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Monday, January 30, 2017

January 2017 Data Update 7: Profitability, Excess Returns and Governance

If asked to describe a successful business, most people will tell you that it is one that makes money and that is not an unreasonable starting point, but it is not a good ending point. For a business to be a success, it is not just enough that it makes money but that it makes enough money to compensate the owners for the capital that they have invested in it, the risk that they are exposed to and the time that they have to wait to get their money back. That, in a nutshell, is how we define investment success in corporate finance and in this post, I would like to use that perspective to measure whether publicly traded companies are successful.

Measuring Investment Returns
The first step towards measuring investment success is measuring the return that companies make on their investments. This step, though seemingly simple, is fraught with difficulties. First, corporate measures of profits are not only historical (as opposed to future expectations) but are also skewed by accounting discretion and practice and year-to-year volatility. Second, to measure the capital that a company has invested in its existing investments, you often have begin with what is shown as capital invested in a balance sheet, implicitly assuming that book value is a good proxy for capital invested. Notwithstanding these concerns, analysts often compute a return on invested capital (ROIC) as a measure of investment return earned by a company:

This simple computation has become corporate finance’s most widely computed and used ratio and while I compute it and use it in a variety of contexts, I do so with the recognition that it comes with flaws, some of which can be fatal. In the context of reporting this statistic at the start of last year, I reported my ROIC caveats in a picture:

Put simply, it would be unfair of me to tar a young company like Tesla as a failure because it has a negative return on invested capital, and dangerous for me to view HP as a company that has made good investments, because it has a high ROIC, since is only due to the fact that it has written off almost $16 billion of mistakes, reducing its invested capital and inflating its ROIC. I compute the return on invested capital at the start of 2017 for each company in my public company sample of 42,668 firms, using the following judgments in my estimation:

I do make adjustments to operating income and invested capital that reflect my view that accounting miscategorizes R&D and operating leases. I am still using a bludgeon rather than a scalpel here and  the returns on invested capital for some companies will be off, either because the last year’s operating income was abnormally high or low and/or accountants have managed to turn the invested capital at this company into a number that has little to do with what is invested in projects. That said, I have the law of large numbers as my ally.

Measuring Excess Returns

If the measure of investment success is that you are earning more on your capital invested than you could have made elsewhere, in an investment of equivalent risk, you can see why the cost of capital becomes the other half of the excess return equation. The cost of capital is measure of what investors can generate in the market on investments of equivalent risk. Thus, a company that can consistently generate returns on its invested capital that exceed its cost of capital is creating value, one that generates returns equal to the cost of capital is running in place and one that generates returns that are less than the cost of capital, it is destroying value. Of course, this comparison can be done entirely on an equity basis, using the cost of equity as the required rate and the return on equity as a measure of return:

In general, especially when comparing large numbers of stocks across many sectors, the capital comparison is a more reliable one than the equity comparison. My end results for the capital comparison are summarized in the picture below, where I break my global companies into three broad groups. The first, value creators, includes companies that earn a return on invested capital that is at least 2% greater than the cost of capital, the second, value zeros, includes companies that earn within 2% (within my estimation error) of their cost of capital in either direction and the third, value destroyers, that earn a return on invested capital that is 2% lower than the cost of capital or worse. 

The public market place globally, at least at the start of 2017, has more value destroyers than value creators, at least based upon 2016 trailing returns on capital. The good news is that there are almost 6000 companies that are super value creators, earning returns on capital that earn 10% higher than the cost of capital or more. The bad news is that the value destroying group has almost 20,000 firms (about 63% of all firms) in it and a large subset of these companies are stuck in their value destructive ways, not only continuing to stay invested in bad businesses, but investing more capital.

If you are wary because the returns computed used the most recent 12 months of data, you are right be. To counter that, I also computed a ten-year average ROIC (for those companies with ten years of historical data or more) and that number compared to the cost of capital. As you would expect with the selection bias, the results are much more favorable, with almost 77% of firms earning more than their cost of capital, but even over this much longer time period, 23% of the firms earned less than the cost of capital. Finally, if you are doing this for an individual company, you can use much more finesse in your computation and use this spreadsheet to make your own adjustments to the number.

Regional and Sector Differences
If you accept my numbers, a third of all companies are destroying value, a third are running in place and a third are creating value, but are there differences across countries? I answer that question by computing the excess returns, by country, in the picture below:
Link to live map

Just a note on caution on reading the numbers. Some of the countries in my sample, like Mali and Kazakhstan have very few companies listed and the numbers should taken with a grain of salt. Breaking out the excess returns by broad regional groupings, here is what I get:
Spreadsheet with country data
Finally, I took a look at excess returns by sector, both globally and for different regions of the world, comparing returns on capital on an aggregated basis to the cost of capital. Focusing on non-financial service sectors, the sectors that delivered the most negative and most positive excess returns (ROIC - Cost of Capital) are listed below:
Spreadsheet with sector data
Many of the sectors that delivered the worst returns in 2016 were in the natural resource sectors, and depressed commodity prices can be fingered as the culprit. Among the best performing sectors are many with low capital intensity and service businesses, though tobacco tops the list with the highest return spread, partly because the large buybacks/dividends in the sector have shrunk the capital invested in the sector.

For investors, looking at this listing of good and bad businesses in 2017, I would offer a warning about extrapolating to investing choices. The correlation between business quality and investment returns is tenuous, at best, and here is why. To the extent that the market is pricing in investment quality into stock prices, there is a very real possibility that the companies in the worst businesses may offer the best investment opportunities, if markets have over reacted to investment performance, and the companies in the best businesses may be the ones to avoid, if the market has pushed up prices too much. There is, however, a corporate governance lesson worth heeding. Notwithstanding claims to the contrary, there are many companies where managers left to their own devices, will find ways to spend investor money badly and need to be held to account.

What next?

I am not surprised, as some might be, by the numbers above. In many companies, break even is defined as making money and profitable projects are considered to be pulling their weight, even if those profits don’t measure up to alternative investments. A large number of companies, if put on the spot, will not even able to tell you how much capital they have invested in existing assets, either because the investments occurred way in the past or because of the way they are accounted for. It is not only investors who bear the cost of these poor investments but the economy overall, since more capital invested in bad businesses means less capital available for new and perhaps much better businesses, something to think about the next time you read a rant against stock buybacks or dividends.

