Sunday, 22 March 2009 by CVM.

I’m still trying to figure out what the point of blogging is, but maybe a blog can serve as a kind of historical record, tracking perspective in real time, before those recollections can be contemplated in tranquility.  I have often wished I had kept such a journal while on the track of a discovery. Although I can probably remember roughly what it felt like not to know something, it’s impossible to completely capture that exquisite state of ignorance.

In that spirit, I plan to blog my progress in a course I’m taking on Buddhism.  I hope that my sensei, the detailed blogger, will correct my misunderstandings before they do too much damage.

First I should say that the audio course is from the Teaching Company, which has been the source of much top-notch education for me over the years — I listen to the courses on my commute through Central Park. The course is taught by Malcolm David Eckel, who got his Ph.D. in comparative religion from Harvard and has written several books on Buddhism.  It’s difficult to tell exactly how much he himself is a Buddhist, but he clearly has a tremendous amount of respect for Buddhism.

In introductory lectures, Eckel discusses the Hindu background into which the Buddha (I will call him this though technically he wasn’t the Buddha until his enlightenment, or possibly his death) was born.  To the extent that Buddhism arises from and is a response to Hindu religious beliefs, the key influences are the Vedas (composed around 1500 to 500 BCE and written down beginning around 800 BCE) and the explications of the Vedas in the Upanishads, composed around 700 BCE (the Buddha, of course, was famously contemporaneous with Socrates, and like Socrates died around 400 BC).

Although no doubt the modern Buddhist might disagree, Eckel presents the Buddha’s insight as a response to the Hindu view of death (the comparisons to other religions are my own).  Apparently the early Vedas presented a view of death fairly similar to that found in The Epic of Gilgamesh (probably composed around 2300 BCE and written down around 2100 BCE)) and the early Hebrew Bible (probably composed around 1500-800 BCE and written down around beginning around 800 BCE), and probably characteristic of most known civilizations at that time. That view is that after death the soul becomes a shade and transmigrates to a Hades-like place (thus the early Greeks shared this view, though described it in more detail), which is not particularly interesting but not particularly horrible either (though not a place you’d want to go if you had a choice). A few heroes and kings maybe go to a better place where the gods live, and the gods are similar to other religions completely distinct from humans. The very late Vedas developed the notion of reincarnation (in Sanskrit, the word means “wandering”), in which the soul is reincarnated “millions” of times (according to a late Veda) and this notion is the basis of subsequent Hindu views of the afterlife, including the Upanishads. Since gods are also subject to reincarnation, the distinction between gods and humans has begun to dissolve in the Upanishads.  By the time of the  Buddha, the Hindu concept of reincarnation had developed into a decidedly pessimistic view, since it would seem that on the whole one is most likely to be reincarnated as a fairly miserable creature (the ant is commonly used as an example in the Vedas).

Thus, as Eckel conveys it, the Buddha’s big insight was that the trap of infinite reincarnation could be stopped by proper understanding of the nature of the self and reality, achieving Nirvana (Sanskrit for “extinguishing”).  The Buddha came to this understanding, and thus achieved Nirvana, and was kind enough to spend the next 40 or so years of his life conveying this understanding to his followers.

I can describe some initial concepts now.  The fundamental basis of Buddhism can apparently be understood within the context of the 4 Noble Truths: 1. All is suffering; 2. Where suffering comes from; 3. How suffering can be stopped; 4. The method leading to the cessation of suffering.

I won’t get much into this now, but to make a few preliminary comments. First, it would appear that the Buddha paves the way to the four Noble Truths with a metaphysical insight: that all is impermanent, and that the self is a delusion, and, in particular, “all is one”. My first response to this metaphysical maneuver is that it is deep and compelling.  Some of the most difficult problems in contemporary Western philosophy (the nature of identity and the nature of consciousness) can be dropped as distractions if one makes these basic metaphysical assumptions. Of course it doesn’t feel that way (one does have a sense of one’s self, of course, and if the self is a delusion, who or what is suffering that delusion?). On the other hand, from a purely scientific point of view, it certainly is true that “all is one”, and the explanatory gap in the hard problem of consciousness seems just about impossible to overcome.  A pure materialist — and aren’t we all? — would seem to be better off embracing Buddhism than trying to hold on to Cartesian dualism. More on this later.

A second point I would make is that they don’t call it the axial age for nothin’. While the Buddha was putting the kibosh on the Hindu view of the afterlife, Plato (presumably following Socrates, who claimed to be following the oracular hymns) was doing about the same to the Greek view of the afterlife.  As I indicated above, until the time of Socrates the prevalent view of the afterlife was that shades migrated to a fairly unappetizing Hades. In his meditations just before he died (in the Phaedo) he describes a view of the afterlife completely at odds with Greek (and contemporaneous Hebrew) views, and virtually identical to the one now held by Christians, Jews, and Muslims, at least those following the literal exoteric forms of their religions. The Hellenized Jewish authors of the New Testament clearly lifted their entire view of Heaven and Hell from the Hellenic strain, probably from the Phaedo, and Jews were changing their views at about the same time, probably for the same reason.  The Muslims of course took their views from the by that time well-developed dogmas of the Jews and Christians. From the modern perspective, the bracingly mechanistic and atheistic metaphysics of the Buddha is obviously more appealing, though the question of the metaphysical nature of reincarnation, which Buddhist thought was originally developed to address, does not appeal to the modern.  Nevertheless, stripped of those metaphysical assumptions, Buddhist thought does develop a bracing and fascinating set of philosophies.

In the past I have been guilty of oversimplifying Buddhism as simply an exercise in lowered expectations.  I am beginning to see much beyond that, though I still see Buddhism (which, I gather, advocates extinction [”extinguishing”? — Ed.]) on a collision course with existentialism (which, in my version at least, advocates the opposite, though Sartre might disagree). More on this later.

