THANK YOU

Dear readers,

Thank you all for being extremely supporting towards my writings here. I've got a lot of feedback and learnt a lot from this 3 year journey.

The main purpose of this blog was to write down my thoughts for my Bachelor's and Master's Thesis and in the same time make my thought open for a wider audience. It was also aimed to boost my professional career, which has indeed been positively effected by this blog.

However, with great regards and condolences I have to inform you that this blog has faced its decline phase in its life cycle due to increased lack in direction and theme.

But fear no more, I'm continuing blogging with bit of a different perspective at The Market Addict. Go and check it out!

Hopefully you and my texts will meet again in the new site.

Sincerely,
SW

Is the FAANG too big to handle?

The FAANG-stocks (Facebook, Amazon, Apple, Netflix and Google) have rallied in the US stock-market for the past years. From those Apple, Google and Amazon are currently the biggest public companies in the world measured by market capitalization.

The valuations of the FAANG-stocks are huge and together they compose 13 % of the S&P 500 index. They are the main reason why S&P 500-index was up 2,6 % in the first half of 2018. Without FAANG, the total return would have been -0,7 %. 

Many investment funds investing globally and to the US have been enjoying the ride throughout 2018 and shown promising graphs for the investors. A small comparison can be illustrated below:

The graph above shows us three example index-funds from Nordea: Global Passive Fund, the European Passive Fund and the North America Fund. The Benchmark describes the return of the MSCI World Total Return NTR from the past 6-months. As we can see, the Global fund has performed better than the European one from the mid of May. Also interesting observation is that when the spread between the European and the Global index-funds has been increasing, the holdings of the North America Fund have outperformed the global index. My hypothesis is that this is all due to the rapid growth of the FAANG-stocks during 2018.

That also creates a concern for the index-investors. If you buy the extremely popular iShares Core MSCI World UCITS ETF (EUNL) or not to mention the iShares Core S&P 500 UCITS ETF (SXR8), you are highly exposed to the movements of the FAANG-stocks since they form the biggest share of holdings of these index funds.

Netflix released its Q3 earnings a few days ago. A company of $4bn in net debt still possess a net debt/EBITDA of only 3,2 years. In the same time the free cash-flow has been estimated to be as negative as -$3bn. Especially the debt burden has already made several Wall Street-analysts to cut their price targets for the company and question the sustainability of the growth. Apple reported its astonishing Q3 in August and Amazon, Google and Facebook are reporting their Q3 earnings in the following weeks.

I have to say that I´m always a bit skeptical when someone mentions “easy-money” or “almost risk-free investment”. These are the words that I´ve heard from the FAANG-stocks lately. “If Apple and Amazon have grown so rapidly, no one can stop them, and they keep on growing and owning the planet with their data.”

We all should know that this isn´t a universal truth. How long can the growth continue? No-one really knows. Rapid growth can introduce risks that investors and the shareholders could not know yet. Already U.S President Donald Trump has been furious towards Amazon and some regulations have been planned to slow down Amazon based on lowering barriers to entry and increasing competition in the market.

The big question is: Are the FAANG-stocks already too big? 5 companies in the same sector already have a significant contribution to the global stock market and their movements contribute to the stock indices all over the world. If something negative happens with these companies (etc. a big crash), we are going to see significant echoes all over the global financial markets.

Being honest, it is hard to see what could be the thing that could drop the FAANG-stocks fundamentally. They have a reason why they are the biggest companies in the world: Their core business is solid, and they have already proved their capability to innovate and to create disruption in their markets. The main thing is to note here that even with good diversification you might not be safe from the movements of the FAANG-stocks.

Even as an index-investor, you might have a higher risk-exposure to the FAANG that you might think.

The Fear of Missing Out

What is fear of missing out? It is described as a pervasive apprehension that others might be having rewarding experiences from which one is absent. It is characterized by a desire to stay continuously connected on what others are doing and is generally abbreviated as FOMO. It is an exceptionally strong feeling that we all have, and it usually drives us into different activities.

Fear of missing out has its presence also in investing.

Let me tell you an example. Whenever I hear that my friends are going somewhere to have fun, or I watch them making their plans for the evening in the group chats of WhatsApp, I get a bit anxious that I´m going to miss out on something if I´m not joining. That has been the case as long as I can remember. I want to get the sense of belonging. I know that the rest of you want and crave the same.

The same goes for investing. If you are engaged a lot in a group that invests actively and follows the markets daily, the incentive for you to start investing comes greater. I mean, if other people are engaged in this and think it’s fun, why shouldn´t I join if it’s that fun?

