tag:blogger.com,1999:blog-8152901575140311047.post5513299558089227841..comments2024-03-29T07:41:47.433-04:00Comments on Musings on Markets: Catastrophe and consequences for valueAswath Damodaranhttp://www.blogger.com/profile/12021594649672906878noreply@blogger.comBlogger13125tag:blogger.com,1999:blog-8152901575140311047.post-7276106578949962452011-04-08T08:56:40.628-04:002011-04-08T08:56:40.628-04:00Very well said Gold (yellow).
You have augmented ...Very well said Gold (yellow).<br /><br />You have augmented my point.<br /><br />You can add another example: How businesses exist near the Andreas fault in California.<br /><br />I hope Prof. reads the replies to his old posts and will respond some day.Mikehttps://www.blogger.com/profile/07355513525615592382noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-90939626910332067282011-04-07T23:32:47.342-04:002011-04-07T23:32:47.342-04:00Hi, I am a buyside analyst and have followed your ...Hi, I am a buyside analyst and have followed your postings periodically. When doing valuations, if we take into consideration all aspects/consequences, nothing gets done as nothing becomes economically viable. Bear in mind that there are market competitors, be it public or private. As such, by accounting for such risks, you would be essentially not doing much as your pricing is so much out of the general expectations. <br /><br />Why is this so? I compare it to how farmers farm under an active volcano or how flowers bloom in a desert, the list goes on... Long term survivability is zero but in the short term, it provides above average returns. Perhaps, life (interpreted through plants, animals) is essentially a series of short term valuation exercises.yellowbearhttps://www.blogger.com/profile/17108596907025972281noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-404661886123719972011-03-26T22:53:00.811-04:002011-03-26T22:53:00.811-04:00Respected Prof
Doing a great job and expec...Respected Prof<br /> Doing a great job and expect you to contribute more for sharing your knowledge.<br /><br />H.VenkatUnknownhttps://www.blogger.com/profile/05434191692193311277noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-68182281977261692922011-03-26T12:17:21.181-04:002011-03-26T12:17:21.181-04:00I can see that after almost 1 year your position i...I can see that after almost 1 year your position is changed.Slightly but changed , even in your langage.<br /><br />I enjoyed your intellectuals contributions -impeccables and less scholastics than before. <br /><br />In my opinion you are the best around in valuing a business, and is increased the the pleasure in reading you less deterministic.<br /><br />I was in NYU 2 weeks ago, but I did not knocked on your door for a coffee in the old Waverly Pane e Cioccolata.<br />Maybe next time I will.<br /><br />Best to you, bright mind.<br /><br />Amicalement<br /><br />Waltz LannesWaltz Lanneshttps://www.blogger.com/profile/05256485559185859147noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-3018833770972599422011-03-25T12:28:27.927-04:002011-03-25T12:28:27.927-04:00Hi Prof,
I read that some economists are predicit...Hi Prof,<br /><br />I read that some economists are prediciting an economic tsunami to hit the US and many other countries in the coming year.<br />In the US, it is expected to start at the municipal and state level bankruptsy, followed by riots similar to mid-east riots.<br /><br />Do you belong to this camp? Common sense indicates that it is a possibility - considering the the trend of deficit, debt and uncontrolled spending by the govts.<br /><br />How do you incorporate the risk of this man-made catastrophe?Mikehttps://www.blogger.com/profile/07355513525615592382noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-86351246437188427642011-03-24T08:38:46.447-04:002011-03-24T08:38:46.447-04:00Prof,
As you and others have mentioned, it is v...Prof, <br /><br />As you and others have mentioned, it is very difficult to find out the risk involved in such Catastrophes that are <i>likey</i> to occur once in a life-time.<br /><br />What is the median life-span of a company? 20 years or 30 years?<br /><br />Considering the fact that the catastrophe does not occur in the life-time of a overwhelming majority of the companies, probably the companies are justified in not incorporating this risk in their planning.<br /><br />I mean, if you can not recover from such a Catastrophe, you can start over, or some new blood can start over with new technology, new ideas.Mikehttps://www.blogger.com/profile/07355513525615592382noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-55673012601491552662011-03-24T00:47:47.792-04:002011-03-24T00:47:47.792-04:00Dear Sir,
