Tuesday, February 12, 2013

Calling out the Media: Matthew Yglesias Proves He Shouldn't Be a Financial Journalist

See, Slate? I can make a mildly incendiary and breathtakingly arrogant headline with the best of them. But let's move on to the heart of the matter:

Yglesias, Slate's financial journalist, posted today on the trend of large funds buying up swaths of housing all over the country and renting them out and then explains risk mitigation the following way:

The alchemy is not that sophisticated, and while you can't "guarantee returns no matter the vacancy rate or the economic climate" you can truly reduce the average volatility without reducing the average return. It's basic diversification that works for the same reason that holding an S&P 500 index fund is probably a better idea than rolling the dice and buying a single S&P 500 stock at random.

But rental income is a lot like a fixed income instrument. A much better argument can be made for risk mitigation akin to loaning money (at a fixed, preplanned rate) to multiple parties instead of loaning just to one party. So the analogy is simply terrible and only shows that Yglesias knows the very basics of finance.

Equity investing is different in the fact that there is potentially infinite upside. The same can't be said about fixed income, where the best case scenario is that the lender gets their money back at the agreed-upon-beforehand interest rate. There are companies whose stock price have increased 500% over the course of a year. But nobody will ever lend at a 500% interest rate.

 So did I just skewer Yglesias over using a poor metaphor when a much better one was available? Yes I did. I think I could be Slate's best writer.

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