Digitalization and social media offer us wide range of information and opinion. That makes also professional and industrial groups and communities more convenient to access and follow. My WhatsApp-example offers a case where the fear of missing out can be caused by a conversation in social media. When it comes to investing, sources for possible fear of missing out in Finland can be caused by Nordnet´s Shareville, Facebook´s Investment-club and following analysts, experts and economists on Twitter.

On the other hand, I consider this completely fine. I love these kinds of communities which debunk myths about investing, share information and encourage unsure people to do their research properly and start their way towards wealth and prosperity. This is why I started. I read a couple of books and did my research after I´ve realized how many of people from my school had been investing for the stock market a long time. My community at school and at work made me to think about long-term saving and investments and then kick-started my interest towards investments and financial markets. I feared that I was missing out of something big.

But fear of missing out can affect much more than just the decision on whether to start investing or not. It can also have a huge effect on investment decisions. This is one of the biggest reasons in my opinion why many investors fail in their most fundamental rule: They differ from their initial investment plan.

World is full of information and opportunities of investors: Annual reports, mergers, new products, internationalization etc. Stocks that weren´t interesting before suddenly become worth investing when something new happens. Some of us fall easily to this trap and put their money on the stock “just to see what happens”.

New initial public offerings have been emerging like mushrooms on a rainy day. These easily lure investors to “participate” since they have the fear of missing out potential profits and the “next big thing” that the firms promote. I´ve seen this at work: Whenever there is a new IPO coming, all of my colleagues are asking me and others to find out who is participating and evaluating their own participation.

Another effect from the fear is the incentive to make regular transactions no matter on the weather in the markets. Rational investors are afraid that if they wait for the 30 % market drop and keep their funds as cash, they could miss out the 40 % return before that happens. I think this is healthy and rational. They also tend to liquidate their cash positions whenever facing a bigger drop in the indices.

Fear of missing out is natural and in some cases it even can be a good thing but you must know how to control it. The most successful investors are those who know themselves the best, their strengths and weaknesses. They also know how to keep cool in the world of constant flow and provision of new additional information. We regular mortals have a lot to learn from them.

Personally I never participate in initial public offerings. I don´t fear missing out on something that I don´t have the full information. Paradox, isn´t it?

Text: SW
Pictures don´t belong to me.

Crazy Little Thing Called Banking

Some say that being able to make a career in banking you really really have to like it. Otherwise, you won´t last longer than 5 years at maximum.

I´ve always found banking and banks in general very interesting. They´ve always seemed somewhat mysterious and intriguing. Places where time and space collide. People with suits handling people´s money there and being charge on so many things. That might have been the reason I´ve thought that even the basic bank advisers are like government officials: They have lots of responsibility and are somehow above you in the hierarchy. You don´t want to mess with them.

Now as a bit older and having worked in a bank for several years, I have learnt that people in the banks are just regular people like everyone else, just doing their job. As employers, banks offer a wide range of positions and departments, thus offer you various opportunities to watch and learn about how the money makes the world go around.  Since I´m eager to always develop myself and to learn more, banking offers me probably the viewing point on the economy both in the microlevel and the macrolevel.

As long as people have had gold coins and wealth without any kind of storage for them, the banks have kindly offered their services to hold the wealth in exchange for a small fee. Then the system got on rolling when these bankers figured out the use of bank bills, bonds and the ability to loan the existing deposits. After that the banking business has generated mainly revenues from the loan business and the people making the deposits have been compensated with short-term interest as a thank you to making the bank´s business possible. After that the innovations have kept on coming even though the basic idea is the same.

Banks have been throughout the history been the hubs and storage for information and advice, even though the essence still is basically the sales of financial products and services. According to study, the services and products people dislike the most are the banking products and services. It is easy to dislike paying a service that has been made compulsory for you. Statistics show that for example in the United States, only 7 % of the population does NOT have a bank account. 93 % of the population however does have. The map below shows some statistics on the amount of established bank accounts for over 15-year-olds. Banking seems like a good business in general.

Banks are important for individuals. That’s why currently the banks are discussing their role more on advising and educating people in personal finance. For example digitalization requires the banks to teach new ways of online banking identification for elderly people and the banks want also to teach young people the basics of savings and finance. No matter whether the motives are additional sales or minimizing future non-performing loans of the customer base, I think that banks have increased their “voluntary work” in educating the population at least in the Nordics for the sake of offering their knowledge and expertise sometimes pro bono. Even though banking is about sales, it is also about help and advisory on important issues.