YouTube Video


Spreadsheet
  1. ROIC Calculator
Datasets
  1. Excess Returns, by Country- January 2017
  2. Excess Returns, by Industry - January 2017

Sunday, January 29, 2017

BOLO DE CHOCOLATE FOFINHO E MOLHADINHO


INGREDIENTES:

02 XÍCARAS DE FARINHA DE TRIGO 
02 XÍCARAS DE AÇÚCAR
01 XÍCARA DE LEITE
02 COLHERES DE (SOPA) MANTEIGA OU MARGARINA
06 COLHERES DE (SOPA) DE CHOCOLATE EM PÓ
01 COLHER DE (SOPA) DE FERMENTO BIOLÓGICO EM PÓ
06 OVOS INTEIROS

PREPARO:

EM UMA BATEDEIRA, OU NA MÃO MESMO, BATA AS CLARAS EM NEVE, E VA ACRESCENTANDO AS GEMAS E BATENDO, O AÇUCAR,  E BATA MUITO BEM.
EM SEGUIDA ADICIONE A FARINHA DE TRIGO, O CHOCOLATE EM PÓ, E O FERMENTO, O LEITE, E BATA POR MAIS ALGUNS MINUTOS, ATÉ A MASSA FICAR BEM HOMOGÊNEA.   EM SEGUIDA DESPEJE A MASSA EM UMA FORMA, QUADRADA OU REDONDA DE SUA PREFERÊNCIA UNTADA COM MARGARINA, E LEVEMENTE POLVILHADA COM FARINHA DE TRIGO, E LEVE PARA ASSAR EM FORNO JÁ PRÉ AQUECIDO A 180º, POR MAIS OU MENOS 40 MINUTOS.

RECHEIO E COBERTURA:

O RECHEIO, NORMALMENTE VOCÊ PODE FAZER DE SUA PREFERÊNCIA, COM CREMES OU DOCES QUE VOCÊ NORMALMENTE GOSTE.

OBSERVAÇÃO: EU QUANDO FAÇO ESSA RECEITA, COSTUMO FAZER APENAS 1/2 RECEITA, UMA RECEITA COMPLETA É INDICADA QUANDO A FAMÍLIA É GRANDE.

Thursday, January 26, 2017

January 2017 Data Update 6: A Cost of Capital Update!

I have described the cost of capital as the Swiss Army knife of finance, a number that shows up in so many different places in corporate financial and analysis and valuation and in so many different contexts, that it is easy to mangle and misunderstand. In this post, my objective is simple. I will start with a description of the sequence that I use to get to a cost of capital for companies in January 2017, but the bulk of the post will be describing what the cost of capital looks like at the start of 2017 for companies around the world.

The Cost of Capital: Hurdle Rate, Opportunity Cost and Discount Rate
As I move from corporate finance to valuation to investment philosophies, the one number that seems to show up in almost every aspect of analysis is the cost of capital. In corporate finance, it is the hurdle rate that determines whether companies should make new investments, the optimizer for financing mix and the divining rod for how much to return to stockholders in dividends and buybacks. In valuation, it is the discount rate in discounted cash flow valuations and the determinants of enterprise value multiples (of EBITDA and sales).

It is perhaps because it is used in so many different contexts by such varied sub-groups that it remains a vastly misunderstood and misused number. If you are interested in reading more about the cost of capital, you may want to try this paper that I have on the topic (it is not technical or theoretical).

The Cost of Capital Calculation
The cost of capital is the weighted average of the costs of equity and debt for a business. While entire books have been written on the measurement questions, I will keep it simple.
1. The cost of equity is the rate of return that the marginal investors, i.e., the investors who are most influential at setting your market price, are demanding to invest in equity in your business. To get to that number, you need three inputs, a risk free rate to get started, a measure of how risky your equity is, from the perspective of the marginal investors, and a price for taking that risk.
Cost of Equity = Risk Free Risk + Relative Risk Measure * Price of Risk
In the rarefied world of the capital asset pricing model, you assume that the marginal investor is diversified, beta measures relative risk and the equity risk premium is the price of risk, yielding a cost of equity.
2. The cost of debt is the rate at which you can borrow money, long term and today. It is not a historic cost of borrowing, nor can it be influenced by decisions on changing debt maturity. It can be computed by adding a credit or default spread to the risk free rate but it does come, in many markets, with a tax benefit which is captured by netting it out of your cost.
After-tax Cost of Debt = (Risk Free Rate + Default Spread) (1- Marginal Tax Rate)
The default spread can sometimes be observed, if the company issues long term bonds, sometimes easily estimated, if the company has a bond rating and you trust that rating, and sometimes requires more work, if you have to estimate default risk yourself.
3. The weights on debt and equity should be based upon market values, not book values, and can change over time, as your company changes.

Since I want to compute the cost of capital for every one of the 42,668 firms that comprised this year’s sample, I had to make some simplifying (and perhaps even simplistic) assumptions, some of which were necessitated by the size of my sample and some by data limitations. I have summarized them in the picture below.

I have computed the costs of capital for all companies in US dollar terms, not for parochial reasons, since converting to another currency is trivial (as I noted in my post on cracking the currency code) but to allow for consolidation and comparison.

The costs of capital that I compute for individual companies have two shortcomings, driven primarily by data limitations. The first is that the beta that I use for a company comes from the business that it is categorized in, rather than a weighted average of the multiple businesses that it may operate in. The second is that I have attached the equity risk premium of the country of incorporation rather than a weighted average of the ERPs of the countries in which a company operates; I had to do this since the revenue breakdowns by country were either not available for many companies or in too difficult a form to work with. If you want to compute the cost of capital for a company using my data, I have a spreadsheet that you can use that will let you break out of these bounds, allowing you to compute a beta across multiple businesses and an equity risk premium across many countries/regions.

Differences across Geographies
The first comparison I make is in the costs of capital across different countries and regions. The picture below shows cost of capital by country and you can download the data in a spreadsheet at this link.
Given that these are all US-dollar based costs of capital, the differences across countries can be attributed to four factors:
  1. Country risk: Country risk shows up in two places in the cost of capital calculation, the equity risk premium for the company (which is set equal to the equity risk premium of the country it is in) and an additional default spread in the cost of debt. 
  2. Industry concentration: Since my measure of relative risk comes from looking at the global beta for the sector in which a company operates, the cost of capital for a country will reflect the breakdown of industries in that country. Thus, the cost of capital for Peru, a country with a disproportionately large number of natural resource companies, will reflect the beta of mining and natural resource companies.
  3. Marginal tax rate: To the extent that a higher marginal tax rate lowers the after-tax cost of debt, holding all else constant, countries with higher marginal tax rates will have lower after-tax costs of debt and perhaps lower costs of capital.
  4. Debt ratio: Twinned with the marginal tax rate, in computing how much a company is being helped by the tax benefit of debt, is the amount of debt that the company uses, with higher debt ratios often translating into lower costs of capital.
Differences across Industry Groups
I next turn to industry groupings and differences in cost of capital across them. In the table below, I list the ten (non-financial service) industry groupings globally, with the highest costs of capital, and the ten, with the lowest, at the start of 2017.
The reason for excluding financial service companies is simple. For banks, insurance companies and investment banks, the only hurdle rate that has relevance is a cost of equity, since debt is more raw material than a source of capital for these firms. You can download the entire industry list (with Global, European, Emerging Market and Australia/Canada worksheets) at this link, but again there are only a few reasons for the differences:
  1. Business risk: Some businesses are clearly more risky than others and I am using my sector betas to capture the differences in risk. 
  2. Leverage differences: Companies in some sectors borrow more than others, with mixed effects on the cost of capital. The resulting higher debt to equity ratios push up sector betas more, leading to higher costs of equity. That, though, is more than partially offset by the benefit of raising financing at the after-tax cost of debt, a bargain relative to equity.
  3. Country exposure: Some industry groupings have geographic concentrations and to the extent that those concentrations are in countries with very low or very high risk, relative to the rest of the world, your cost of capital will be skewed low or high.
Distributional Perspective
I have long argued that analysts spend far too much time on tweaking and finessing costs of capital in valuation and not enough on estimating earnings and cash flows, and I base my argument on a very simple fact. The distribution of costs of capital for publicly traded companies is a tight one, with a large proportion of companies falling in a very narrow range. Rather than talk in abstractions, consider the histogram of costs of capital for US and global companies at the start of 2017:

