Mauling Mr. Market: Valuing Equity Capital of Businesses by Long-Term Value-Investors

39 Pages Posted: 19 Aug 2012 Last revised: 15 Mar 2014

See all articles by Myuran Rajaratnam

Myuran Rajaratnam

University of the Witwatersrand - School of Economics and Business Sciences

Balakanapathy Rajaratnam

Stanford University

Kanshukan Rajaratnam

University of Cape Town (UCT) - Department of Finance and Tax

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

Rajaratnam, Myuran and Rajaratnam, Balakanapathy and Rajaratnam, Kanshukan, Mauling Mr. Market: Valuing Equity Capital of Businesses by Long-Term Value-Investors (August 19, 2012). Available at SSRN: https://ssrn.com/abstract=2132051 or http://dx.doi.org/10.2139/ssrn.2132051

Myuran Rajaratnam (Contact Author)

University of the Witwatersrand - School of Economics and Business Sciences ( email )

Private Bag 3
P.O. Wits 2050
Johannesburg
South Africa

Balakanapathy Rajaratnam

Stanford University ( email )

Stanford, CA 94305
United States

Kanshukan Rajaratnam

University of Cape Town (UCT) - Department of Finance and Tax ( email )

Private Bag X3
Rondebosch, 7701
South Africa

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