The current financial markets are highly integrated and thus make the transmittance and spreading of financial crisis’s (banking mistakes) very broad and efficient. That´s why banks are among the most regulated industries in the planet and have a high level of responsibility on our financial system in addition to being important to individuals.

That is probably the main problem of banks. The banks know that they are important part of the society and know that the public sector would rescue them in the case of a crisis. Banks might consider themselves “too big to fail”. According to classical economic theory, this introduces the banks a “moral-hazard” to take more risk in their business, if they know that they are rescued in case something goes horribly wrong. In 2008 however, the case of Lehman Brothers showed that this is not always the case.

Banks have established themselves a central position in our society. They are profit maximizing firms like corporates, but they are almost as compulsory part of the society as the government institutions. They are in the between of everything and they hold all the strings. Their purpose is to keep the people in the Ferris-wheel 24/7 and let them enjoy the ride.

That is the true essence of banking and that´s what makes it so interesting.

In addition to the retail banks we can see in every town we have investment banks and central banks. Each “level up” in the banking makes the magic behind the banking business more complex with M&A’s and monetary policies. I´ve had the opportunity to work in a retail bank and in an investment bank and I´ve learnt so much about the economics and finance behind these institutions.

Only the central bank is missing…

Text: SW

Pictures don´t belong to me

Are We Done With Active Fund Management?

Currently the competition in comission fees and management fees for funds for investors runs extremely fierce between banks and asset managers. Investors are demanding more cost-efficient financial instruments for their investments and want their brokerage to be as cheap as possible. This is why for instance the popularity of ETFs has exploded after the financial crisis.

ETFs and index funds generally take less fees than actively managed funds. This is explained by the workd "active". The active funds are managed actively and their aim is to beat the index. ETFs and index funds are just trying to passively mimic the return of the given index like S&P500 for instance. Passive management enables these funds to run on low costs which of course attract more investors.

The competition comes more fierce then when asset managers are offering these kinds of services with zero-cost. The Nordic people might already be familiar with Nordnet´s "Superfunds" which are offered to investors with zero cost. Couple weeks ago also Fidelity shocked the investment world by starting to offer zero-cost index funds with an international horizon. The international Superfund immediately became a hit.

The figure below shows the investment flows to passive index funds vs. actively managed funds. The costs really matters. Investors are moving their money where the costs are the most efficient or non-existent. Cost are relevant since the longer the investment period, more the annual costs start dragging your return lower.

So the million dollar question for banks and asset managers is: Are active mutual funds anymore necessary? What is the reason and the incentive to offer relatively costly active mutual funds for investors in the long-run?

Couple of issues exists with the future of actively managed funds. First of all is their whole justification. A study conducted in Berkley University in 2012, found out that nearly 74 % of all the active funds underperformed their index. Now when the whole purpose of active management is to BEAT the index, it might be fair to say that many active funds fail in their mission. Added the fact that investors are paying the high management fees to portfolio managers who are almost doomed to fail in their management, the whole purpose and marketing of the active funds seems a bit fishy for the experienced investors.

The second issue is the information that is available and the regulation. Currently investors can find so much information and statistics helped partly by regulation MiFID II) concerning different investment funds that the returns and the costs are transparent and all the funds from different managers are comparable with each other in terms of return and cost. Enlightened investors know the fact that index funds are more probable to offer higher return than actively managed funds, with lower management fees and thus are moving their money from active funds to passive ones.

How long active funds can keep on going before they run out? Most of the banks are already selling their funds with a loss to attract investors. Cheap index funds are of course a strategy to lure investors to the firm and get the profit from other services such as stock or derivative trading fees. This is for instance how Nordnet and Fidelity work with their offering of zero-cost funds.

I wrote a blog on AI-based portfolio management last year and I want to remind this again. If active fund management dies and the passive index funds are managed by AI, as a graduate CFA in portfolio management I´d be quite worried about the future of the profession. 

My theory is that eventually active index funds must come up with some new lure to attract investors or they will die out in the competition against passive fund management. Their purpose and existence isn´t anymore justifiable. 

Asset managers are already facing the competition with zero-cost index funds and this might become the new norm. Other managers must react to this fast if they want to keep in the competition. Those who can offer the most cost-efficient products with the best return are the winners. 

If they still manage to stay in business with their zero-cost index funds.