The median US $ cost of capital for a US company is 7.22%, 50% of all US companies have costs of capital between 5.69% and 8.14%, and 80% have costs of capital between 4.59% and 8.87%. If you expand the distribution to include all global stocks, your distribution widens but not by as much as you might think. The median US $ cost of capital for a global company is 8.03%, half of all global companies have costs of capital between 6.88% and 9.15% and 90% of all companies globally have costs of capital between 5.63% and 10.68%. In other words, you don't have a lot of leeway to move your cost of capital for publicly traded firms. It is true that as you bring in other currencies into the mix, you can make the differences larger, but as I noted in my post on currencies, it is because of differences in inflation. You may want to pay heed to these distributions the next time that you see an analyst using a 20% US$ cost of capital to value a "risky" company or a 3% US$ cost of capital for a "safe" company, since neither number looks defensible, given the distribution.

Cost of Capital Maxims
I think that we not only spend too much time on estimating costs of capital in valuation but we also misunderstand what it is designed to measure. At the risk of repeating myself, here are four suggestions that I have on the cost of capital:
  1. Don't make the cost of capital the receptacle of all your hopes and fears: Many analysts take to heart the principle that riskier firms should have higher costs of capital (or discount rates) but then proceed to intuit what that discount rate should be for company, given how risky they think it is.  In the process, they often incorporate risks that don't belong in discount rates and attach prices for those risks that reflect their gut responses rather than what the market is paying.
  2. Focus on cash flows, not discount rates: When your valuations go awry, it is almost never because of the mistakes that you made on the discount rate and almost always because of errors in your estimates of cash flows (with growth, margins and reinvestment). 
  3. Spend less time on estimating discount rates: It follows then that when you have a limited amount of time that you can spend on a valuation (and who does not?), that time is better spent on assessing cash flows than in fine tuning the discount rate.
  4. An approximation works well : When I am in a hurry to value a company, I use my distributional statistics (see graph above) to get started. Thus, if I am valuing an average risk company in US dollars, I will start off using an 8% cost of capital (the global median is 8.03%) and complete my valuation with that number, and if I still have time, I will come back and tweak the cost of capital. If it is very risky firm, I will start off with a 10.68% cost of capital (the 90th percentile) and gain revisit that number, if I have the time.
All in all, if your find yourself obsessing about the minutiae of discount rates in a valuation, it is perhaps because you want to avoid the big questions that make valuation interesting and challenging at the same time.

YouTube Video

  1. Cost of Capital (US$), by Country - January 2017
  2. Cost of Capital (US$), by Industry - January 2017
  3. US $ Cost of Capital - Percentiles for US and Global companies

Wednesday, January 25, 2017

I've moved!

Hello dear readers,

After nine years of blogging on this platform, I've decided to move to a new website at stephanguyenet.com.  This coincides with the impending release of my book, The Hungry Brain, on February 7, 2017, as well as my general desire to have a more professional-looking public interface.  My blog will be there, as well as a book page, a page for the Ideal Weight Program, and other resources.

Thank you all for your support, and I'll see you at stephanguyenet.com.  Sincerely,

Stephan

January 2017 Data Update 5: A Taxing Year Ahead?

There are three realities that you cannot avoid in business and investing. The first is that your returns and value are based upon the cash flows you have left over after you pay taxes. The second is that the taxes you pay are a function of both the tax code of the country or countries that you operate in and how you, as a business, work within (or outside) that code. The third is that the tax code itself can change over time, as countries institute changes in both rates and rules. The upcoming year looks like it will be more eventful than most, especially for US companies, as there is talk about major changes coming to both corporate and individual taxation.

Why taxes matter
While we are often casual in our treatment of taxes, the value of a business is a affected substantially by tax policy, with our measures of expected cash flows and discount rates both being affected by taxes.
  • In the numerator, you have expected cash flows after taxes, where the taxes you pay will reflect not only where in the world you generate income (since tax rates and rules vary across countries) but how the country in which you are incorporated in treats that foreign income. The US, for instance, requires US companies to pay the US tax rate even on foreign income, though the additional tax is due only when that income is remitted back to the US, leading to a predictable result. Multinational US companies leave their foreign income un-remitted, leading to the phenomenon of trapped cash (amounting to more than $2 trillion at US companies at the start of 2017).
  • The denominator, which is the discount rate, is also affected by the tax code. To the extent that tax laws in much of the world benefit debt over equity, using more debt in your financing mix can potentially lower your cost of capital. In computing this tax benefit from debt, there are two points to keep in mind. The first is that interest expenses save you taxes at the margin, i.e., your dollar in interest expense offsets your last dollar of income, saving you taxes on that last dollar, making it imperative that you use the marginal tax rate when computing your tax benefit from borrowing. The second is that companies have a choice on where to borrow money and not surprisingly choose those locations where they get the highest tax benefit (with the highest marginal tax rate). Is it any surprise that while Apple generates its income globally and finds ways to pay an effective tax rate of 21% on its taxable income in 2016, almost all of its debt is in the United States, saving taxes at an almost 40% marginal tax rate?
Following up, then, the values of all companies in a country can change, some in positive and some in negative ways, when tax codes get rewritten. Even if the corporate tax codes don’t change, a company’s decisions on how to structure itself and where geographically to go for growth will affect its cash flows and discount rates in future years.

