Economic theory does not make a clear distinction between them. Buying a share of a firm or investing in a green field project are somehow treated as substitutes. However, from the decision taking perspective the risks, expected return and exit strategy diverge. A number of factors influence the decision to enter in productive investment. Firms will maximize its profits through a capex when the size and dynamics of a market are attractive enough to counterbalance its barriers and local costs. What do you think? Can you suggest some literature or relevant experience on this matter?
Hi Victor,
The following textbook would help:
William Sharpe, Investors and Markets, 2007
https://www.researchgate.net/publication/274731802_Renewable_Energy_with_Volatile_Prices_Why_NPV_Fails_to_Tell_the_Whole_Story
I have addressed the question of portfolio vs individual investments in energy in this paper, where I examined their differences.
On a more general note, portfolio of financial securities differ from physical asset portfolios in a number of ways:
1. Liquidity - shares can be traded readily, particularly in developed markets. Physical assets tend to take time to sell, with the corresponding costs and risks when markets change in the midst of a transaction.
2. Managerial influence - financial investors who buy and sell shares tend to have limited influence on how the companies are managed. For managers of physical assets, the influence is often direct.
One way of making the distinction is through the real options literature. When there is managerial flexibility under uncertainty, managers may obtain a right but not an obligation to commit. This is the essence of real options reasoning.
In contrast, for financial assets or options, the managers acquire, sit back, grin and wait for the outcomes.
Regards.
Article Renewable Energy with Volatile Prices: Why NPV Fails to Tell...
Thanks Mo and Ricardo for your helpful answers. I will consider your valuable insights and suggestions.
Hi Victor, my experience is that 'productive' investments carry more costs in terms of time and energy (i.e. you are the manager) whereas portfolio or equity frees you from having to manage the day to day running of the business. With that cost of course comes the potential for greater return. It all comes back to knowing your strengths and weaknesses. Just do what you are strong at and outsource everything else.
Thanks,
-Steve
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