How not to lose money in Make a Million

I have a clear strategy for how not to lose money playing the Make a Million competition. As I explain it, you may come up with some smart tactics to win the competition and enhance your returns, but you’re on you’re own there. So, how does one not lose money with the Make a Million …

Implied Pension Return Assumptions and the Equity Risk Premium

When companies value pension obligations and required contribution rates, they make assumptions about the expected future investment returns. (Accounting standards require market-based rates reflecting fixed interest returns, but that’s a separate point). So what assumptions are pension funds making? The WSJ has an interesting article showing that the average US pension fund is assuming future …

The Power of Misconceptions

In broad terms, we are all mostly ignorant. Worse than ignorant, we have notions and views, firmly held, that are entirely incorrect. We only complain about what we don’t like Nobody complains to their boss that they are overpaid. Nobody complains that their pension or social security increases were above inflation last year. We don’t …

Why you’re mis-estimating the Equity Risk Premium #6

You haven’t checked your result with prospective estimates implied by the market Your ERP estimate could be out of line with prospective views of the ERP if you haven’t sense-checked it against plausible estimates from the market as a whole. Historical estimates of the ERP are determined by looking at realised excess returns of equities …

Why you’re mis-estimating the Equity Risk Premium #5

You’ve been swayed by others’ use of high ERP estimates Your ERP estimate may well be too high if you have been informed by ERP estimates widely used in corporate finance. For some of the previously discussed reasons, many practitioners overestimate the ERP dramatically, ending up with estimates in the range of 7% to 10%. …

Why you’re mis-estimating the Equity Risk Premium #4

You haven’t factored in the likely decrease in the ERP over time Your ERP estimate is too high. There are two related reasons for this. Firstly, if the ERP has been trending down over time, estimating the average ERP over the period will overestimate the current ERP. Further, if the ERP continues to decrease, your …

Why you’re mis-estimating the Equity Risk Premium #3

You’ve used the ‘wrong’ risk free rate Your ERP estimate can be incorrect if you’re not applying it in the same manner in which you estimated it. This isn’t as much an issue of there being a ‘right’ risk-free rate, but we have to compare apples with apples. The ERP estimated with risk-free as T-Bills …