CVM

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Tuesday, 3 March 2009 by bbbeard.

“What you’re now seeing is a profit and earnings ratios get to the point that buying stocks is a good thing if you have a long-term perspective on it.”

Do you think He knows what “P/E ratio” stands for? I’ve listened to the video a couple of times and, even allowing for off-the-cuffiness of the exchange, it’s not clear to me that he does.

UPDATE (10 March 09):

Delta Foxtrot says I’m being cryptic. So here are some deeper observations that flesh out this particular complaint:

Well, the superficial observation is that at first and second listening Obama apparently refers to the “profit and earning ratios” of publicly traded companies. The problem with that is that the meaning of “P/E ratio” is “price / earnings ratio”, not “profit / earnings ratio”. To a market already badly shaken in its faith in our 44th President, to confuse “profit” with “price” is a faux pas that would only send the market down further. He should consider bringing a TelePrompTer before he says anything at all about the markets.

But this is a quibble. Perhaps he meant to say, “corporate profit [COMMA] and [IMPLICTLY: price / ] earnings ratios”. However, this reflects a deeper confusion about the meaning of the P/E ratio.

The “price” in “P/E ratio” means the per-share stock price times the number of shares outstanding. What determines the price? Conventionally, a company is ‘worth’ its net present value (NPV). The NPV is the total present value of all anticipated future net profit streams, discounted using the usual formula for time value of money. In quant form, the present value is discounted from the future value by a factor that depends geometrically on time, that is, PV(t) = FV(t)*exp(-k*t), where k is an interest rate.

Now, for a company working in a ’static’ (slow-growth) industry, like, say, a paper company, next year’s earnings are likely similar to this year’s earnings. So if you compute the NPV of a static income stream, the NPV is just (this year’s earnings) divided by (the discount interest rate k), e.g. if k=8%, the P/E should be about 12.5. So ceteris paribus, the companies in a given sector should all be priced with similar P/E ratios. This tells an analyst whether a stock is overpriced or underpriced. Small changes in a company’s prospects can shift the actual P/E up or down. If a company is in a high-growth sector (like computers 10 years ago), the P/E ratio can be very high, because the anticipated growth of the company’s revenue can exceed the discount rate(!). So many tech stocks were trading at P/E’s over 100 (until the bubble burst)….

So, here’s the rub — if a company, or an entire sector, has P/E’s lower than historical averages, it means that investors believe that profit streams are likely on a downward trend. It doesn’t necessarily mean that the company is a great buy. And when an entire market has low P/E, it means that the assessment is that the economy is in a long-term downward spiral. It doesn’t mean the market is a good buy at the low P/E. It just means that investors have taken into account all the currently available information and have concluded that the net present value of each and every stock that has a low P/E, is low.

So, when Mr. Obama gets up in front of international film crew and says, “Hey! Buy now! P/E ratios are really low!” that’s well, kind of ass-backwards, not to mention a little scary. The P/E ratios are low because he has convinced the market he is out to ruin the market system, or at least, he really doesn’t care enough about capital markets to learn the first thing about them.

More thoughts about the P/E ratio: stocks in general behave a bit like “martingales” (link to a book here), that is, a “martingale” is a random variable that changes erratically as time passes, in a way that the expectation of a future value is equal to its current value. Stocks are a bit different than pure martingales because of the time value of money (”TVM”), but the martingale concept can still be applied with some adjustment. What that means, in short, is that there really isn’t anything like a time when “stocks are a great buy” or when “stocks are overpriced”. Unless you know something about the future that the market doesn’t know. For example, you might “know” that Obama is about to repudiate all the economy-hostile measures he has promoted (like the trillion-dollar deficit). In that case, the market assessment of values (tied to the projection of the future profit stream) for nearly all stocks would increase. And before the repudiation, stocks would be a great buy. Or you might “know” that Obama is going to announce the forced merger of GM, Ford, and Chrysler into a single government-run “American Motor Company” — prior to the announcement would be a good time to sell your stocks (or buy “puts”).

Nonetheless, one of the ways in which stocks do not simply behave like TVM martingales is that their price includes an implicit risk deflator. That is, the projection for the expected value of GM stock might be that profits will start to grow year-on-year at say, 5%, leading to a per-share price of, say, $100. But there might be considerable uncertainty about the projection — some analysts might predict a 3% yearly growth, others, 7%. The effect of the uncertainty will be to depress the stock price. Even though the expected value of the net present value of the future profit stream is $100 per share, the uncertainty might drive the stock price to, say, $90 per share. The difference is called a “risk premium” by analysts. If the uncertainty grows, the stock price declines even further.

Now, it is quite apparent that a huge risk premium is attached to stock prices right now, in addition to the penalty exacted for the impacts of massive deficits, the impending cap-and-trade tax, and massive tax increases on the productive class. Not all of this is Obama’s fault, of course — we live in interesting times! But inasmuch as the market incorporates all available information, including, e.g. North Korea’s pronouncement that shooting down their missile will spark a wider conflict, Obama’s incompetence in foreign relations also exacts a toll on the markets.

Now, the thing is, as time passes, projected risk diminishes — a year from now we will know what GM’s profit in 2009 will have been. So, a year from now, we will have a better, albeit still incomplete, idea of how Obama’s policies will play out. By March 2010, we will know if he got his trillion-dollar deficit passed, we will know if foreign investors abandoned Treasury securities or stuck with us, we will have a better idea how the November 2010 elections will turn out. Thing is — even if the news is bad, removing the uncertainty can drive the market up. The catch is, as time passes, uncertainty can also increase. If Obama’s actions in the domestic and foreign policy arenas become increasingly erratic, it may keep the markets depressed even as the economy recovers.

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