Thursday, December 22, 2005

Christmas Shopping

Today I had the unfortunate experience of going Christmas shopping. I procrastinate and do my shopping close to the 25th, a fact I usually blame on school becoming hectic right about the time my family is passing around their lists. Thus I must wait until school goes to recess for the semester to actually commence shopping. This being said, Christmas shopping is like my own personal circle of the Inferno, where I am continually punished by demonic store employees referring me to opposite ends of the store to find the elusive widget I seek.

As I seem to do in all walks of my life, I even began to sort the Christmas shoppers in to various groups (mathspeak: equivalence relations). I began to see various types of shoppers such as the Warrior, the Dawdler, the Hesitant, the Impatient, and the Epic. Gracious readers, please take advantage of your ability to comment anonymously and add to this list as you see fit.

The Warrior
The Warrior is perhaps the easiest of all Christmas shoppers to identify. As the name suggests, this shopper is on a quest, and every opposition to their aim is a battle to them. Neither snow, nor rain, nor normal flow of traffic shall impede their search for the polka-dot sweater their Great Aunt Brenda requested. These are the shoppers that make their way through the crowds with all the grace of a rhinoceros, but with much more noise. They will use their carts as weapons, bruising your shins and banging your elbows. Warriors are best left alone, as battles with them usually result in raised tempers, perhaps a shout or two, and a much less enjoyable shopping experience afterwards.

The Dawdler
The Dawdler has already completed 99% of their Christmas shopping. The one and only gift they have left to get, therefore, causes them such little stress that they feel free to take their sweet time moving about the aisles of the store. If you have ever had the misfortune of getting behind a Dawdler in one of those increasingly narrow store aisles that makes passing impossible, then you, too, have felt the frustration of going slower than a drunken slug. Ironically, I seem to see more Dawdlers as it draws closer to Christmas, and thus those more like me, who procrastinate, find their slow, relaxed pace of life enraging.

Another interesting facet of the Dawdler is that they are normally found in pairs. These two friends find nothing wrong with plodding along in a slow manner in order to enjoy their companion's conversation. Should you ever be stuck behind two Dawdlers, resist the temptation to become a Warrior and be glad that you're moving at all, because you could be dealing with...

The Hesitant
The Hesitant cannot make up their mind. In spite of the fact that they have already picked up the same candle and the one next to it 47 times, they still are unable to choose between the cream candle that smells like strawberries and the strawberry candle that smells like cream. Somehow, by some act of Satan, the Hesitant always manages to wind up directly in front of the item you need (and have already chosen to buy). There you are, hunched over your cart in an attempt to use everything you know about body language, languishing, because within 5 feet is the perfect gift for your mom, but yet it is still blocked by this dolt of a shopper who needs to start researching Christmas gifts in March in order to pick them out in a timely manner.

The Hesitant can take many forms, I must say. I think I have even been the Hesitant at times. The Hesitant may be a grandparent confused by the newest video game systems, or perhaps a parent trying to pick out the right CD for their teenager, or maybe a boy unaccustomed to an X-chromosome-only area, such as Hallmark, searching for some gift for a girlfriend (that would be when I'm the Hesitant). The Hesitant usually means well, but nevertheless clogs aisles in ways that the Dawdler could only fantasize about.

Also, should you ever have the fortune to see it, a Warrior encountering a Hesitant is a comical affair. Given an very effective Hesitant with a large shopping cart, the Warrior may do a small dance around the Hesitant, resembling a bee dancing to indicate the position of the nearest flowers. Yet, the Warrior is helpless against the brick wall of indecision that the Hesitant builds, and is forced, like the rest of us, to wait their choice.

The Impatient
"I can't believe we have to wait 10 minutes in line on the 23rd of December. Why don't they have more registers open? Doesn't anybody work here?" Ever heard those words, or something like them? Yup, you guessed it, that's the Impatient.

The Impatient gets easily frustrated when something is out of order. They feel that open complaints will magically bring more employees to the registers or out on the floor to help them find the perfect gift. When the Impatient finally does corner an employee, if anything goes wrong they make sure to voice their displeasure with body and voice, rolling their eyes and raising their arms because the Office Max store had run out of the super-sale keyboard they had advertised since last Tuesday.

These people get to me sometimes, I have to admit. It's Christmas season. You have to understand that things are going to be slow, or at least slower than in July when you Impatients last ventured into the mall. Complaining about your circumstances will not bring help to you, and more likely, it will probably drive help away because employees are frustrated at dealing with Impatients and Warriors all day long.

