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This highlights something that I've always found confusing about the stock market. The traditional CAPM assumes stocks are priced based upon discounted future c
by gfodor 6y ago
This highlights something that I've always found confusing about the stock market. The traditional CAPM assumes stocks are priced based upon discounted future cash flows. But yet, we have many stocks which have an extremely high liklihood of never returning capital to investors: stocks which are likely to never buy back shares nor issue dividends. And yet, investors price them as if that capital will be returned to investors. There does seem to be something fairly unexplainable about stock valuation by the market. Perhaps this finally reveals something more to it.
- arawde 6y agoThat's because CAPM isn't the only way to price stocks. Some stocks can be priced like options, if they have contingent cashflows. Consider a biotech startup with a product coming to market. If they get FDA approval, that company is probably worth a lot! But if they don't, it might be worthless. Similar for an oil & gas company drilling for resources in a new area. You might like checking out Aswath Damadoran's videos on valuation https://www.youtube.com/watch?v=znmQ7oMiQrM#t=9m23s https://www.youtube.com/watch?v=znmQ7oMiQrM#t=9m23s.