Text: SW

Pictures don´t belong to me

Driving the Consumer

If you are a car owner like me, you should know that the government requires you to pay a tax on your car. This tax can vary depending on the weight, the engine size and the year model of your car. The tax is justifiable since cars and traffic produce emissions and negative externalities of consumption. The tax on your car works as a Pigouvian tax on the emissions.

Couple of my colleagues at work were assessing the problem that what is the elasticity of demand for owning a car? Would changes in price or the tax affect the demand for personal motoring?

Let us think of a scenario. Electric cars (which consumption or driving itself produce 0 emissions) make their way to the market, the vehicle tax as Pigouvian tax isn´t anymore justifiable. The two options are either to lobby to keep the vehicle tax by reformatting it as a property tax, or remove the vehicle tax entirely. In this blog we are going to take a deeper look to the second scenario.

Removing the tax would presumably decrease the price of the car usage and it should thus increase demand for the cars. But how much?

I would say that the demand for cars and personal motoring is relatively inelastic. Usually the people who consider buying a car are in a situation where they think that there already exists a personal demand for a car. After that, the consumer decides to go to a dealership and find a suitable car for a good price. The point in this is that demand might be more reliable on other factors than price: Family size, location and distances, status etc. For example, if you think that you don´t need a car and the government says that now owning a car is cheaper due to tax cuts, would you be more willing to buy a car? You still would probably be indifferent.

Also the price of the substitute, public transportation, doesn´t have a considerable effect for the demand of personal motoring. Even though in major European cities public transportation has proven to be cheaper, faster and more ecological, still these cities have insane traffic jams from personal motoring.

People make their buying decision more with other factors that the cost of owning a car. That´s why I would say that the demand for cars is relatively inelastic.

One interesting point is that car sharing and "mobility services" have become more and more popular. Instead of buying an own car, people are buying a service that a car provides; getting from point A to point B. This already suggests that maybe car owners are buying the car for this exact reason.

So back to the starting point: If vehicle tax would be eliminated, the demand for cars wouldn´t change significantly. People are still demanding the service that owning a car provides. Larger societal changes would be required at this point to increase significantly demand for personal motoring. People are already finding the substitutes more lucrative than before, especially in large metropolises.

Conclusion is that electric car or not, fiscal policies might not be as effective in controlling the demand of personal motoring than it is for controlling the negative externalities of road traffic. The trend for the decreasing demand of owning a car might be stronger than any price effects on personal motoring. There are more other factors driving the consumer into decision-making than the price.

Text: SW

In Ratings We Trust

Some say that you shouldn't trust anyone, but sometimes you have no choice. The financial system is an example of such.


What does the whole financial system lean on? It is highly dependent on only one thing; trust.
Without trust, there wouldn't be reliable transactions between agents. Without trust, the money and the currencies would have no stable value. As in life also, in financial markets trust is everything. Lose that and bad things will happen.


One source of trust comes from the rating agencies such as Standard&Poor's, Moody's and Fitch Ratings. These institutions give ratings on corporations, securities and even countries and from the information provided by them the financial markets form their products for investors. These companies pretty much give the benchmark for other ratings and determine the interest rates and the quality of certain investments, businesses and economies.


When it comes to auditing, if you have a KPGM or a E&Y stamp from auditing, hardly no one questions on the integrity of their financial statements. But recent history with Arthur Andersen with the Enron-scandal and recently also KPMG with its auditing process on British construction company Carillion which went bankrupt earlier this year, shows that trust can be betrayed easily. And we must not forget the sad story of the Lehman Brothers in 2008 and the nonsense behind their financial statements.

Auditing is all about business and that's why there exists a moral dilemma. How big are the incentives to give good credits from auditing to a big long-term client, which has been a valuable source of revenue? Giving F for financials would in worst case make the client to switch its auditing partner and the auditing firm would lose its valuable client. This is the moral dilemma and several cases of the Big Four have been probed by international regulators worldwide because of this.


Why should we think that rating agencies could be any different? In 2007-2008 already the credit rating agencies (CRA's from now on) were accused of giving triple-A statuses to complex structured financial instruments basically on the basis of business, even though these instruments were evaluated according to some experts to have been backed by bad credit mortgages. These CRA's needed to give the ratings to hold on to their biggest customers and allow them to buy these products to their regulated portfolios that would only allow triple-A securities.


In 2008 the investors trusted these ratings blindly and inflated the popularity and the prices of collateralized debt obligations (CDO's) and we know what happened.


Blind trust can be lethal.

