> Help me out here, what is the "classical Finance model"?
Uh oh.
As you probably guessed, I made up that phrase. Since I am
completely ignorant about Finance, perhaps I have it all
wrong. What I meant was that you would define the
intrinsic value of a company at some future point as being the
dividends the company paid out, plus the cash value of its assets
(all suitably discounted). Clearly you would get different values
for different dates; e.g., if the company paid large enough
dividends or accumulated assets quickly enough. Hence there are
lots of techniques for getting a more consistent answer by
looking at projected earnings, etc., but they appear to me to all
boil down to this -- imagine that company is run to steady state,
including into the ground, and see what number comes out. There
will clearly be a lot of variability in these calculations, but
at least this valuation method depends less directly on whether
someone has a bee in their bonnet about the company. In
particular, if the stock is priced properly, you (or your heirs)
do okay just holding onto the stock.
My understanding from looking at books like "The Intelligent
Investor" is that this was the procedure that was considered
standard practice for evaluating stock in the past. It sounded as
if this was what Mr. Michaelson was talking about earlier in this
thread. But few high-tech companies pay dividends and their
assets are worth a lot less than the stock price, and yet I don't
believe that the companies are worthless, either. So is the
expectation that people have about the value of the stock based
on an expectation that someday the winning companies WILL pay
dividends, or is it something more complex than that? Or is it a
pyramid scheme? |
