Joined: 26/May/2008
Location: India
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Posts: 721
Topic: Real options Posted: 03/Sep/2008 at 1:52pm
Is real options valuation useful in the real world?
Can you name any companies where real options valuation could be useful?
Or is it just a theoretical concept?
It would be useful if Teddies could pitch in with their views...
"History does not tell you the probability of future financial things happening" - Warren Buffett
Joined: 27/Jan/2008
Location: India
Online Status: Offline
Posts: 366
Posted: 03/Sep/2008 at 5:03pm
yes, yes we believe it is just theoretical. I studied MAFA in C.A. PE-2 comprising all kinds of equity valuations which I found out has no really useful value. Learnt much more by studying how Warren Buffett's brain is wired and what are his strategies rather than all formulaes. Sheer waste of time! Books like 24 Simple investing strategies by the world's greatest value investor by James Pardoe and Buffetology by Mary Buffett. Warren Buffett does not use too many compalicated formulaes.
If an initial investment works out well, then management
can exercise the option to expand its commitment
to the strategy. For example, a company that enters
a new geographic market may build a distribution center
that it can expand easily if market demand materializes.
An
initial investment can serve as a platform to extend
a company's scope into related market opportunities.
For example, Amazon.com's substantial investment to
develop its customer base, brand name and information
infrastructure for its core book business created
a portfolio of real options to extend its operations
into a variety of new businesses.
Management
may begin with a relatively small trial investment
and create an option to abandon the project
if results are unsatisfactory. Research and development
spending is a good example. A company's future investment
in product development often depends on specific performance
targets achieved in the lab. The option to abandon
research projects is valuable because the company
can make investments in stages rather than all up-front.
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