Friday, April 10, 2009
Life's like that!
The Oracle of Omaha, Warren Buffett is himself not immune from the economic crisis. Investments made by his firm, Berkshire Hathaway have been down ever since, and seeing this (and also citing the economic pressures on the firm), credit rating agency Moody's has downgraded the triple A rating of Berkshire Hathaway!
Saturday, April 4, 2009
Comic book lessons on Wall Street and risk
Comic book lessons on Wall Street and risk, by Loren Steffy of Nytimes :
Comic books taught me about illiquid markets.
As a youth, I was an avid collector. For years, I monitored the value of my “investment” by checking prices in the various guides that purported to offer the going rates. By those accounts, my collection at its peak should have been worth five figures.
The crown jewel, if you’ll indulge me a bit of nerdy braggadocio, was a complete set of the popular new X-Men.
My brother, literally a rocket scientist, would shake his head at my obsession. If comics were so valuable, he’d ask, why didn't someone on Wall Street buy every issue of the X-Men and corner the market?
The answer, which I didn’t understand at the time, was risk. Wall Street doesn't buy comic books because there’s a risk in getting stuck with hard-to-value assets, especially when there’s no common exchange or uniformity to the investments.
Wall Street, however, seemed to have no problem with illiquid markets so long as they had an air of financial wizardry, such as credit-default swaps and collateralized debt obligations (CDO). These markets turned out to be the financial equivalent of Beanie Babies or X-Men comics, and yet Wall Street pumped trillions of dollars into them. [...]
Friday, April 3, 2009
Remembering Marlboro Friday
Marlboro Friday refers to Friday, the 2nd of April 1993 when Philip Morriss and his executives met to decide how to revive the No. 1 cigarette manufacturer Marlboro from growing competition. And so, they slashed prices by 20%.
Now, economics simply says that when price falls, demand rises. There is an inverse relation between the two. But did demand fall? Don't know but their stock did fall by 26%, wiping $10 billion in a single day. It was the day the Marlboro Man fell.
But, the Marlboro brand was considered the iconic symbol of American marketing. Since 1954, the product had been advertised as a cigarette with a different kind of class. A higher price enabled it to live up to such a reputation, and any downward change in the price broke the sense of class around it.
And, the Marlboro Man finally did fall, but only just.
Which company has such a big war chest to finance a 20% price cut? Marlboro, you'd say and you would be correct in that, because this move signaled an end to the price war. Marlboro's competitors were soon wiped out in the market, and 2 years later, the stock had recovered to earlier values.
Now, economics simply says that when price falls, demand rises. There is an inverse relation between the two. But did demand fall? Don't know but their stock did fall by 26%, wiping $10 billion in a single day. It was the day the Marlboro Man fell.
But, the Marlboro brand was considered the iconic symbol of American marketing. Since 1954, the product had been advertised as a cigarette with a different kind of class. A higher price enabled it to live up to such a reputation, and any downward change in the price broke the sense of class around it.
And, the Marlboro Man finally did fall, but only just.
Which company has such a big war chest to finance a 20% price cut? Marlboro, you'd say and you would be correct in that, because this move signaled an end to the price war. Marlboro's competitors were soon wiped out in the market, and 2 years later, the stock had recovered to earlier values.
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