During the mid 2000s, housing prices were booming. Along the east coast of Florida, especially, there was massive condo speculation. This market fluctuation ended up being a bad investment for many. This article referenced shows how many were questioning the future of the market back in 2005.
http://www.mortgagenewsdaily.com/5172005_Housing_Bubble_2005.asp
Research an investment (could be a public company, private company, government agency, infrastructure project, etc) that you believe meets the definition of a malinvestment (past or present) and argue why you think it’s a misallocation of capital (3-5 sentences).
Finnish energy company TVO started construction of new nuclear power plant in 2005, the main constructor promised a fixed price of 3billion euros. Despite having two identical working nuclear plants, they decided that third plant should be the first 3generation reactor in the world. On this day it’s still not started production and the estimated cost of the construction is now 11 Billion euros. Money well spent…
https://en.wikipedia.org/wiki/Olkiluoto_Nuclear_Power_Plant
I feel a raise of minimum wage in the U.S. to $15 is a malinvestment. This would only speed up the rate of inflation over the short term. This would eventually lead to the $15 rate of pay less valuable than the previous minimum wage.
The stipulations of the assigned activity demand researching an investment of which I believe meets the definition of a mal-investment. Furthermore, the stipulated activity calls for stated arguments pertaining to why I believe it is a misallocation of capital.
According to The Department of Treasury; debt of which is rated below investment grade are defined as Exchange Traded Funds [ETF]. ETFs and/ or ‘junk bonds’ are however high yield. Moreover, ETFs meet the definition of mal-investments.
For individuals and/ or firms to invest in ETFs is by all definition a misallocation of capital and/ or mal-investment. Although investments in ETFs by individuals and/ or corporations are arguably high yield, ETFs are in fact mal-investments because they are debt rated below investment grade.
Best Regards,
References
Riquier, A., (2020), fed-kicks-off-its-buying-of-corporate-debt-etfs-2020-05-12. Retrieved From: https://www.marketwatch.com/story/fed-kicks-off-its-buying-of-corporate-debt-etfs-2020-05-12?mod=article_inline
The Department of Treasury, (2020) center/data-chart-center/interest-rates. Retrieved From: https://www.treasury.gov/resource-center/data-chart-center/interest-rates/pages/TextView.aspx?data=yieldYear&year=2020
2020 For there is the german company Wirecard, a former DAX tech enterprise that went very quickly broke cause of taking more and more money in while faking their accounting books which caused an abrupt loss of trust and massive sums of capital to every stakeholder.
2021 the Wallstreetbets hype led to people buying GameStop stocks at up to $400 to the peak making all kinds of dumb decisions just to see prices fall in short time as the stock was far overrated and just shilled while people thought risking all in a very uncertain happening was a good idea.
Sub-prime scandal, mixing up horrible stuff with good stuff to build a somewhat riskier stuff, and then getting more bad stuff in building stuff that has less and less good in it, ending up with a shitty stuff all around the market, and then boom, lost of confidence, Henry the VIII.
We as a community of this academy are known to be pro-crypto and pro-bitcoin, however I think the world of cryptocurrencies has allowed for the birth of a new wave of various malinvestments, probably some, which we all are still at this moment invested in and believing in. We are definitely in the bubble similar to tech and dot-com bubble. Most recently, the Dogecoin, XRP and various pump and dump telegram and discord fueled (Sky coin) scenarios come to mind. The currently popular (but already in decline) “short-squeeze” incentive has inspired the especially new-comers to the crypto market to again believe in the “community incentive” and a basic economic model of supply and demand. (“If we all buy and hodl, this will go to the moon!”). With the GME case proving that this indeed is possible, the incentive has been proven. Why then has “the value” not sustained, and people buying at the 300$ basically already lost majority of their investment? Because with no actual utility in the real world, any project with no fundamentals is doomed to failure sooner than later. I believe we will see many more failures this year, some will surprise us more than others.
I believe the tulip mania was a malinvestment. There was a lot of new found capital available after the bubonic plague and a series of wars wreaked havoc through the dutch population. People would inheret a lot of money and wages would go up with the shortage of manpower that happend. New money was searching for speculative investments which was found in the tulip trade. One tulip bulb could be worth an entire amsterdam canal house. When three years later people suddenly stopped buying tulip bulbs many where left impoverished.
Solindra. They were are a startup when Obama was elected, he got them major subsidies, hyped up the market on solar panels and such. They sold investors on a pump and dump for special interests and a lot of people got wrecked, but not Solindra and certainly not uncle sam.
My malinvestment would be the crypto currency xrp simply because its an amazing asset that is being manipulated. I consider it very disruptive technology because how fast it and cheap transactions can happen. The supply is large and demand is there but when xrp is dumped onto the market or manipulating news comes out becomes very diluted causing the price to go down.
My father invested the equity of his home into his company to cover the expenses. Expenses were high though, due to a lack of management skills, which he never replaced. The investment helped him for some time, but eventually he got to the same financial situation as before.
To invest in the stock market long term. Stocks are connected to paper money which is part of the ever expanding money supply. Paper money lose their value every day, which means that if a portfolio has a yearly increase of say 3%, the inflation will have negated that effect to your savings being not changed at all or actually decreased in value.
Pineapples in the 17th century. Fruit as a store of value is nuts. It decays, was expensive to grow and technology caught up and now it’s very cheap.
I would say that the govt-banks-fintech getting free $$ to keep ZOMBIE companies with NO emplyees or revenue is an over step of malinvestment
Our national pension fund invested alot of money into a new building. The old one wasn’t perfect but when taking into consideration, that our pension fund is struggling many people consider it a malinvestment to then build a building that is not thought through. Window shutters can’t be closed manually, windows cant be opened, weirdly situatied toilets and no air conditioning which all were available and functioning in the old building severely demoralised the employes, reduced their productivity and increased fluctuation.
There was a water park that opened up in Mexico. They had a large expense due to the water shortage already plaguing the country but they also decided to make all the slides out of inflatable material (and these are not small slides). The fee’s they were paying for electricity and water were so much that they had to charge equivalent to western prices for an amusement park, this in a Mexican economy. They did not last long.
The recent US Covid 19 relief package is a malinvestment. It’s like slapping a band-aid on a bullet wound. Instead of allowing businesses and individuals the sovereignty to make a risk verses reward based decision to open or close their businesses to the public while following health guide lines, the US continues to borrow from the infinite fiat money printing machine. They continue taking more from the FED while outsourcing inflation so inflationary numbers deflect our view from the economic fallout and fiscal cliff we’re catapulting towards at an alarming rate.
In 2000, Blockbuster video passed on the opportunity to buy Netflix. 10 years later Blockbuster would be bankrupted out of the industry. Any investment made against the growing trend of streaming services would be malinvestment.
Poor City Planning/Constant Construction. Where i live, it feels like it is constantly under construction, however, once a project is finished it is already far too small for the population. If it were designed to better fit the rapidly growing population then it may not be as bad of a malinvestment in our local infrastructure. AS it stands, it appears a lot of our tax dollars are wasted on poor planning for the future.
I am honestly starting to think that investing in USD is a bad investment. It’s deflationary and currently you get no interest with a bank. Therefore holding smarter investment such as crypto, real estate, stocks, ect. will actually grow your portfolio.