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> 'Return' on an increase in valuation isn't a real return. It's exactly like poker. Completely false. Let's talk about how investment money is used, and how t

by Pyxl101 11y ago

> 'Return' on an increase in valuation isn't a real return. It's exactly like poker. Completely false. Let's talk about how investment money is used, and how that impacts valuation. Say that a friend has started a new farm as a business and he's seeking investment. He'd like a cash investment in order to buy a tractor, harvester, and combine for the farm, which he can't afford himself. So I make the investment and the farm buys the equipment, which enables the farm to grow substantially more crops (vs tilling, planting, and harvesting by hand). By growing more crops with that equipment, the farm has vastly more revenue and earnings. This farm has actually grown more crops than it could have otherwise - the investment led to the creation of wealth. The crops are net additional wealth, and the farm's ability to grow and sell them for revenue leads directly to the increase in the farm's valuation. The farm grows and hires more employees; it's also an engine of job creation. All made possible by the investment, without which the farm could not have gotten started. > Hedge funds and the like. And what do hedge funds do with the investment money they receive from the wealthy? Do they put that cash under their mattress and somehow generate returns by doing that? No, they invest it in companies which use the cash to create wealth.

owyn 11y ago
Say that a friend has started a new farm as a business and he's seeking investment. That's really not a good example of what we're talking about here. A single family farm is not a profitable business at all. There was an HN story about it just a couple of days ago. https://news.ycombinator.com/item?id=10823747 https://news.ycombinator.com/item?id=10823747 He'd like a cash investment in order to buy a tractor, harvester, and combine for the farm, which he can't afford himself. So I make the investment and the farm buys the equipment, which enables the farm to grow substantially more crops. No you don't. He might get a bank loan, in which case he is actually paying a fee in order to borrow that money. Now, if you were talking about the profitability of people paying you to borrow money, now you're in the right ballpark. I hear it's quite a profitable business. Look I'm not talking about hypothetical small business hand wavy stuff, I'm talking about the trillions of dollars floating around at the top end. Most of which is currently flowing into real estate, powering various bubbles around the world. I'll give you an example: from what I understand, Larry Ellison doesn't actually sell his stock in order to buy islands. He uses it as collateral to secure a loan. Those loans (something like 10 billion dollars worth at this point) can be spent/invested/leveraged, but it's not directly taxable because it's a loan. That's the kind of thing that you can do when you have a few billion. You don't even have to spend your own money. The net increase in the value of his real estate holdings is more than enough to pay the interest. Now, try playing that game if you have zero billions. http://www.bloomberg.com/news/articles/2014-09-25/larry-ellison-boosts-oracle-credit-line-to-9-9-billion http://www.bloomberg.com/news/articles/2014-09-25/larry-elli... No, they invest it in companies which use the cash to create wealth. Apple isn't a good example either. Companies do get cash from IPO's. After that, having a valuable stock is certainly nice. Apple doesn't fund operations by selling their stock. If the stock doubles, Apple doesn't get that money. Indirectly, of course Apple does issue stock as bonuses to employees, and buys back stock to return cash to investors. If Apple was privately held they'd make just as much money. They don't need the stock at all, it's just a side benefit that they can take advantage of when they make compensation packages.
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- Fjolsvith 11y ago
  > I'll give you an example: from what I understand, Larry Ellison doesn't actually sell his stock in order to buy islands. He uses it as collateral to secure a loan. Those loans (something like 10 billion dollars worth at this point) can be spent/invested/leveraged, but it's not directly taxable because it's a loan. Right, but if he converts money into land, the land does get taxed. Additionally, he pays a sales tax when he purchases the land. > That's the kind of thing that you can do when you have a few billion. You don't even have to spend your own money. The net increase in the value of his real estate holdings is more than enough to pay the interest. False. He is spending his own money, because he still pays back the loan. He borrows money, buys some land, then pays the loan back.
Mikeb85 11y ago
You just described what happens when you receive an initial investment, like an IPO. You also didn't describe how the hedge fund gets a return. What you described could also be accomplished through debt. I was talking about something different.
- Tycho 11y ago
  Many hedge funds do invest in IPOs. They also invest in all sorts of debt: corporate, municipal, sovereign, emerging market. It's true that hedge funds and mutual funds also invest in the stock market, which is a secondary market where the money doesn't go to the original issuers. However the existence of a healthy and liquid secondary market is what gives primary investors the confidence to buy stakes (or lend) to start-ups in the first instance. Who would want these assets if they literally had no choice but to hold onto them forever (or until maturity or acquisition or bankruptcy).
  - Mikeb85 11y ago
    Not saying it's a bad thing, only that it's a thing, and the availability of these types of funds to the rich and lack of availability to the average investor is one of the reasons for inequality, as the original poster was saying. Becoming 'increasingly divorced' from economic reality doesn't mean that it's completely separate, only that even in times of low growth, the ultra rich have high yield funds available to them which exacerbates economic inequality. It's just a trend. Or as Piketty states, r > g. Hedge funds used to be entirely defensive against market downturns, today they're increasingly run by speculative traders, many of whom offer outsized returns.