If the biggest and most well-known CRA's (which are American by the way) could make scandalous decisions in terms of business, what about politics? Country's rating influences a lot of the interest rates on which the economy can raise debt and also the attractiveness of the country for investments. In the worst case scenario these ratings could be used (in theory) as a political weapon to downgrade certain countries financial wise.


I'm not saying that something shady would be necessarily going on in the CRAs, since I couldn't possibly know. The thing I know is that many commercial banks and investors rely highly on ratings from these companies and make their investment decisions on the basis of these ratings. If a scandal on the scale of Arthur Andersen or KPMG would be to hit the CRAs again, that would again question the integrity of these institutions and the trust towards our financial system. In 2008, we saw what the lack of trust made happen.


The integrity of the CRAs hasn't been in the news frequently, nor the fact on how dependent the financial markets are from them. Is it because we are too afraid the question these? Or is it just the fact that "in ratings we trust"? They have a bigger influence and power than many people think. If you stopped reading at some point and started to think about the role of CRAs in the middle of this blog, this blog achieved its goal.


Text: SW
Pictures don't belong to me

The Social Influence

We are living in the golden age of social media. Social media introduces us wide networks between different people, businesses and even products. These networks are shaping our society and questioning the regular business models: For example, social media influencers on YouTube have managed to revolutionize the whole retail industry with cosmetics. An article from Financial Times show that a single YouTube-video has a power to generate quick revenues for different companies.


Social media influences businesses, so why not investing? Does social media affect the average investor behavior?


It sure does.


What you say public in social media has to affect the stock markets in some way. I think it isn't even necessary to mention Donald Trump and the power of his Twitter to the stock markets. Also, the things individual people say in their blogs or Facebook-statuses, must effect on behavior of some (but not all) investors. Of course this depends on the amount of influence that the person has and the amount of the audience following the influencer.


If I would say that Metsä Board and Nokia are the best stocks currently to buy in the Nasdaq Helsinki Stock Exchange, maybe some of you would just follow and buy some of these stocks. So few of you would buy these stocks that it would hardly change the quote of these stocks. But if it's an analyst or an other expert seen as reliable who would say this, these stocks will start to go up since more people are buying them and more capital is flowing into these securities.


For example socialite Kylie Jenner posted in her twitter that she (from all the people) doesn't believe that Snapchat is any good at the moment. This tweet sent Snap Inc. on the way to lose 1,3 bn USD from its market value at the time.

This is nothing new. Only thing that is the new is the variety of opinions and the amount of information available for the average investor is much more than it was 15 years ago. Back then you could only get this information if you could afford the monthly subscription of Bloomberg or Financial Times. Now you can get it from Google or from Facebook for free by just asking from a community of thousands of people.


For example a Finnish Facebook-group Sijoituskerho (The Investment Club) has over 30 000 members making hundreds of daily posts with statements and questions about different stocks, commodities and businesses. And the best thing is that you can join this group for free and get different opinions from real investors for your investing decisions. You don't have to buy Bloomberg.


The Facebook-group isn't official investment advisory, but if you get 100 "buy" recommendations from other investors, you would probably take that as a suggestion to buy the stock, am I right?


Now when we are presumably living in the boom-phase of the stock-market, it is expected that the volatility will increase. But how about now when we have the social media, its influencers and its incredibly good capabilities to distribute information to millions of investors worldwide? Could that increase the volatility even more in this phase? I would say yes. Could social media be also one reason to the unexplainable market reactions during announcements of quarterly results? That I don't know but would like to.

The availability of all kind of information isn't only exploited by investors, but also investment funds with their AI's searching for key-words or themes from blogs and forums all over the internet to interpret the investor attitudes and to predict stock-market activity. With capital sizes of that big that really could turn the tides of the stock-market on a daily basis.


The power of the communities is real everywhere, in investing it isn't any different. Also this introduces all kinds of ways to misuse. A while back Swedish amateur bloggers were sued for market manipulation. In their popular blog they gave recommendations to the stocks that they owned to inflate the prices of their stocks. Social media platforms like Twitter and Facebook were also used to accelerate the distribution of this kind of behavior.


We live in the 21st Century where we have more information in our hands than ever and we are integrated to interact with each other more than before. Due to the increased availability of transparent information the investor behavior and the stock-market are effected in some way. It is in the hands of the investors to process this information to make their best investment decisions and judgements on what to do with their wealth.


