Value of a company

[DcifrThs]

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20% is extremely high and the particular number will depend on the particular asset you're valuing.

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Is it? You can get 8-15% with funds and you aren't liable. I'm guessing the liability/responsibility of owning a company should add 5-10% annual return.

I'm just thinking out loud really. I obv. have no idea.

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Okay two things here:

1) What fund do you "get" 8-15% with? Are you talking about historical performance of something? This probably doesn't need to be said, but that does not necessarily imply future results. I also have no idea what you mean by not being liable.

Yes, but the same could be said for buying a company with past results. Of course there is always future uncertainity.

2) You don't get compensated for idiosyncratic risk.

I don't know what this means.



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he means you can't "get" 8-15% a year easily. you can, but it takes thought on portfolio structuring and a good amt of risk (especially at the 15% area) if you're talking about long only passive holdings.

further, the purpose of american LLCs is that you are NOT liable for owning a company past the point of the total net asset value of the company. if the comany, at the point where it is no longer a going concern, owes more in liabilites than it has in assets/accts receivable, the owners of the corporation are NOT personally liable for those claims.

another mistkae you've made is that owning a company automatically gets you a return. the general rule that you assume to be true when you invest is that risky assets will give a higher return than cash.

you are compensated for taking certain types of risk. if treasury bonds yield 4%, and stocks also yielded 4%, you'd always rather hold the bonds. so, company's pay a risk premia or excess return to raise money (having you buy shares) and THAT is where your return comes from.

you don't get return for taking certain types of risk. currencies for example. if you held a basked of developed world currencies the value of that holding would likely vary a great deal as they all have about a 15% historic annual volatility. but, you'd expect no excess return from that since if you're holding one side of those contracts, then another person is holding the other side and developed world currencies aren't even remotely likely to collapse. therefore, nobody is PAYING YOU (giving you excess returns for taking risk) for holding those currencies...said another way, there is not natural reason why you'd hold one developed world currency over the other whereas with emerging market currencies, investors are more reluctant to hold them and thus the return you get from holding those (more risky currencies) comes from teh fact that their own citizens/govt have a disproportional desire to hold currencies that are not their own.

similarly, owning a company is your choice that the mkt doesn't pay you for (forgetting about the fact that you actually have no liabilities past the value of the company). so you don't get 5-10% annual return simply by owning a company.

thats the basic idea behind 'idiosyncratic risk.' technically, i think it is the risk you could diversify away. past some point of being able to diversify that risk away, there is the systemic or market risk (what company's pretty much ahve to pay holders of stocks for taking more risk than treasruy bonds) which you are compensated for in the form of excess returns.

i have a beef with that definition b/c it assumes that the non diversifiable risk of just owning stocks can't be reduced and you are thus getting paid that amt for holding them. that risk of just holding stocks, however, can be reduced while not impacting your return, so i think the definition is misleading (or i have the wrong definition)

Barron