Marginal Tax Rates
If the marginal tax rate is the rate that a business pays on its last dollar of income, where in its financial statements are you most likely to find it? The answer in most companies is that you do not, and that you have to look in the tax code instead. Fortunately, KPMG does a yeoman job each year of pulling these numbers together and reporting them and the most recent update can be found here. The map below lists marginal tax rates by country and you also download a spreadsheet with the latest numbers at this link:
Link to live map
As you survey the world's marginal tax rates, you can see why trapped cash has become such a common phenomenon at US companies. The US has one of the highest marginal tax rates in the world at 40% (including a federal tax rate of 35%, topped off with state and local taxes) and is one of only a handful of countries that still insist on taxing companies incorporated in their domiciles on their global income, rather than adopting the more defensible practice of territorial taxation, where you require businesses to pay taxes in the countries that they generate their income in. As Congress looks at what to do about “trapped cash”, with many suggesting a one-time special deal where companies will be allowed to bring the cash back, they should also realize that unless the underlying reason for it is fixed, the problem will recur. That will mean either lowering the US marginal tax rate closer to the rest of the world (about 25%) or changing to a territorial tax model.

The marginal tax rate is the number that you use to compute your after-tax cost of debt but that practice is built on the presumption that all interest expenses are tax deductible (and that you have enough taxable income to cover the interest deduction). That is still true in much of the world but there are parts of the world, where you either cannot deduct interest expenses (such as the Middle East) or you have taxes computed on a line item like revenues (thus nullifying the tax benefit of debt), where you will have to alter the practice of giving debt a tax benefit. For multinational companies that face different marginal tax rates in different operating countries, my recommendation is that you use the highest marginal tax rates across countries, since that is where these companies will direct their borrowing. 

Effective Tax Rates: Country Level Differences
If the marginal tax rate is the tax rate on your last dollar of income, what is the effective tax rate, the number that you often see reported in financial statements? In most cases, it is a computed tax rate that comes directly from the income statement and is computed as follows:
Effective Tax Rate = (Accrual) Taxes Payable / (Accrual) Taxable Income
Both number are accrual income numbers and thus can be different from cash taxes paid, with the differences usually visible in the statement of cash flows. Let’s start with looking at what companies pay as effective tax rates in the United States, a country with a marginal tax rate of 40%. In the most recent twelve months leading into January 2017, the distribution of effective tax rates paid by tax-paying US companies is captured below.

The most interesting numbers in this distribution are the average effective tax rate of 26.42% across profitable US companies, well below the marginal tax rate of 40%. and the fact that 88% of US companies have effective tax rates that are lower than the marginal. The most important reason for this difference, in my view, is foreign operations with those firms that generate revenues outside the United States paying lower taxes, simply because the tax rate on income outside the United States is much lower (and that differential tax is not due until the cash is remitted). While there are some who suggest that a simple fix for this is to force US firms to pay the entire marginal tax rate when they make their income in foreign locales immediately (rather than on repatriation), this will be a powerful incentive for US companies to move their headquarters overseas. 

In these populist times, you may be convinced that US companies are not paying their fair share of taxes but is that true? To make that judgment, I looked at effective tax rates paid by companies in different countries in the picture below and you can download the data in a spreadsheet in the link below:
Link to live map
At least, based upon the data on taxes paid in 2017, US companies measure up well against the rest of the world, in terms of paying taxes, with only Japanese companies paying significantly more in taxes; Indian and Australian companies pay about what US companies do and the rest of the world pays less.


Sub GroupEffective Tax RateSub GroupEffective Tax Rate
Africa and Middle East15.48%India27.65%
Australia & NZ26.76%Japan31.07%
Canada19.68%Latin America & Caribbean22.91%
China21.72%Small Asia21.59%
EU & Environs23.03%UK22.26%
Eastern Europe & Russia19.88%United States26.22%
As US companies market their products and services in other countries, it is true that some of this tax revenue is being collected by foreign governments, but that is the nature of a multinational business and is something that every country in the world with multinational corporations has as a shared problem.

Effective Tax Rates: Industry and Company Differences
As a final analysis, I compared the effective tax rates by US companies, categorized by industry. This table, which I have reported before, lists the ten industry groups that pay the highest effective tax rate and the ten that pay the lowest:
The entire list can be downloaded here. Again, there are many reasons for the differences, with companies that generate more income from foreign operations paying lower taxes than domestic companies being a primary one. It is also true that the US tax code is filled with sector-specific provisions that provide special treatment for these sectors in the form of generous tax deductions. Most of these tax deductions (like higher depreciation allowances) show up as expenses in the income statement and the taxable income should already reflect them and so should the effective tax rate, but in some cases it does show up as a marginal tax rate.

While in most years, these differences across sectors is a just a source of discussion or a reason to vent on the unfairness of taxes, I believe that investors, this year, should be paying particular attention to them. If Congress is serious about rewriting the tax code this year, there is reason to believe that the changed tax code is going to create winners and losers, and especially so, if it is designed to be revenue neutral. Those winners and losers will of course be different, depending on which version of corporate tax reform passes.
  • At one extreme in the version that is least disruptive to the current system, the marginal tax rate for corporations will be lowered, perhaps with a loss of some tax deductions/credits and adjustments on how foreign income gets taxed to reduce the problem of trapped cash. If this change occurs, the effects on value will be mixed, with cash flows increasing for those firms that will have lower effective tax rates as a consequence and the costs of debt and capital increasing as the tax benefits of debt will decrease. The biggest beneficiaries will be firms that pay high effective tax rates today (see the table above for the sectors) and have little debt. The biggest losers will be firms that pay low effective tax rates today and fund their operations with lots of debt.
  • At the other extreme, the House of Representatives is considering a more radical version of tax reform, where the current corporate income tax will be scrapped and replaced with a "Destination Based Cash-flow Tax" (DBCT), a value added tax system, with a deduction for wages, where the tax rate that you pay as a company will be a function of how much of your input material you import and where you sell your output.  The first side product of the DBCT will be that debt will lose its historical tax-favored status, relative to equity. The second side product is that, if left unadorned, it will eliminate any incentives to move profits across countries or borders, since the tax is not based on income. Companies who produce their goods with inputs from the US that then export these goods and services will benefit the most, paying the lowest taxes, whereas companies that are heavily reliant on imported inputs that sell their products in the United States would pay the most in taxes. And firms that are heavily debt funded will be adversely affected, relative to those that are not debt funded.
There are numerous other proposals that float in the middle, most offering lower corporate tax rates in exchange for loss of tax deductions.  It is early in the game and we have no idea what the final version will look like. I will cheerfully confess that I am not expert on tax law and have absolutely no interest in providing specific directions on how the tax code should be rewritten but I will offer two simple pieces of advice having watched other attempts to rework corporate taxes:
  1. Keep it simple: When tax law gets complex, bad corporate behavior seems to follow. Unfortunately, the way legislative processes work seems to conspire against simplicity, as legislators trying to protect specific industries try to make sure that their ox does not get gored. 
  2. The tax code is not an effective behavior modifier for businesses: I understand the desire of some to use tax law as a corporate behavior modification tool but it is not a very effective one. Thus, if Congress is serious about the DBCT, it should be because they believe it is a more effective revenue generating mechanism that the current complex system and not because it wants to encourage companies to move manufacturing to the United States. If that is a byproduct, that is a plus but it should not be the end game.
  3. Make it predictable: Companies have enough uncertainty on their plates to worry about without adding uncertainty about future tax law changes to the mix. It would help if the tax code, once written, was not constantly revisited and revised.
I am also a realist and believe that the likelihood of either of these pieces of advice being followed is close to zero.