Text: SW

Everybody's Green

Before the liberalization of electricity markets, the consumers of electricity were served by monopoly utility. When the energy markets opened for competition, consumers were allowed to choose their preferred electricity provider from various providers. Also different sources of energy, like the green power options were introduced. This raises the importance to understand customer preferences when it comes to energy production and competition in the energy markets.

Currently sustainability and renewable energy sources are hot topics. Many countries in Europe make huge investments into green energy production to cut down carbon emissions and the European Union has promoted the use of renewable energy sources with several directives. This gives raise to even more sources of energies the consumers to choose from. Many studies show that consumers have mostly positive attitudes towards renewable energy sources and are willing to pay a premium for green energy consumption.


The key element of measuring consumer willingness to pay comes from the consumers’ preferences, which can be illustrated with a simple indifference curve. In the following graph, we can see the trade-off between the consumption of green electricity and the expenditure on electricity which is not produced by renewable energy.

The graph shows two indifference curves u0 and u1. Initially, the income used to expenditure on non-green electricity is in Y0 and the quantity of green electricity enjoyed is in the level of Q0. Now let us suppose that the quantity of green electricity enjoyed increases from Q0 to Q1 and we move from the initial point A to point C in the indifference curve u0.

At point C the consumer’s income has decreased by the amount BC to reach the point C in the indifference curve. This decrease in income gives the consumer willingness to pay (WTP) for the increase in the green electricity consumption.

Studies show that the WTP is positive for green energy in the most cases. This might be due to the fact of increased environmental awareness and more positive preference and opinions towards sustainable energy.

However, studies show that even though generic green energy has a positive WTP, there exists differences between different energy sources. Different energy sources are not perceived as equally preferred by the consumers. A study conducted in the United States showed that consumers gain more utility from solar energy than from alternative green energy sources. Similarly, In Finland wind energy was perceived as the most preferred source of electricity production.

Geographical differences have an impact on the consumers’ willingness to pay for a certain source of green energy. If the consumers have formed their personal opinion or attitudes towards different energy sources or have had past experiences of them, this has an effect on the willingness to pay for these energy sources. A study conducted in Germany, for instance, implied that the consumers prefer domestically produced energy to foreign energy. In the rural areas of Eastern Finland biomass on the other hand is preferred to other energy sources. This can be explained by the fact that in the Eastern part of Finland the potential supply of biomass energy production is considerable high, which might affect the consumers to prefer energy that is familiar to them and produced near of their habitat.

Also personal perceptions of energy sources affect the consumer choice. If for example in the case of biomass in Eastern Finland the local energy production creates more employment and income in the area, the people of the area might have more positive attitudes towards that source of energy. Perceptions work on the other way as well. After the Great East Japan Earthquake of March 2011 and the Fukushima nuclear plant accident, attitudes towards nuclear power changed radically. After the accident, it was shown that even though the WTP for green energy sources and emission reduction were positive, the WTP for increasing nuclear power in the electricity production become negative. Consumers were not willing to pay for a source of energy from which they had bad personal experiences.

WTP is generally positive for green energy sources but is it overestimated? It is suggested that limited participation to choose the green energy sources may have caused an overestimation of the WTP. Consumers may have evaluated different energy sources according to their preferences, but are not choosing to consume them because of several reasons.

Studies show that despite the positive WTP, there exists limited participation to green electricity. If changing from the default option requires physical effort and expenditures, consumers are less willing to switch their energy source even though they would value green energy mix more than their default one.

We can conclude that there exist several interesting attributes, which affect the consumers’ willingness to pay for green electricity. In general, it is shown that consumers indeed are willing to pay a premium for green electricity mix. This can be a causation for more awareness and positive attitude towards environment and sustainability.

One solution to increase WTP and increase participation would be to make green electricity even more available than today. If the process of switching to more green electricity would become easier, more transparent and less costly, we could see increases in the participation rates and increase the consumption of green electricity.

One way of achieving this could a government-backed program to impose green electricity to consumers without consumers themselves having to put an effort to the process of switching from the default. Several choice experiments state that the consumers are willing to pay for green electricity but the problem is how to choose and order it.

Just For The Laughs

First of all, I want to wish hyvää vappua to all of my Finnish readers, klara vappen to my Swedish readers and happy labor day to all of you rest. The Finnish Vappu is the holiday of joy and laughter. It is the time when university students with their overalls start spreading across towns and cities and all the people are filled with happiness. It is the start of the summer and fun.


Finland was recently ranked as the most happy nation in the world. Despite the government's efforts to restrict people from having too much fun during 1915-1981 with taxation.