It is realty very difficult task of fi...Dear Sir,<br /> It is realty very difficult task of finding out the risk involve in such Catastrophes. there are chances that a company may have numerous kind of catastrophes and each with different degree of damage.again it will depend on the location of particular company and also kind of product portfolio it is having.<br /> but then how to inculcate the degree of risk involved and what risk premium to add for valuation for that particular company?<br /> for example if i want to do valuation of education related company then what factors to look out? how to include such kind of risk?Sunil. Kushwahahttps://www.blogger.com/profile/01100040705534922931noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-16119782699080583572011-03-23T16:24:24.939-04:002011-03-23T16:24:24.939-04:00Yes. That is another manifestation of distress cos...Yes. That is another manifestation of distress costs.Aswath Damodaranhttps://www.blogger.com/profile/12021594649672906878noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-46954836287416234162011-03-23T14:48:33.307-04:002011-03-23T14:48:33.307-04:00Mr Damodaran,
Are we right in assuming that compa...Mr Damodaran,<br /><br />Are we right in assuming that companies selling assets at lower than their fair value, mostly good ones, to either cover claims or fund repair/replacement of damaged ones is another loss not generally accounted-for in the calculations? E.g. values of fixed/equity market instruments falling in fears of selling pressure by insurance companies.Unknownhttps://www.blogger.com/profile/17077586956283347874noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-87600848232168721852011-03-23T12:42:38.937-04:002011-03-23T12:42:38.937-04:00Village Analyst,
It would be double counting if yo...Village Analyst,<br />It would be double counting if you explicitly reduced your expected cash flows to acccount for risk, but it is not if all you have done is reflect the likely effect of the catastrophe in your expected cash flow. <br />Let me explain what I mean. Let's assume that you had an expected cash flow of $200, before you thought about the catastrophe. Furthermore, let's assume that there is a 10% chance of a catastrophe and that the expected loss, if it happens, is $ 250 million. You would reduce your expected cash flow by $25 million (250 *.10) but that is still an expected cash flow. (There is no risk adjustment in it).<br />Unless you adjust the discount rate for the additional risk, you have not risk adjusted your value for catastrophes.Aswath Damodaranhttps://www.blogger.com/profile/12021594649672906878noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-67310333714745899192011-03-23T10:03:31.920-04:002011-03-23T10:03:31.920-04:00Sir,
Wouldn't doing both actually double-accou...Sir,<br />Wouldn't doing both actually double-account for the risk?<br />Its my humble view that the catastrophe scenario is much akin to investing in emerging markets.Village Analysthttps://www.blogger.com/profile/01167721037626916609noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-28669777336842998062011-03-23T06:57:46.033-04:002011-03-23T06:57:46.033-04:00Terry,
Good point but you may need to do both - lo...Terry,<br />Good point but you may need to do both - lower the cash flow to reflect the expected effect of a catastrophe and raise the risk premium, since the catastrophe is market-wide risk (and therefore cannot be easily diversified away).Aswath Damodaranhttps://www.blogger.com/profile/12021594649672906878noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-27955464343556734822011-03-22T21:05:09.280-04:002011-03-22T21:05:09.280-04:00Of your suggestions for how to incorporate the ris...Of your suggestions for how to incorporate the risk of future catastrophes into valuation models raising the risk premium does not strike me as the most viable approach. How much should one raise the premium is the obvious question that follows. Conceptually incorporating the cost of insurance would be the best approach (as it is a market driven price) but as you suggest it may not be easy to obtain an estimate of this cost. I'd suggest an approach similar to your truncation risk alternative. If one were to take a scenario based approach to valuation then one could continue to use a standard risk premium and could incorporate catastrophe risk as a probability weighted scenario where the business is worth nothing. I guess this begs the question of what probability to place on the catastrophe scenario but for me I'd be happier taking a stab at this rather than adding ??? basis points to the risk premium.Terryhttps://www.blogger.com/profile/01216569036162916738noreply@blogger.com