Krishan's Leverage EV Case

[midas]

Forum readers:

Krishan had a very interesting post describing EV vs. stock price and came to the conclusion that having large cash balances "cushions" the fall of a stock price due to the theory of EV.

On a percentage basis this is true because no matter what the overall health of a business - cash doesn't change its value thus providing a floor a Company's EV - but you pay a higher stock price for these Companies relative to there EV so drops in price seem lower as a percentage of value. So someone who cares about their % loss likes the high cash balance case but the stock price rises less in good times hurting your % upside.

In reality, in a sale, all investors lose the same amount of money - $5 per share and vice versa in a rising company.

[Jimbo]

This might be true if they kept their cash in a mattress somewhere but not if it is drawing interest. Also the cash can be used as a hammer to "threaten" to rebuy their stock which normally results in an immediate short term bounce in their stock price whehther they actually buy any stock back or not. Stocks without this cash position have neither of these advantages.

Jimbo

[krishan]

[ QUOTE ]

So someone who cares about their % loss likes the high cash balance case but the stock price rises less in good times hurting your % upside.


[/ QUOTE ]

This is true and I may not have said it well in the previous thread. Leverage magnifies the good and the bad. Cash minimizes the good and the bad.

Leverage in itself is not bad.

Krishan

[PRE]

[ QUOTE ]
[ QUOTE ]

So someone who cares about their % loss likes the high cash balance case but the stock price rises less in good times hurting your % upside.


[/ QUOTE ]

This is true and I may not have said it well in the previous thread. Leverage magnifies the good and the bad. Cash minimizes the good and the bad.

Leverage in itself is not bad.

Krishan

[/ QUOTE ]

Especially if you're good at what you do.