So what is this all about? In 1915 the government of Finland (under the Russian reign at the rime) set up a taxation to events of entertainment like concerts, movies, theater plays and dance events. The aim of this was to engage the audiences and the organizers of different forms of entertainment to participate the costs of the society by gathering tax from the people who would participate in the cultural events. The level of the tax varied during its lifetime between 10 % to 50 % of the price of the entrance ticket.


The tax was different to different forms of entertainment. The kind of entertainment that the government considered as "bad" got a higher tax than the entertainment which was judged as "good". This also gave the audience preferences of "higher cultural" events like theater-drama and classical music concerts over the ones of disgraceful comedy shows and rebellious rock concerts. For example the Stanley Kubrick film Clockwork Orange suffered from high tax rates because the movie was considered as "bad and the quality of the content being morally pejorative".


This (like any other tax) created incentives of tax evasion. Magicians and singers were branding themselves as non-entertainers and performing shows in their basements to avoid taxation. Tax exemptions were granted to movies that would include a short educational films. This might be the cause why videos like this exist.

The whole purpose of the tax sounds absurd. Why people should pay the government for seeing shows organized by private organizations and film-makers. Seems that the purpose of the tax was to tax the people. However, I would think that the nature of the tax was only to direct people towards "healthier" forms of entertainment away from sex and pornography.


We could also consider the tax as a Pigovian tax to decrease the effect of negative externalities. Going to see a peasantry comedy could create negative externalities of consumption in terms of sound pollution (laughter) and bad jokes in the streets. For this token, I would impose a tax for all of the shows of Putous.


Going to a Rolling Stones concert could encourage the people to be more rebellious and try drugs and alcohol which could increase crime rates and raise costs in the economy. Also the production of rock music and erotic musicals would create negative externalities in terms of uncomfortable noise pollution (but is Rock'n'Roll noise pollution?). The Pigovian tax would reduce the effects of the externalities to the economy and reduce the size of the market failure.


I'm going to end up this blog to a thought that I want all of you to think: All the taxes (like the one described above) can be politically and economically justified. But that doesn't mean that they would work or be reasonable in any way.


Hyvää vappua!


Text: SW
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Business of Politics

Politics is as inevitable as the cold season in Finland. Don't get me wrong, I like to discuss politics quite often but when it comes down to business, I don't think that politics and business make a good cocktail.


Motivated by the news of the government of Finland pouring billions and billions of euros as subsidies for different companies in different industries I started to wonder the most fundamental reasons and theories behind subsidies. What are the arguments for and against corporate subsidies?


Subsidies are used as a form of government intervention to support different industries and companies. There might be various reasons to this. Either the government want to support domestic production (and employment) or make different services or goods more affordable to the consumers, for instance. For example subsidies to energy are quite familiar to ensure affordable energy for the consumers and households in the economy.


This is the goal, but not the reason for subsidies.


If we take a look at what subsidies really are for the companies, subsidies are money (what they want). That money is then used to operations and investments (or dividends). During my analysis I've seen many companies who stay profitable just because of a subsidy. Taking the subsidy out of the income statement, these mentioned companies would have made losses for the past 10 years and perhaps gone out of business.


This is one reason why subsidies are given. The government may have different opinions on the importance of that one particular company for the economy. If for example one shipping company is considered as important in terms of security of supply or employment or government income, this company can be put on a life supply. But is this wise?


Figure below illustrates the situation where subsidies are given to a company. If we presume that initially the market is in competitive equilibrium, the subsidy moves the supply curve to the right. Now with the subsidy it is possible to produce "more with less". This causes a market failure and a deadweight loss indicated by the grey area in the graph. Meantime the quantity supplied increases from Q* to Qs and the equilibrium price falls from P* to Ps.

So we can agree that government intervention in subsidies should disturb the free markets and decrease social welfare. This is one reason why the World Bank is against subsidies in the developing countries.


Giving free money to a company distorts competition. It reduces the incentives of a business to be more efficient and to invest in its operations to increase its profitability. If the corporations are hold on to a life supply, the markets aren't perfectly competed.


But corporations enjoy this. They get free cash to run their business. So it is quite understandable that big companies try to hang in this money as hard as they can. And the causation of this is lobbying.


Lobbyist know their stuff. They know the right strings to pull and the adequate threats to give. Their only purpose is to get the government to give money for their company. Lobbyists try to think all kinds of reasons and threats from which they achieve their goal. For example they can threat to take their production (thus tax income and employment) abroad if they don't receive the subsidies they want. Also in the negotiation the terms are settled as such that subsidies are promised to grant for tens of years to come so that they cannot be cancelled immediately by the next government.