by Pyxl101 11y ago

owyn 11y ago

Say that a friend has started a new farm as a business and he's seeking investment. That's really not a good example of what we're talking about here. A single family farm is not a profitable business at all. There was an HN story about it just a couple of days ago. https://news.ycombinator.com/item?id=10823747 https://news.ycombinator.com/item?id=10823747 He'd like a cash investment in order to buy a tractor, harvester, and combine for the farm, which he can't afford himself. So I make the investment and the farm buys the equipment, which enables the farm to grow substantially more crops. No you don't. He might get a bank loan, in which case he is actually paying a fee in order to borrow that money. Now, if you were talking about the profitability of people paying you to borrow money, now you're in the right ballpark. I hear it's quite a profitable business. Look I'm not talking about hypothetical small business hand wavy stuff, I'm talking about the trillions of dollars floating around at the top end. Most of which is currently flowing into real estate, powering various bubbles around the world. I'll give you an example: from what I understand, Larry Ellison doesn't actually sell his stock in order to buy islands. He uses it as collateral to secure a loan. Those loans (something like 10 billion dollars worth at this point) can be spent/invested/leveraged, but it's not directly taxable because it's a loan. That's the kind of thing that you can do when you have a few billion. You don't even have to spend your own money. The net increase in the value of his real estate holdings is more than enough to pay the interest. Now, try playing that game if you have zero billions. http://www.bloomberg.com/news/articles/2014-09-25/larry-ellison-boosts-oracle-credit-line-to-9-9-billion http://www.bloomberg.com/news/articles/2014-09-25/larry-elli... No, they invest it in companies which use the cash to create wealth. Apple isn't a good example either. Companies do get cash from IPO's. After that, having a valuable stock is certainly nice. Apple doesn't fund operations by selling their stock. If the stock doubles, Apple doesn't get that money. Indirectly, of course Apple does issue stock as bonuses to employees, and buys back stock to return cash to investors. If Apple was privately held they'd make just as much money. They don't need the stock at all, it's just a side benefit that they can take advantage of when they make compensation packages.

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Fjolsvith 11y ago
> I'll give you an example: from what I understand, Larry Ellison doesn't actually sell his stock in order to buy islands. He uses it as collateral to secure a loan. Those loans (something like 10 billion dollars worth at this point) can be spent/invested/leveraged, but it's not directly taxable because it's a loan. Right, but if he converts money into land, the land does get taxed. Additionally, he pays a sales tax when he purchases the land. > That's the kind of thing that you can do when you have a few billion. You don't even have to spend your own money. The net increase in the value of his real estate holdings is more than enough to pay the interest. False. He is spending his own money, because he still pays back the loan. He borrows money, buys some land, then pays the loan back.

Mikeb85 11y ago

You just described what happens when you receive an initial investment, like an IPO. You also didn't describe how the hedge fund gets a return. What you described could also be accomplished through debt. I was talking about something different.

Tycho 11y ago
Many hedge funds do invest in IPOs. They also invest in all sorts of debt: corporate, municipal, sovereign, emerging market. It's true that hedge funds and mutual funds also invest in the stock market, which is a secondary market where the money doesn't go to the original issuers. However the existence of a healthy and liquid secondary market is what gives primary investors the confidence to buy stakes (or lend) to start-ups in the first instance. Who would want these assets if they literally had no choice but to hold onto them forever (or until maturity or acquisition or bankruptcy).
- Mikeb85 11y ago
  Not saying it's a bad thing, only that it's a thing, and the availability of these types of funds to the rich and lack of availability to the average investor is one of the reasons for inequality, as the original poster was saying. Becoming 'increasingly divorced' from economic reality doesn't mean that it's completely separate, only that even in times of low growth, the ultra rich have high yield funds available to them which exacerbates economic inequality. It's just a trend. Or as Piketty states, r > g. Hedge funds used to be entirely defensive against market downturns, today they're increasingly run by speculative traders, many of whom offer outsized returns.