings? Do we even know how many of said readers were white?
Lacny received one comment on his post that points out that the comparison cases he mentions are not quite as morally unambiguous as he presents them, but adds afterwards that, "it is sick and undeniable though that in the media pets are more important than people, and whites are more important than blacks." This may or may not be true of the media, but Lacny points the finger at a section of white America, not the media. I'm sure some of white America does think that blacks are subhuman. There are in fact hard-right racist organizations functioning the United States. But, in essence, accusing a random slice of the white public of tacitly subscribing to those ideas because some of the Post-Gazette's readership felt comfortable roundly condemning a clear case of cruelty towards animals is absurdly grasping at straws.
The saddest part of the entire thing is that Lacny, having spun these implications out of thin air, will walk way believing the story he's told himself about the attitudes of white Americans and take the lessons learned to the next event that he can show as being an egregious instance racism, sexism, homophobia or whatever other sinful rabbit can be pulled out of the magic rhetorical hat.
I've been living in Washington DC for a little over 2 years currently, and I realize a lot more about the nuance required to have a serious political discussion. I am roundly convinced that on most campuses, one simply cannot have such a discussion. The culture of most do not exist to cultivate a sense of civic virtue so much as to outdo one another with how self-righteously radical one can be. And no one was better at that at Pitt than John Lacny.
Lacny gained a reputation as a leader of the student left for the work he did in founding the labor solidarity organization Students in Solidarity. (Its initials were SIS, but many people thought they were resurrecting the spirit of another student leftist organization with three-letter initials, two of which were also 'S.') It is difficult to recall in one sitting the full breadth of the cacophony of distorted, paranoid conceptions of the world that this man could bark. Perhaps it was his utterly unironic, pompous demeaner that attracted so much respect in individuals who were separated from the serious moral authority of their parents for the first time in their lives. No one ever seemed to speak with John as an equal, he was always in the role of mentor.
On one occasion, he was going on that in the 1980s foreigners looked at workers in the United States as simply victims of capitalist fat cats, but in the early 21st century workers are perceived as just as culpable for American crimes as the ruling class. I casually asked, "what would you attribute that to?" His only response was an impatient grimace.
So, a few years out of college and with a different perspective on the world, I decided (just for kicks) to revisit Mr. Lacny's cognitive processes at work. He currently runs a blog entitled "It's No Accident," in which he makes Marxist commentary on a variety of current affairs. Most recently, he posted a letter to the editor of the Pittsburgh Post-Gazette concerning the public reception of Michael Vick's dog-fighting charges. He alleges that there is a racist double standard in the public mind, constasting the "vituperation" of Post-Gazette readers to the apparent lack of condemnation of Florida boot camp guards for the death of Martin Lee Anderson or the dearth of sympathy for the Jena Six. He ends the letter asking rhetorically, "could it be that some of white America puts a higher value on the lives of dogs than on the lives of young black men?"
My question in all of this is, how would it have been possible to express any legitimate revulsion at Vick's acts, according to Lacny? Would it have been possible at all? There appears to be no such thing as simply condemning Vick's actions in isolation. They immediately have to be compared and contrasted to other events that have no particular relation to what Michael Vick did to construct the image of "some of white America" (who may or may not have even been following those other events) as vile dehumanizers of blacks. Does anyone really believe that the readers condemning Vick wrote their denunciations calculatingly ignoring this or that offense against American blacks? Are we really expected to accept the implied conclusion that those readers value the lives of dogs over human beings? Do we even know how many of said readers were white?
Lacny received one comment on his post that points out that the comparison cases he mentions are not quite as morally unambiguous as he presents them, but adds afterwards that, "it is sick and undeniable though that in the media pets are more important than people, and whites are more important than blacks." This may or may not be true of the media, but Lacny points the finger at a section of white America, not the media. I'm sure some of white America does think that blacks are subhuman. There are in fact hard-right racist organizations functioning the United States. But, in essence, accusing a random slice of the white public of tacitly subscribing to those ideas because some of the Post-Gazette's readership felt comfortable roundly condemning a clear case of cruelty towards animals is absurdly grasping at straws.
