A housekeeping note

Saturday, May 12, 2007

In yesterday's post, Macro Man described the rationale for static pricing of his one touches in terms of his in house option pricer giving values below his purchase price. This was a mistype; in fact, the pricer gave prices above the purchase price, hence the reference to low-ticking the ten year implied vol market.

Paying a price above mid-market is par for the course in illiquid securities, and should be reflected as such in P/Ls. Paying a price substantially below mid-market looks like P/L fiddling, hence the decision to mark the one touches at cost.

Posted by Macro Man at 12:42 PM  


Further to your previous on dividends:

" Our colleagues over at Plexus Asset management in South Africa put out a fascinating study of the history of S&P500 returns. Prieur du Plessis writes:

"Albert Einstein described compound growth as the eighth wonder of the world. Although he may have passed away in 1955 – coincidentally the year when yours truly saw his first ray of light – the concept of compounding remains the single most important principle governing investment. Compounding simply means that you can earn interest on your principal investment amount, as well as earn interest on top of interest. The power of compounding can make an investment grow much faster than would otherwise have been the case, and is obviously based on the assumption that interest or dividends are reinvested in the same asset...

More compelling proof that the odds are stacked against the capital-growth-only brigade is gleaned from an analysis of the components of the total return figures. Let’s go back to the total nominal return of 9.2% per annum and see how that was made up. We already know that 2.2% per annum came from inflation. Real capital growth (i.e. price movements net of inflation) added another 2.2% per annum. Where did the rest of the return come from? Wait for it, dividends - yes boring dividends, slavishly reinvested year after year, contributed 4.8% per annum. This represents more than half the total return over time!"

With Chart back to 1871:


Anonymous said...
5:17 PM  

Yes, I saw that. The dividend number looks a little high to me, but certainly the underlying message is the same: measuring stock returns without dividends is like eating cornflakes without the milk.

Macro Man said...
11:02 AM  
GistOut said...
7:32 AM  

Ha! Thanks for posting that. Some of the credit must go to the immortal Oran 'Juice' Jones, from whose song 'The Rain' the cornflake analogy was lifted...

Macro Man said...
10:29 AM  

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