It’s common to hear analysts discuss the fact that volatility is not a good measure of risk, because most people would consider risk in the context of permanent loss of capital and are generally looking at longer holding periods that reduces/eliminates the importance of stock volatility. The challenge resulting from this relates to the developments of discount rates/required return benchmarks when valuing a potential equity investment.
Another piece related to above is that over time, mis-pricings tend to revert to the intrinsic value of the company, which is based on fundamental valuation as a result of operating performance.
I was trying to think of a better measure for risk that could be used practically in a valuation context - and had the idea of benchmarking company revenue or earnings growth against the growth of the broader market (GDP, sector growth), and using differences between these two metrics to quantify ‘fundamental beta’, which would really just be a measure of risk of the company not growing at the same pace as the economy or sector.
I’ll admit it’s not a very developed thought, but just curious what you guys think of the idea in general.
Another piece related to above is that over time, mis-pricings tend to revert to the intrinsic value of the company, which is based on fundamental valuation as a result of operating performance.
I was trying to think of a better measure for risk that could be used practically in a valuation context - and had the idea of benchmarking company revenue or earnings growth against the growth of the broader market (GDP, sector growth), and using differences between these two metrics to quantify ‘fundamental beta’, which would really just be a measure of risk of the company not growing at the same pace as the economy or sector.
I’ll admit it’s not a very developed thought, but just curious what you guys think of the idea in general.