financial crises? here's the cure

Copyright 2013: Rajesh D. Mudholkar, Author, The Timeless Essence of Financial Science, http://valueerodingfallacies.blogspot.in

Rational Rational InvestorInvestor

Corporate Corporate FinanceFinanceVs.

Chronic conflictChronic conflict = = Financial CrisisFinancial Crisis


Financial Planning Standards Board Ltd

Certified Financial Planner Board of

StandardsFinancial planning professionals help

investors make rational investment decisions,

promote long term investment planning

aligned with defined goals.

Highest Global

Standard


Rational investors follow & expect long term equity

returns linked to business performance, not

speculative short term price


“ The riskiness of an investment is not is not measured by betameasured by beta but rather by the reasoned

probability of that investment causing its owner a loss of purchasing power over his

contemplated holding periodcontemplated holding period.”Warren E. Buffett, Chairman, in a letter to Shareholders of

Berkshire Hathaway, February 25, 2012

Long term planning Long term planning makes short term makes short term volatility irrelevantvolatility irrelevant


Berkshire Hathaway

Dow Jones Index

Jan,1990 to Feb,2014

The Result


“the opportunity cost of capital depends depends on the project’s betaon the project’s beta.. ...SiemensSiemens, a German industrial giant, uses 16 uses 16

different discount ratesdifferent discount rates, depending on the riskiness of each line of its

business.”Fundamentals of Corporate Finance, 3rd edition, ISBN 0-07-

553109-7, Richard A. Brealey, Stewart C. Myers, Alan J. Marcus, Stephen A. Ross, Randolph W. Westerfield, Bradford

D. Jordan, pages 421-423.

What Corporate What Corporate Finance PrescribesFinance Prescribes


Feb,2004 to Feb,2014

The Result

Siemens


Both, the ‘short-term’ and ‘beta’ are irrelevant for ‘opportunity cost’‘opportunity cost’ of

equity


Corporate financial practice conflicts with

rational investor expectations, breeds

‘Financial Crisis’‘Financial Crisis’such as 2008such as 2008


“....we do not yet havedo not yet have complete and generally

accepted explanations for how financial marketsfinancial markets

function......Mispricing of assets may contribute to financial financial

crisescrises”- 2013 Nobel Economic Sciences

Prize Committee


Raises questions, ‘Financial Economics’

never asked

Answers those, ‘Financial

Economics’ never couldTo prevent ‘FINANCIAL CRISIS’, and transform To prevent ‘FINANCIAL CRISIS’, and transform

‘Financial Management’ from a ‘Cultivated Art’ ‘Financial Management’ from a ‘Cultivated Art’ into a truly ‘Objective Science’ into a truly ‘Objective Science’


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financial crises? here's the cure

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