financial crises? here's the cure
TRANSCRIPT
Copyright 2013: Rajesh D. Mudholkar, Author, The Timeless Essence of Financial Science, http://valueerodingfallacies.blogspot.in
Rational Rational InvestorInvestor
Corporate Corporate FinanceFinanceVs.
Chronic conflictChronic conflict = = Financial CrisisFinancial Crisis
Copyright 2013: Rajesh D. Mudholkar, Author, The Timeless Essence of Financial Science, http://valueerodingfallacies.blogspot.in
Financial Planning Standards Board Ltd
Certified Financial Planner Board of
StandardsFinancial planning professionals help
investors make rational investment decisions,
promote long term investment planning
aligned with defined goals.
Highest Global
Standard
Copyright 2013: Rajesh D. Mudholkar, Author, The Timeless Essence of Financial Science, http://valueerodingfallacies.blogspot.in
Rational investors follow & expect long term equity
returns linked to business performance, not
speculative short term price
Copyright 2013: Rajesh D. Mudholkar, Author, The Timeless Essence of Financial Science, http://valueerodingfallacies.blogspot.in
“ The riskiness of an investment is not is not measured by betameasured by beta but rather by the reasoned
probability of that investment causing its owner a loss of purchasing power over his
contemplated holding periodcontemplated holding period.”Warren E. Buffett, Chairman, in a letter to Shareholders of
Berkshire Hathaway, February 25, 2012
Long term planning Long term planning makes short term makes short term volatility irrelevantvolatility irrelevant
Copyright 2013: Rajesh D. Mudholkar, Author, The Timeless Essence of Financial Science, http://valueerodingfallacies.blogspot.in
Berkshire Hathaway
Dow Jones Index
Jan,1990 to Feb,2014
The Result
Copyright 2013: Rajesh D. Mudholkar, Author, The Timeless Essence of Financial Science, http://valueerodingfallacies.blogspot.in
“the opportunity cost of capital depends depends on the project’s betaon the project’s beta.. ...SiemensSiemens, a German industrial giant, uses 16 uses 16
different discount ratesdifferent discount rates, depending on the riskiness of each line of its
business.”Fundamentals of Corporate Finance, 3rd edition, ISBN 0-07-
553109-7, Richard A. Brealey, Stewart C. Myers, Alan J. Marcus, Stephen A. Ross, Randolph W. Westerfield, Bradford
D. Jordan, pages 421-423.
What Corporate What Corporate Finance PrescribesFinance Prescribes
Copyright 2013: Rajesh D. Mudholkar, Author, The Timeless Essence of Financial Science, http://valueerodingfallacies.blogspot.in
Feb,2004 to Feb,2014
The Result
Siemens
Copyright 2013: Rajesh D. Mudholkar, Author, The Timeless Essence of Financial Science, http://valueerodingfallacies.blogspot.in
Both, the ‘short-term’ and ‘beta’ are irrelevant for ‘opportunity cost’‘opportunity cost’ of
equity
Copyright 2013: Rajesh D. Mudholkar, Author, The Timeless Essence of Financial Science, http://valueerodingfallacies.blogspot.in
Corporate financial practice conflicts with
rational investor expectations, breeds
‘Financial Crisis’‘Financial Crisis’such as 2008such as 2008
Copyright 2013: Rajesh D. Mudholkar, Author, The Timeless Essence of Financial Science, http://valueerodingfallacies.blogspot.in
“....we do not yet havedo not yet have complete and generally
accepted explanations for how financial marketsfinancial markets
function......Mispricing of assets may contribute to financial financial
crisescrises”- 2013 Nobel Economic Sciences
Prize Committee
Copyright 2013: Rajesh D. Mudholkar, Author, The Timeless Essence of Financial Science, http://valueerodingfallacies.blogspot.in
Raises questions, ‘Financial Economics’
never asked
Answers those, ‘Financial
Economics’ never couldTo prevent ‘FINANCIAL CRISIS’, and transform To prevent ‘FINANCIAL CRISIS’, and transform
‘Financial Management’ from a ‘Cultivated Art’ ‘Financial Management’ from a ‘Cultivated Art’ into a truly ‘Objective Science’ into a truly ‘Objective Science’