Closing
In the process of computing an implied equity risk premium for the S&P 500, I collected analyst estimates of growth in earnings for the S&P 500 companies. Many of these analysts are predicting that earnings for the S&P 500 will grow strongly in 2017 and one shared reason seems to be that companies will pay less in taxes. Since legislative bodies are not known for speedy action, I am not sure that change, even if it does happen, will show up in 2017 earnings but I think that the ultimate test is not in what the tax code does to marginal tax rates (since I think it is a safe assumption that they will come down from) but the changed tax code will mean for effective tax rates. Assuming that the tax code does get rewritten, how will we know whether it is doing more good or harm?  I have two tests. First, if companies think about, talk about and factor in taxes less in their decision making, that is a good sign. Second, if fewer people are employed as tax lawyers and in transfer pricers, that is an even better one. I won't be holding my breath on either!

YouTube Video

Datasets

    Tuesday, January 24, 2017

    January 2017 Data Update 4: Country Risk Update

    In my last post, I pointed to currency confusion as one of the side effects of globalization. In this one, I will argue that as companies and investors globalize,  investors and analysts have no choice but to learn how to deal with the rest of the world, both in terms of risk and pricing. One reason that I take a detailed look at country risk and pricing numbers every year is that my valuations and corporate finance rest so heavily on them. 

    Why country risk matters
    It seems to me an intuitive proposition that a company’s value and pricing can depend upon the geography of its business. Put simply, cash flows generated in riskier countries should be worth less than equivalent cash flows generated in safer ones but there are two follow up propositions worth emphasizing:
    1. Operation, not incorporation: I believe that it is where a company operates that determines its risk exposure, not just where it is incorporated. Thus, you can have US companies like Coca Cola (through its revenues) and Exxon Mobil (from its oil reserves) with substantial emerging market exposure and emerging market companies like Tata Consulting Services and Embraer with significant developed market exposure. In fact, what we face in valuation increasingly are global companies that through the accident of history happen to be incorporated in different countries.
    2. Company, Country and Global Risks: Not all country risk is created equal, especially as you are look at that risk as a diversified investor. Some country risk can be isolated to individual companies and is therefore averaged out as you diversify even across companies in that country. Still other country risk is country-specific and can be mitigated as your portfolio includes companies from across the globe. There is, however, increasingly a portion of country risk that is global, where even a global investor remains exposed to the risk and more so in some countries than others. The reason that we draw this distinction is that risks that can be diversified away will affect only the expected cash flows; that adjustment effectively takes the form of taking into account the likelihood and cash flow consequences of the risk occurring when computing the expected cash flow. The risks that are not diversifiable will affect both the expected cash flows and also the discount rates, with the mode of adjustment usually taking the form of higher risk premiums for equity and debt. That may sound like double counting but it is not, since the expected cash flows are adjusted for the likelihood of bad scenarios and their consequences and the discount rate adjustment is to demand a premium for being exposed to that risk:
      If you make the assumption that all country risk is diversifiable, you arrive at the conclusion that you don't need to adjust discount rates for country risk, a defensible argument when correlations across countries were very low (as in the 1980s) but not any more.
    Thus, dealing with country risk correctly becomes a key ingredient of both corporate finance, where multinational companies try to measure hurdle rates and returns on projects in different countries and in valuation, where investors try to attach values or prices to the same companies in financial markets. 

    Country Default Risk
    Since I have had extended posts on country risk before, I will not repeat much of what I have said before and instead focus this post on just updating the numbers. Simply put, the most easily accessible measures of country risk tend to be measures of default risk:
    1. Sovereign Ratings: Ratings agencies like S&P, Moody’s and Fitch attach sovereign ratings to countries, where they measure the default risk in government borrowing just as they do for individual companies. These ratings agencies often also provide separate ratings for local currency and foreign currency borrowings by the same government. The picture below summarizes ratings by country, in January 2017, and the linked spreadsheet contains the same data.
      Link to live version of map
    2. Government Bond Default Spreads: When a government issues bonds in a foreign currency, that are traded, the interest rate on those bonds can be compared to the risk free rate in a bond issued in the same currency to arrive at measures of default risk for the government. In much of Latin America, for instance, where countries has US-dollar denominated bonds, comparing the rates on those bonds to the US T.Bond rate (of equivalent maturity) provides a snapshot of default risk. The table below summarizes government bond default spreads as of January 1, 2017, for Latin American countries with US dollar denominated bonds:
    3. Sovereign CDS Spreads: This measure of default risk is of more recent vintage and is a market-determined number. It is, roughly speaking, a measure of how much you would have to pay, on an annual basis, to insure yourself against country default and unlike ratings can move quickly in response to political or economic developments in a country, making them both more timely and more volatile measures of country risk. In January 2017, sovereign CDS spreads were available for 64 countries and you can see them in the picture below and download them as a spreadsheet at this link.
      Link to live version of the map
    Country Equity Risk
    There are many who use country default spreads as a proxy for the additional risk that you would demand for investing in equity in that country, adding it on to a base equity risk premium (ERP) that they have estimated for a mature market (usually the US).
    ERP for Country A = ERP for US + Default Spread for Country A
    The limitation of the approach is that there are not only are equities affected by a broader set of risks than purely default risk but that even default can have a larger impact on equities in a country than its bonds, since equity investors are the residual claimants of cash flows.

    There are broader measures of country risk, taking the form of country risk scores that incorporate political, economic and legal risks, that are estimated by entities, some public (like the World Bank) and some private (like PRS and the Economist). The first is that they tend to be unstandardized, in the sense that each service that measures country risk has its own scoring mechanism, with World Bank scores going from low to high as country risk increases and PRS going from high to low. The second is that they are subjective, with variations in the factors considered and the weights attached to each. That said, there is information in looking at how the scores vary across time and across countries, with the picture below capturing PRS scores by country in January 2017. The numbers are also available in the linked spreadsheet.
    Link to live map
    I have my own idiosyncratic way of estimating the country risk premiums that builds off the country default spreads. I use a ratio of market volatility, arguing that default spreads need to be scaled to reflect the higher volatility of equities in a market, relative to government bonds in that market. 