The Epic
The Epic is the Christmas shopper most like me. The Epic is determined to do as much shopping in one shot as possible. In my case, it's all of it. It doesn't matter if it's going to take three hours or ten hours, the shopping must be completed! Unlike the Impatient and the Warrior, the Epic understands that the going will be slow and steady, and so it is more of a survival test than a battle for the Epic. The Epic carefully plots the most efficient route, keeping in mind possible detours, alternate stores, and places of nourishment. Yes, armed with a list, a cell phone, and a full tank of gas, the Epic sets out and shall not return until the task is completed! Other Christmas shoppers may annoy the Epic, but never to the point of losing sight of the goal. And the goal will be reached, no matter what the cost. The Ring must be de---I mean the presents must be purchased!

So there you have it: my renditions of the Christmas shoppers. Please feel free to add whatever comments you wish to contribute to this discussion. Thanks for reading!

Monday, December 12, 2005

The Dividend Growth Model

First, scroll down and read the previous post.

OK, now that we're all on the same page here, I'd like to write a few things about a stock pricing model known as the Dividend Growth Model, or DGM.

Since I know that non Math-Finance-Economics people read this, I'll take this slowly. What is a stock pricing model? Well, stock pricing models attempt to take financial data about a company and come up with a fair value for their stock price. The DGM basically says the following: "The value of a share of stock XYZ is equal to the present value of its future dividends."

Present value (PV) is money adjusted for interest and inflation. For example, if interest rates are 10%, $110 one year from now is worth only $100 today. This is because you could put $100 in a 10% account today and get $110 in one year. Cute, huh?

I think that the DGM is a bunch of bunk. Why? OK, let's look at the reasons here.

The model says that the value is equal to the PV of all future dividends. That means to infinity. How many of you actually buy anything with the idea that it's going to last to infinity? That isn't realistic in the slightest. Most investors are buying for a shorter horizon than that. Realisitically, you're probably buying stocks for retirement, which should happen in less than 50 years, unless I have much younger readers than I thought I would.

A defender of the DGM would probably explain the model like this: Let's say you buy a share of stock and hold it for one year, during which time you recieve 4 quarterly dividends. Even though you sell it at the end of a year, the price you would get for the stock when you sold it would still be equal to the PV of all future dividends.

Again, I claim that is bunk. It's circular logic. You have to assume that the model works in order for the model to work. Otherwise, the price at the end of the year (or time n for that matter) could be a function of interest rates, consumer confidence, Survivor ratings, womens' skirt lengths in Milan, and a bunch of other factors. Iff (if and only if) you assume that the price at time n exactly equals the PV of all future dividends does the DGM work.

What really frustrates me is that this model is frequently used. Although convenient and easy to calculate (the formula boils down to D1/(k-g), where D1 is the dividend at time 1, k is the required rate of return, and g is the growth rate of dividends), the assumptions of the model are flawed to me, and so I can't really justify its use.

So why is it used? It sounds plausable. I mean it might make sense to think that the value of a stock is worth all its future dividends. It also tends to spit out semi-correct answers (aka prices close to the market price) if you guess around with k and g. In fact, there are reams of literature about how to determine k and g such that they come close to the market price. Most work pretty well, actually, if you use them. Still, I can't really justify the assumptions of the model, and so it seems like a stab in the dark as to whether or not it is correct or not. If you stab enough times in enough dark places, you'll eventually hit something (let's hope not someone).

There are other models which appear to have more solid foundations, so don't worry about the stock market crashing when I hit the publish button to my lower left.

I think that the DGM can be fixed, but I am unsure of how to do that. This may turn into a thesis topic for me, since I had to work with this model extensively this semester. So for all of you out there who I told that my thesis idea was too technical to explain, you now see why. Imagine how much you'd now hate me if I had spent an entire dinner explaining this to you, rather than letting you read it at your leisure. You're welcome.

Overall, the DGM is a flawed model in my eyes and I can't really see why it is used. Maybe I just need to spend a little more time in professors' offices arguing this with them and then I'll understand. Until then, I'm just an insolent multi-disciplinary student who pokes holes in age-old models and doesn't take assumptions lightly.

I'm Back

Woo, it's been a long time since I've written. Wow. I've added a Google AdSense banner to the top of the page. Since I am a fan of all things Google, I've been waiting to try out AdSense for awhile, but never figured that I could try it out on a Blogger site, since Blogger is owned by Google. However, the opportunity has come, and I'll let you all know how it works.

I also have yet to figure out why my little profile sidebar has mysteriously dropped to the bottom right of the page. Weird.

This has been a crazy semester, but hopefully I'll have more frequent updates now that it's almost over. Keep on reading.