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Strategies & Market Trends : Value Investing
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To: robuck who wrote (56929)2/19/2016 7:49:21 AM
From: Graham Osborn  Read Replies (1) of 78764
 
Not at all. But I know that when you combine operating and financial leverage you get "hyper-levered beta," and almost noone gets the discount rate high enough. The other problem Tepper's analysts and others often forget is that risk premia are time-varying and can spike during times of tightened credit. In other words, reflexivity predicts a disproportionate collapse in the valuations of hyperlevered businesses during times of financial stress. So when I see both types of leverage, I don't need to run the full calculation to know the market is underestimating the downside. In particular, the option valuation models don't have hyperleverage built in.
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