If you reflect on Buffett's approach, you realize that the risk isn't inherent in the stock's price, but rather on the clarity and consistency of a company's future prospects.
The more unpredictable (hard to understand) the company and its future, the greater the risk.
There is no way to easily quantify this kind of risk.
Generally, business risks are accounted for in the discount rate by making a conservative assumptions - a high discount, or hurdle, rate - to provide a margin of safety.
No comments:
Post a Comment