    Since the volatility ratio can be both difficult to get at a country level and volatile, especially if the government bond is illiquid, I compute volatilities in an emerging market equity index and an emerging market government bond index and use the resulting ratio as a constant that I apply globally to arrive at equity risk premiums for individual countries. In January 2017, I started my estimates with a 5.69% equity risk premium for mature markets (set equal to the implied premium on January 1, 2017, for the S&P 500) and then used a combination of default spreads for countries and a ratio of 1.23 for relative equity market volatility (from the index volatilities) to arrive at equity risk premiums for individual countries.

    For countries that had both sovereign CDS spreads and sovereign ratings, I was able to get different measures of equity risk premium using either. For countries that had only a sovereign rating, I used the default spread based on that rating to estimate equity risk premiums (see lookup table here). For those countries that also had sovereign CDS spreads, I computed alternate measures of equity risk premiums using those spreads. Finally, for those frontier countries (mostly in the Middle East and Africa) that were neither rated nor had sovereign CDS spreads, I used their PRS scores to attach very rough measures of equity risk premiums (by looking at other rated countries with similar PRS scores). The picture below summarizes equity risk premiums by country and the link will give you the same information in a spreadsheet.
    Link to live map
    Closing
    The one prediction that we can also safely make for next year is that just as we have each year since 2008, there will be at least one and perhaps even two major shocks to the global economic system, precipitated by politics or by economics or both. Those shocks affect all markets globally, but to different degrees and it behooves us to not only be aware of the impact after they happen but be proactive and start building in the expectation that they will happen into our required returns and values.

    YouTube Video


    Datasets
    1. Sovereign Ratings by Country, S&P and Moody's on January 1, 2017
    2. Sovereign CDS spreads (ten-year) on January 1, 2017
    3. Political Risk Services (PRS) scores by country, January 1, 2017
    4. Equity Risk Premiums and Country Risk Premiums by country on January 1, 2017

    Monday, January 23, 2017

    台北電玩展 X 遊戲 X 麵包


    一轉眼又到了一年一度的台北電玩展啦,
    想起去年參展時,
    Roll Turtle還沒有上架,
    認識的開發者朋友也並不多,現在因為做遊戲的關係認識了好多朋友。

    Roll Turtle的iOS版本在2016年5月18日上架,
    Android版本則是在2016年8月初上架,
    看時間點其實沒有上架很久,但感覺上已經過了很久了,
    甚至覺得有已經上架好幾年的錯覺,
    已上架差不多半年的遊戲來說,這個時間點對於要不要參展還是有些尷尬的。

    其實這次原本並不打算再參加台北電玩展了,
    但是因為B2B的獨立開發者展區是免費參加的,
    就如同許多開發者朋友所說的,在當作是"同學會"的情形下,
    還是決定以交流為重心,報了一個B2B攤位,,
    宣傳或推廣Roll Turtle的部份,比較沒有那麼看重,不是這次參展的主要目的。

    B2C的部份雖然沒有展出,
    在Live House的台灣好遊戲實況活動中,也有2天各20分鐘的遊戲介紹實況,
    托許多朋友幫忙的福,活動在昨天也已經順利結束啦 (≧∀≦)


    在作品已經發售的情形下,參加這次的展會,
    尤其是這半年經歷了這麼多之後,再次重返這個地方,
    心裡面是很有感觸的,
    台北電玩展是Roll Turtle發售前,所參加的最後一個展覽,
    跟很多獨立開發者一樣,
    當時只是單純的想著,做出一個好玩的遊戲,自然就會有人買,
    遊戲賣的不好的話,一定是品質不夠好。

    遇到許久不見的朋友告訴我,
    Roll Turtle已經賣的不錯了啊,然後又得了許多獎等等的,
    至少以手機上的付費遊戲來說是不錯了。
    (那個誰誰誰,今天甚至問我是不是可以退休了...可以閒閒的到處逛Orz)

    因為是單人開發,所以很幸運的,目前的情況是可以接受的,
    但如果這不是單人開發,
    不要說養團隊,光是一般常見的編制,一名程式+一名美術的話,
    應該就是掛了,沒辦法撐到下一款作品產出。

    得獎的作品 != 商業上能夠獲得巨大成功,
    每次獲獎,在作品受到肯定感到開心之餘,
    其實會忍不住暗暗期待,是否會帶來一波下載,
    但幾次經驗之後,發現這兩者其實是沒有直接關聯的。

    "遊戲好玩,品質好,自然就會大賣"
    就好像鋼鍊那句等價交換法則名言一樣,這是我之前一直相信的。

    自己是認為Roll Turtle賣的沒有很好,頂多就普普吧,
    「嗯...應該是遊戲品質不夠好,遊戲品質夠好就一定會賣!」
    但是,Roll Turtle陸續獲得了許多獎項的肯定,
    一個獎,兩個獎,三個獎,國內的、國外的...愈來愈多獎,
    老實說,我都很怕Roll Turtle是不是配不上這些獎項,
    尤其是這次IMGA China獲獎,是具有指標性意義的國際獎項,
    IMGA評選遊戲的標準只有是否"好玩",
    不把行銷能力,營收能力,宣傳能力列入,
    所以能獲得IMGA的獎項,真的是莫大的殊榮。

    這樣應該表示遊戲品質真的有被肯定....吧?
    遊戲好玩,品質好,自然就會賣的好....嗎?
    看看在IMGA不管是sea還是china更不用說是west獲獎的遊戲,
    經過IMGA認證的遊戲每個似乎都十萬起跳,甚至百萬下載耶!
    又讓我想起半路說過的那個"金城武教你追女友"的經典名言XD

    金城武: 「只要真心誠意,一定能交到女友」
    這真的太經典了 ( ´∀`)

    這個世界上有很多製作精良,又很好玩的遊戲大熱賣,這是理所當然的;
    但同樣的,除了Roll Turtle之外,
    當然還有許多很好玩的遊戲,沒有得獎也沒有大賣,
    為什麼? 沒有為什麼^^"

    「你想問為什麼,我也想問啊!」
    「為什麼我老爸不是李嘉誠?」
    「為什麼我長這麼帥 ,就要掉頭髮?」
    「你們兩個長那麼醜,就不掉頭髮」

    遊戲好玩,品質好,只是基本。

    就像鋼之鍊金術師裡艾德華兄弟鍊成了他們的媽媽一樣,
    等價交換法則是鍊金術的絕對,但又並不是那麼絕對。

    做遊戲要賺錢,真的沒有那麼容易,
    但最初所希望的生活,
    可以把創作遊戲當做工作,又能維持生活,
    每天不管是做遊戲還是玩遊戲,都在鑽研遊戲,
    能夠單純的享受遊戲的樂趣,
    這樣就很好了。

    有時候聊天,會提到撐不撐得到下一款作品做完,這類的話題,
    其實這個說法想一想好像不是很好,
    根本不用撐啊,做自己喜歡的事,是很快樂的,
    只是有時候忘記了而已,要做的只是想起那份快樂。

    如果是用"撐"的,那表示是痛苦的,可能這件事已經不是自己的最愛了。

    好想再次讓自己一頭栽進新作品的開發,
    不管外面的世界如何運轉,
    每天每時每分每秒只專心一意想著如何讓作品更好。

    走了展場一圈,
    最大的收獲是,看到大家都充滿著熱情為自己的作品努力著,
    並且整個會場塞滿了喜歡遊戲而聚集在此的人,
    真的讓人好想好想趕快開始新專案啊!

