Busting money illusions

A closer look at three headline news events from the last week shows how investors are all too often labouring under illusions about the way money works.

FT.com

To economists money illusion is confusing nominal and real prices. But investors are befuddled by finance in all kinds of ways. Three stories last week told particularly common tales of money illusion.

The first was the news that Apple would begin paying a $2.65 per share quarterly dividend and authorise a $10 billion share buyback program. To be sure, payouts give signals and little old ladies love receiving regular cheques in the mail. But Apple’s worth does not change a single cent because Tim Cook chose to pay out Steve Jobs’ hard-earned cash.

Even more common than dividend dizziness is the illusion that "rent is a waste of money” relative to buying property. As if the $292,000 in total interest payments on a half-million dollar mortgage at 5 per cent over two decades is somehow going to a worthier place than a landlord’s pocket. Those at risk of foreclosure who elect to sell-and-lease back their properties to Bank of America in a pilot program announced last week must remember this. They will be better off than their mortgage-paying neighbours under almost every scenario save the mother of all housing rallies.

The final big example of money illusion last week was a double-header: Friday’s 6 per cent rally in BT Group’s shares after the British telco said its pension deficit was smaller than previously estimated and an extra £2 billion would be paid into it. (Investors assumed a higher dividend would follow!)

Theoretically, any actuarial pension surplus or shortfall should already be reflected in BT’s share price. Indeed, analysts have long noted increased volatility in the stock as the company’s pension hole deepened. But this may be one case where investors are not being so easily fooled. While shareholders technically have equal exposure to pension surpluses as to deficits, in practice the former are never paid out while investors are on the hook for the latter. No illusion there.

Copyright The Financial Times Limited 2012.