Also the incentive to grant subsidies increases if politicians face projects from their hometown or something that they are familiar with. In these cases it must be evaluated that the subsidies aren't granted for the wrong reasons.


Subsidies increase efficiency and competitiveness only if they are used to create more value for the company and the production. Because of the lobbyists it is hard to distinguish what is the real key motive of getting money from the government. Is it to increase value or is it just a matter keeping the business as such.

I also have to admit that some companies are important in terms of employment and welfare in an individual worker level. But when considering the big picture, subsidies (like any other government intervention) create disturbances and inefficiencies to the market.


But in the end, I don't think that it's fair that the tax payers have to pay the subsidies to the corporations for the sake of corporations staying in business.


If you are interested more about subsidies, I'm visiting my friends' podcast soon where you can hear more discussion about corporate subsidies. I'll add a link as soon as it is in the air.


Text: SW
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Why We Should Hate Dividends

The purpose and goal of any business is to increase the wealth of its shareholders. It can be done by increasing the value of shareholder equity or giving dividends to the shareholders. Analysts and bankers HATE dividends. Should the average investor too?




The lure of companies paying high dividends is huge. For example Nordea Bank AB paid a week ago over 7 % dividend yield on its stock. Usually especially European value stocks have been paying generously high yields of dividends to the investors. Investors get the dividends (with a few tax exemptions in some countries) and can re-invest these dividends back to the stock market to gain the compound interest, which could boost the investors wealth considerable in the long run. It could be considered as investing "free money" to gain even more "free money" the year after.




Compound interest is the reason why I have been investing in value stocks which have a high dividend yield and great potential to increase it. But from what I have heard from analysts, professors and bankers, they all despise dividends and hate corporations that do that. That got me investigating the matter a bit more.




Let's consider a value firm which pays a good dividend for the stock. Now, the company is giving money outside to the company to the shareholders, which means that the cash isn't there for future investments. Shareholders are happy, but analysts and bankers are not.

Investing in assets is important when we consider the growth of the corporation. Capital expenditure and the increase in the long-term assets tell that something is going on in the company: They are investing in their operations. This means that something is coming and it will have a positive or a negative effect to the company.




For sure if the managers are wise, they pay the dividends so that there exists cash to do the planned investments. But still, less funds are available to invest in growth of shareholder equity.




In the worst case scenario, the free cash flow after paying the dividends can be negative! This isn't not so uncommon from what I've discovered. For example Finnish company Sampo generated free cash flow of 1,255bn€ and paid dividends worth of 1,286bn€ in 2017, creating a small deficit. In 2016 the situation was more severe: Sampo's free cash flow was 182m€ and paid dividends worth of 1,2bn€, creating a deficit of 1bn€




So who finances this deficit? Who pays these dividends? The banks of course!




Let's break it down a bit: After you've generated the cash, what do you have to pay with that? You have to pay your capital expenditure for compulsory investments and have the sufficient working capital for your business to operate. After that, whatever becomes negative, is financed from long-term liabilities. Paying dividends financed by debt sounds rather unorthodox and from this you get an evil eye from the bankers who are considering to grant a loan for the corporation.

What about the assets? What is the effect for the corporation that pays dividends but doesn't invest? Especially from bankers' and analysts' perspective we are interested on what the corporation does with its liabilities. If debt is used for gearing some investments and long-term acquisitions, woah that's good. And you get tax exemptions as well. But if the liabilities are used to finance dividends, firm isn't necessarily growing since it isn't investing in new businesses.


The money you get is away from the corporation and from the growth.


If we think in depth how a balance sheet works, it should be that long-term liabilities finance long-term assets and current liabilities finance current assets. If long-term finances short-term and short term finances long-term, it also sounds a bit wrong. This is why also cash should be financed from current liabilities and not from a bank loan.


What I've learned is to be more critical towards generous payout ratios of dividends and focus more on the free cash flow in a corporation when taking it into evaluation.


Berkshire Hathaway hasn't paid dividend in 50 years. When the question of whether the company should pay dividends or not was popped up in the annual shareholder meeting, the shareholders said: "Just don't. Keep investing the money as the same way you have done before, you are going to do it better than us".


In the 1990's dividend stocks weren't that much of a hot topic. Could it be that the modern society of "everything to me as soon as possible" has gotten us to praise dividends without that much consideration?


Text: SW
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