    不過,在那之前,得先把搬家的事跟桐寶上幼稚園的事搞定 (゚∀゚ )
    今年的年來得特別早,
    電玩展裡,路上的商家,到處充滿著年節味,
    回家的路上在車站買了一個桐寶喜歡的可頌麵包,這是出門前答應他的。

    看著手上的麵包,
    「這個可頌麵包是用做遊戲所賺來得的錢買的」
    提著麵包去等車,有一種幸福的感覺浮上心頭。


    Sunday, January 22, 2017

    [遊戲設計] 英勇之心:偉大戰爭是怎麼讓你情緒潰堤的?




    原作者:Stanislav Costiuc  on January/05/17

    以下文章內容,除經另行註明,係由Gamasutra社群的成員所著。

    其中表達的想法與意見為該作者所有,並不代表Gamasutra及其母公司。




      我可以大書特書英勇之心:偉大戰爭(Valiant Hearts 以下簡稱英勇之心)有多棒嗎?真的超級無敵棒。我的意思是就整體設計層面來看,這遊戲有辦法將第一次世界大戰的背景、解詸式冒險玩法、卡通美術風格、遊戲中無意義的語音、戰爭期間英雄式的「帥啦」時刻、戲劇性的戰爭情勢、戰時敵對雙方的人性、開車的音樂關卡等東西結合起來,並讓你體驗一場情緒的雲宵飛車。要不眼角泛淚是很困難的事。還有那隻狗狗。或許是遊戲史上最棒的狗狗了。但我要講的重點不是狗狗。我要談論的是遊戲後期的某個關卡 -- 貴婦小徑 (Chemin des Dames),以及它是如何讓你情緒潰堤。


      在探討貴婦小徑之前,不說明一下主角之一、同時也是本關操控角色的Emile先前發生的事是不行的。要詳加介紹的話會花很多時間(最好還是去把遊戲玩一玩吧 :D ),但大致上來說,Emile受夠了這場戰爭。他生了病、他認為他的德國女婿死了、在逃離德軍監牢後被法國軍事法庭不合理地判定為逃兵(接著被赦免並重新派回前線)、他也飽受無數種恐怖的景象,包括要炸死才剛從倒塌的坑道中救他出來的德軍士兵。所以,在這個時間點我們可以理解Emile對於要參加這場後世稱為第一次世界大戰中最血腥且失敗的進攻行動之一時,並沒有展現多大的動機。


    How Valiant Hearts drives you to the breaking point
      這關在長官下令去找到三個人和我們同行之下展開。他們是我們第一次看到的無名NPC,但和大多數無名NPC不一樣的是他們有很特別的造型。這樣的不同能幫助我們在這關中和他們建立情感,即使我們對他們一無所知。

    How Valiant Hearts drives you to the breaking point
      當我們走向前向時,氣氛開始凝重起來 - 我們會經過許多抬著傷患的士兵。那我們的長官呢?嗯,他好好地待在法國領土上(相對)安全的前線,但當我們衝進危險區域時他隨時都會在部隊後面,對我們揮舞著他的軍刀和手槍要我們筆直衝向敵人的火線。這是對這角色產生敵意的起源。

    How Valiant Hearts drives you to the breaking point
      所以,當我們抵達戰區時,我們得在坑道之間移動以避開敵人機槍的火線。很重要的一點是,坑道被用來當做絕對安全的區域 -  你只要在裡面就不會死掉。

    How Valiant Hearts drives you to the breaking point
      以上那點很快地被接著出現的另一種掩體證實 -- 木製擋板很輕易地就被機關槍摧毀,所以你不能待在後面太久,你必須隨時保持移動。

    How Valiant Hearts drives you to the breaking point
      接著我們在某個班兵試著破壞鐵絲網時失去了他(雖然沒有喪命)。在後方的長官不斷地逼我們向前衝以及德軍機關槍攻擊之際,我們帶著長官抵達一個安全的壕溝並再往前推進。

    How Valiant Hearts drives you to the breaking point
      再往前一點,我們會碰到關卡中第一個挖掘區。我想強調地下挖掘在這個時間點代表的是避難所,遠離了那宛如地獄一般的地表,這對之後提昇情緒的緊張感是很重要的。

    How Valiant Hearts drives you to the breaking point
      接著碰到的場景是在會被破壞的掩體後躲開敵人炮火。而我想要強調,不單是這一段期間,整個關卡從頭到尾我們都沒有直接面對任何一個德軍士兵。這關就只是在長官的指揮下往前衝,避開炮火並活下來。在畫面背景和前景會看到一些衝突,所以部份的法軍是有取得一些戰果,但因為我們除了往前衝和閃躲之外沒有做任何事,所以這開始讓人感到絕望。

    How Valiant Hearts drives you to the breaking point
      很快地,我們會進入第二個挖掘區。這次就不再那麼安全了。一碰即爆的炮彈就卡在土裡,所以你在挖的時候要避開它們。這只是讓過往認為是安全區域不再安全的第一步。

    How Valiant Hearts drives you to the breaking point
      下一個場景很讓人傷心。場景中是成堆的遺體。但底下還有人活著,當我們將他安全地拉出來後他會加入我們成為第三個班兵。接下來發生的事我認為在營造情緒的層面上做得很棒。

    How Valiant Hearts drives you to the breaking point
      所以,先前我們用人造物來當做掩體  --  坑道和木板牆。但現在我們要用成堆死去的同袍屍體當做掩護。這顚覆我們習以為常的掩體印象,而且對情感造成很大的衝擊。當我們躲在屍體堆後且德軍仍然朝我們攻擊時,照樣能聽到那個長官咆哮著要我們推進,這添加了對那個角色的不滿,他真的讓我們開始不爽了。然後,我們得爬過另一堆堆屍體好進入坑道。

