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Strategies & Market Trends : Gorilla and King Portfolio Candidates
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To: EnricoPalazzo who wrote (43577)6/17/2001 11:48:49 AM
From: Stock Farmer  Read Replies (1) of 54805
 
Sorry if I attenuated the dialogue, I will try to be more clear so we can connect. There is value to clarity in this area I think.

In our struggle to come up with a "fair value", we are dealing with two unknowns: projected future cash flows, and risk that this future does not unfold as projected.

The essence of the market is that the participating parties come up with different views of the future, by definition. So here you and I are fully agreed.

But there are different ways to agree to disagree and conduct a healthy transaction.

One school of thought would have two parties haggle until they agree on the same cash flow projection, and base their different buy/sell stances on a disagreement in risk.

Another school of thought would have the haggling over the discount rate and have the difference in views based on cash flow projections.

My statement was merely to point out that the latter is superior to the former, because the former is exposed to risk tolerance bias. If practiced continuously, leads to the individual with a higher risk tolerance becoming a holder-of-the-bag.

So this is the logic behind my preferred stance of: "many eyes on risk, my eyes on capital". I will therefore achieve consensus with the market on the cost of capital, and make my own assessment of future cash flows from the business.

John
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