Percentages don’t pay any bills. Making fantastic returns on small investments that generate no dollars, what are we supposed to do with that? – Jules van Binsbergen
Finance professors Jonathan Berk and Jules van Binsbergen delve into the common financial mistakes that decision-makers often make.
They highlight the importance of understanding the difference between return measures and value measures, recognizing the scarcity of good ideas over capital, and not confusing realized returns with expected returns.
Additionally, they discuss the role of labor in wealth accumulation and debunk misconceptions about financial engineering.
Table of Contents
- Value Measures vs Return Measures
- Scarcity of Good Ideas
- Realized Returns vs Expected Returns
- Evolution of Capitalism
- Financial Engineering
- Value of Good Companies
- Investing with Successful Money Managers
- Having Investable Money
- Frictions in Real World
- Tax Shield from Debt Financing
- ‘Good Deals’ Are Rare
- Labor Gets Rents
Value Measures vs Return Measures
Focusing on percentage change in investment value can be misleading as it doesn’t reflect actual dollars generated.
High returns on small investments that generate minimal dollars aren’t as beneficial as they seem.
This is particularly prevalent in private equity and venture capital investments where people focus on Internal Rate of Returns (IRR) without considering the scale at which they were able to invest.
Scarcity of Good Ideas
There’s a false assumption that positive Net Present Value (NPV) opportunities are infinite and can be scaled up infinitely at the same return level.
The reality is that such opportunities are hard to find due to decreasing returns to scale.
In today’s world, capital is in abundant supply for positive NPV investments; what’s scarce are good ideas.