    How Valiant Hearts drives you to the breaking point
      這個坑道很特別。因為這裡是地獄的入口。炸彈掉了進來並毀了天花板。更多炸彈接踵而至,所以你最好快逃。坑道不再安全了。

    How Valiant Hearts drives you to the breaking point
      然後,當我們之中的某個班兵在安裝炸彈要清掉碎石好開路時,坑道的側邊被機關槍打破並殺了正在執行任務的班兵。從這一刻開始,坑道不再是避難所了。你有可能被上方的炸彈炸死,你在任何角落都有可能被機槍掃射。而那個長官仍不斷用槍口指著我們要我們推進。

    How Valiant Hearts drives you to the breaking point
      現在只剩兩個班兵還活著,接著就進入開卡最後的挖掘場。我們現在不僅要向前挖的同時避開卡在土裡的炮彈,從上方掉下來的炸彈還會毀掉這個區域。如果你站著不動幾秒的話大概就死定了,因為那些炸彈會毀掉我們正在挖的通道結構。

    How Valiant Hearts drives you to the breaking point
      在經歷過非常刺激的一刻後,我們會通過一段讓人喘口氣的戰場廢墟。但這段路不長,很快我們會抵達德軍朝我們開火的據點。

    How Valiant Hearts drives you to the breaking point
      然後我們要利用載滿屍體的推車來當做掩體。而我們從屍體堆中救出來的班兵為了要推動車子而陣亡。我要強調,每一個NPC同伴在死掉時會用拉近畫面、慢動作、以及一兩個影格會改變色調的方式做強調。

    How Valiant Hearts drives you to the breaking point

      在這最後一段可遊玩的場景中,我們要自己控制這台載滿屍體的推車,並在對的時間點停下來以避開敵人炮火。

    How Valiant Hearts drives you to the breaking point
      在我們通過這一區後,我們終於和活到最後的班兵進入沒有敵人會對我們射擊的安全區域。儘管說這股安心感很詭異,因為我們被成千上百具死去的士兵屍體環繞。但氣氛卻非常平靜,特別是和我們剛才經歷過的那些場景來做對比。

    How Valiant Hearts drives you to the breaking point
      這份安靜被一個掉下來的炸彈打斷,爆炸讓Emile震暈了一會兒。接著是全然的安靜,正當我們甦醒時,這份寂靜被那一位我們熟知且痛恨、正在發號施令的長官給打破。我們回到了充滿敵人炮火的區域。那位長官,如往常在部隊後方安全的地方指揮著大家衝入敵方致命的火線。

    How Valiant Hearts drives you to the breaking point
    士兵們紛紛倒下,有些人因為害怕而不想出去,其中一個不願出去的士兵是我們的班兵,那位從關卡開始就和你衝鋒陷陣的唯一班兵,其他人不是死就是傷重。而這長官不太高興。

    How Valiant Hearts drives you to the breaking point
      他拿出他的槍,他朝那名班兵的腳附近開槍,迫使他往後退並越來越靠近敵人的死亡火線。下一秒發生的事,是我看過所有玩家都有的自然反應。

    How Valiant Hearts drives you to the breaking point
      他們用鏟子砍向長官。那一擊非常致命,縱使Emile並不想砍得那麼重。但這不是重點。重點是,這一刻被編寫的方式讓你無法越過長官,要再往前的唯一方式就是砍他。但玩家並沒有花多餘的時間去想還有沒有別的方法,他們就是砍下去。

      因為這關讓玩家的情緒潰堤,就像整個戰爭讓Emile崩潰一樣。
      貴婦小徑引進了安全區域的概念,接著讓這些區域一個一個變得不安全,同時提昇敵人攻擊你的緊張感。這關帶入了獨特的NPC,有些人有自己的兵種角色,像是破壞鐵絲網或安裝炸藥,然後再把這些人從你身邊抽離。在經歷這一切的同時有個混蛋不停地把你推進死亡火線之中。接著,當你以為這一切都結束,終於安全時,那個長官又開始把你帶回死亡火線,並開始對唯一一個和你從頭經歷這一切的班兵開槍。對這個人展現出「幹你媽的」的情感是非常自然的。
      讓這一切的後果產生更深的情緒的是,玩家就和Emile一樣,並不想要這一擊如此致命。因為在整個遊戲中,你並沒有真的直接殺掉任何一個人。你從來沒有對一個人開過槍。丟手榴彈是為了要破壞障礙或屏障,如果附近有人的話,他們一定會逃離該地。你所有角色的攻擊動作都是揍人,而且這只會把人打昏而已。這和遊戲整體風格和基調一致,而且你早已覺得事情就該如此。
      這也是為什麼當你攻擊那個不講理的傢伙,也就是那個長官,結果殺死他時會讓人感受如此強烈了。對我來說這是個很棒的反差。這導向了非常難過且讓人掉淚的結局。而這也是我認為英勇之心為什麼可以如此巧妙結合嚴肅和滑稽要素的原因。
    How Valiant Hearts drives you to the breaking point
      在遊戲的最一開始,Emile在進行戰鬥訓練時也碰到了類似不斷咆哮且強迫人的長官。當時覺得滿滑稽的。但在最後出現的這個同類型長官,對你和其他同袍來說比敵人還要危險。

    How Valiant Hearts drives you to the breaking point
      遊戲中有道謎題是環繞在要如何去和一個人用一隻襪子交換墨水。這是冒險遊戲的基本款 - 找到一個髒掉的襪子,想辦法洗乾淨然後烘乾它。但請仔細想想整個氛圍。你身處在軍營中尋找一個襪子當做交易用物品,因為在這種時候對那個有需求的人來說那竟是最有價值的東西。這真的很讓人沮喪。

    How Valiant Hearts drives you to the breaking point



      遊戲角色Freddie有一整段關於尋找某位德軍將軍報仇,並且在QTE(Quick-Time Event 快速反應事件)中打爆他的故事線。這段故事既悲壯且富有張力。但當你開始回顧這整個故事線的起源時,一切都改變了。就在你獵殺這個搞笑劇中常見的壞人時,會看到我們在扮演Emile時和德軍士兵一起合作的場景,而這位德軍士兵救了我們。在我們目睹到我們幫助法軍炸掉一堆敵人後沒多久,我們看到那位德軍士兵也在其中。
      這就是為什麼我認為英勇之心是一趟情緒的雲宵飛車之旅。它用某種方法將這些看起來完全不搭軋的東西湊在一起,在這邊照著常理走,但在另一邊又推翻了你的想法,最後全部又環環相扣。而我真的很愛它擺弄這一切的手法,貴婦小徑就是個例子。
      謝謝你的閱讀。請隨意在下方留言。如果你想多注意我以後的文章,請在Twitter上追蹤我。
    翻譯:XDorz87
    校訂:MilkReaver