GDP and its flaws

Robert Rodriguez and his funds are one of my favorite things to find ideas about investing. Here is what he mentioned about the GDP in one of the FPA Crescent funds quarterly commentaries (found on the quarter ended 12/31/2011):

The most widely used measure for the economy is GDP, and we therefore use it in our economic discussions for the same purpose. However, it’s important to appreciate its flaws, especially those listed below:

1) GDP measures revenue, but the focus should be on a host of variables, including income, return on capital, and employment.

2) GDP can be bought. The government prints money and gives it to someone who ostensibly needs it. That individual spends it and GDP rises. Therefore, the more money the government prints, the faster the economy grows (nominally, anyway).

3) Not everything that reduces GDP is bad for the economy. For example, cancer treatments and services cost $264 billion a year in the United States. Those costs represent someone else’s sales (e.g., hospitals, HMOs, drug companies) and contribute to GDP. If we found a cure for cancer, GDP would then be negatively impacted. Yet how could one argue that curing cancer would be bad for the economy?

We are not suggesting there’s a superior measure to GDP, just that economic discussions should take into account the limitations of the metrics at hand.

Cheers and happy 2012 !
jrv

About jrv

I was born in Spain and lived in Belgium, Chile, France, USA, Argentina among other places. Currently I am trying to settle down in a wild place. I am "retired", even though now I dedicate more hours "working" for my investments than I ever worked in the real labor market where I used to work in IT and Banking. I am a family man, I have a lovely wife, several sons and one step daughter. I have humble tastes, I like to stay home and read about companies and investments. I started investing at 25 before the internet bubble exploded. I did not know much about investing and liked technical analysis so my results were pretty bad. Fortunately I did not have much to lose. Some years later in 2006 bored of doing only real state investments and with quite a lot of money saved I opened an account in a cheap and excellent online broker and started again. This time I did not want to commit the same mistake, so I decided to follow a model. I heard that Warren Buffett was the best at making money via stocks so I started by reading a lot about him, all of his shareholders letters and several of the books that he recommended. I learned a lot, started applying his investing principles and reading a lot of 10K's. Digested news from lots of different sources. Basically I started buying very good and cheap companies and holding them for ever if possible and if nothing changed fundamentally. When the housing crisis started I was more than 75% cash. At that time I identified good companies at incredibly cheap prices so I invested most of my savings in stocks. In less than I year I doubled. By the second semester of 2009 I turned my software company into an investment vehicle and dedicated myself full time to it. My wife and I decided to change our lifestyle and moved from Belgium to the beach in a wild country. The goal was to keep fixed costs low in order to be able to live with a minimum 6-8% yearly return but specially to move away from the inhuman life of civilization and to have finally some peace and sunny weather to concentrate better on investing. Now I can think and study about companies 60 hours a week and I am doing great. I can finally do what I want full time and can proudly say that I have never been so happy, specially also with my just born 4th son, my other great kids and my sweet wife who supports me fully while I study most of the day and patiently wait for the opportunity to make a swing ! You can learn a bit more about my portfolio by viewing it at www.kuchita.com/view/sumo.php or you may learn more about me and my family by following the link "Author's site" from the menu above.
This entry was posted in General and tagged . Bookmark the permalink.

The Intelligent Investor Blog Posts Feeds

Receive posts by email?