The saddest part of the entire thing is that Lacny, having spun these implications out of thin air, will walk way believing the story he's told himself about the attitudes of white Americans and take the lessons learned to the next event that he can show as being an egregious instance racism, sexism, homophobia or whatever other sinful rabbit can be pulled out of the magic rhetorical hat.
Wednesday, September 19, 2007
Thank God I'm a Country Boy
By many accounts, I am a bit of an odd duck as regards my political history. When I first began thinking about politics in middle school, I was rather right-wing, and remained conservative-leaning all the way through high school. I had some forays into libertarianism and Objectivism as I attempted to articulate myself a bit more sharply late in high school. But when I went to attend university in a medium-sized city, I took a hard turn to the left. I left school and remained residually attached to leftism for a few years, and have returned to conservatism, bolstered by my conversion to Mormonism.
Now, why was leftism so appealing to me in college? On the one hand, leftism is appealing in college in general. College campuses are a cornucopia of liberal causes, with no shortage of activities in which to involve oneself. But I would say something else was at work as well. Even though I adopted left-wing politics, I always retained an antipathy for the Democratic Party. I was a socialist, a Trotskyite. Looking back on it now, I think there was a desire to appease my social environment in adopting a left-leaning political line, but also to express my instinctual revulsion towards liberal politics.
I had no home amongst the urbane College Republicans. In the first instance, I wanted to discuss and elaborate ideas, NOT campaign for candidates. It became clear after not long that the College Republicans were a prep school for party functionaries. These individuals seemed to possess a detached, country club smugness about their own perspective that I found off-putting, to say the least. They had no interest in grappling with ambiguities and hard compromises. They were emphatically not the party of ideas.
Who was? The only community I found was amongst the liberal activists. It was not the measured, thoughtful community of scholars that I had hoped for, but it was the only game in town. But throughout it all, there was an underlying tension between my natural inclinations and my reality.
Pittsburgh was the first place I had lived in that was a significantly liberal (or at least Democrat-controlled) enclave, and the first bona-fide city I had lived in. As part of a military family growing up, I lived primarily in suburban bedroom communities, and usually in areas near military installations where, since these forts and bases contributed immensely to the local economy, they exerted a conservatizing influence on already middle-class local attitudes. Combine this with the fact of the “nomadic existence” of military life as my father put it, and the only sense of roots I came to have were in the backcountry of Appalachia from where my parents had moved. So, much about the assumptions that informed Pittsburghers lives I did not understand.
In fact, I don’t think I ever came to truly understand it. Instead, I subscribed to a brand of left politics that gave me the opportunity to speak the language of the leftists while retaining my criticisms of the meat and potatoes of modern liberalism. For instance, with respect to gun control, instead of sticking to the traditional right-wing arguments against it, I cited the targeting of the Black Panthers in the gun control laws of the 1960s. It was more acceptable to be against something that had a detrimental effect on a radical political organization than it was to have ideas about neo-republican virtue or radically Lockean liberty. So, that was the tack I took. To that extent, I think the Davidsonian “left in form, right in essence” characterization of my politics was correct. Interestingly, I discovered an article in The American Conservative concerning this very issue:
- The endless gun-control brouhaha, which on the surface appears to be a bitter battle between liberal and conservative whites, also features a cryptic racial angle. What blue-region white liberals actually want is for the government to disarm the dangerous urban minorities that threaten their children’s safety. Red-region white conservatives, insulated by distance from the Crips and the Bloods, don’t care that white liberals’ kids are in peril. Besides, in sparsely populated Republican areas, where police response times are slow and the chances of drilling an innocent bystander are slim, guns make more sense for self-defense than in the cities and suburbs.
White liberals, angered by white conservatives’ lack of racial solidarity with them, yet bereft of any vocabulary for expressing such a verboten concept, pretend that they need gun control to protect them from gun-crazy rural rednecks, such as the ones Michael Moore demonized in “Bowling for Columbine,” thus further enraging red-region Republicans.
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