After the Bubble Bursts (CBD Yeo, 2006)
So let's say the dot.com has been struggling to overcome its initial capital outlay for a while (amazon.com) and has no real earnings to match its extravagant share price save for the prospect of hypergrowth. Let's also assume a rational investor.
What happens after the bubble bursts?
The investor is shaken by reality, reviews his annual reports to decide if the company's market value is justified by its intrinsic value and consequently to make his sell or hold decision. And since intrinsic value is measured by the sum of all future cashflows into the company, discounted at an appropriate rate, a stock that constantly brings negative returns should warrant a negative valuation.
There is no reason for the investor to hold his stock, regardless of how much he has fallen in love with it during the period of "irrational exuberance". After all, past performance says as much of future performance as share prices say of intrinsic value.
But let's assume he does. This implies that, given the unenthusiastic short-term prospects of the company, the investor forsees extraordinary medium to long-term cashflows that, when discounted to present value, negate all negative cashflows and give rise to a positive NPV. (We haven't even factored in opportunity costs yet!)
People will laugh at that: they don't believe in giant reversals, they don't believe that fallen dot.coms will ever rise again. But investors don't just think what people think, they don't care what others think! They decide for themselves. Nevertheless, the intelligent investor is attracted to value - he only buys when he sees a margin of safety.
What happens after the bubble bursts?
The investor is shaken by reality, reviews his annual reports to decide if the company's market value is justified by its intrinsic value and consequently to make his sell or hold decision. And since intrinsic value is measured by the sum of all future cashflows into the company, discounted at an appropriate rate, a stock that constantly brings negative returns should warrant a negative valuation.
There is no reason for the investor to hold his stock, regardless of how much he has fallen in love with it during the period of "irrational exuberance". After all, past performance says as much of future performance as share prices say of intrinsic value.
But let's assume he does. This implies that, given the unenthusiastic short-term prospects of the company, the investor forsees extraordinary medium to long-term cashflows that, when discounted to present value, negate all negative cashflows and give rise to a positive NPV. (We haven't even factored in opportunity costs yet!)
People will laugh at that: they don't believe in giant reversals, they don't believe that fallen dot.coms will ever rise again. But investors don't just think what people think, they don't care what others think! They decide for themselves. Nevertheless, the intelligent investor is attracted to value - he only buys when he sees a margin of safety.
posted by justin at 10:50 PM
2 Comments:
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Haha, truly 话中有话..
Anyway, dave you and xm should read this shuaigepoon book called: Compilation of Essays of Warren Buffet (by Lawrence Cunningham). It will blow you away!! (But maybe not daryl la, since he knows how to play new card games even before we teach him haha)
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