The formula for valuing all assets that are purchased for financial gain has been unchanged since it was first laid out by a very smart man in about 600 B.C. (though he wasn’t smart enough to know it was 600 B.C.).
The Oracle was Aesop and his enduring, though somewhat incomplete, investment insight was ” a bird in the hand is worth two in the bush.”
To flesh out this principle, you must answer only three questions.
- How certain are you that there are indeed birds in the bush?
- When will they emerge and how many will be there?
- What is the risk-free interest rate (which we consider to be the yield on long-term bonds) ?
If you can answer these three questions, you will know the maximum value of the bush-and the maximum number of the birds you now posses that should be offered for it.
And, of course, don’t literally think birds. Think money
Aesop’s investment axiom, thus expanded and converted into dollars, is immutable. It applies to outlays for farms, oil royalties, bonds, stocks, lottery tickets, and manufacturing plants. and neither the advent of the steam engine, the harnessing of electricity nor the creation of the automobile changed the formula one iota-nor will the internet. Just insert the correct number, and you can rank the attractiveness of all possible uses of capital throughout the universe.