Mauling Mr. Market: Valuing Equity Capital of Businesses by Long-Term Value-Investors
39 Pages Posted: 19 Aug 2012 Last revised: 15 Mar 2014
Date Written: August 19, 2012
Abstract
We present a novel asset pricing model that captures the investment wisdom of the long-term value-investors Benjamin Graham and Warren Buffett. Taking a longer term view of business prospects and business risks, we explicitly consider the time period in which a business enjoys a competitive advantage over its peers as the central tenet of our model and capture the eventual demise of this competitive advantage in a probabilistic manner. Assuming that our investor has log utility, our model answers the question of capital allocation in a two-asset scenario. The model does not enforce the Efficient Market Hypothesis and is shown to explain some well-known empirical studies on stock returns.
Keywords: Equities, Asset Pricing, Asset Returns, Value-Investing, Capital Allocation
JEL Classification: G12
Suggested Citation: Suggested Citation