Ep37 Five Common Finance Mistakes

Returns vs. Value

Jonathan Berk and Jules van Binsbergen explain why focusing on return measures instead of value measures is a common mistake in finance. They argue that percentages don't pay bills, and actual dollar value is what matters. Jonathan illustrates this with an example, asking if one would prefer a 5% return on $100 or a 1% return on a million dollars, emphasizing that the latter is more beneficial.

Percentages don't pay any bills. I cannot buy data or pay salaries or pay bonuses or do anything with percentages. The only thing that I can pay bills with is actual dollars, actual value that I have created.

--- Jules van Binsbergen

They also discuss how large institutions and private markets need to consider the scale of investments, as returns alone can be misleading 1 2.

   

Investment Misconceptions

Jonathan Berk and Jules van Binsbergen address the misconception that good companies automatically make good investments. They compare it to buying a car, where the price paid relative to the car's value determines if it's a good deal. Jonathan shares an anecdote about a student who overlooked whether land prices already reflected anticipated growth.

It isn't good enough to say there's going to be this enormous growth. You also have to say that people don't realize it yet.

--- Jonathan Berk

They also caution against assuming that investing with a good money manager guarantees high returns, as market competition and fund size can diminish returns 3 4.