DangerandOpportunity

DangerandOpportunity - Danger and Opportunity: Musings on...

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Aswath Damodaran 1 Danger and Opportunity: Musings on Risk Aswath Damodaran
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Aswath Damodaran 2 The essence of risk… Risk, in traditional terms, is viewed as a ‘negative’. Webster’s dictionary, for instance, deFnes risk as “exposing to danger or hazard”. The Chinese symbols for risk, reproduced below, give a much better description of risk The Frst symbol is the symbol for “danger”, while the second is the symbol for “opportunity”, making risk a mix of danger and opportunity.
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Aswath Damodaran 3 1. Where there is upside. .
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Aswath Damodaran 4 Stories abound about why the party will not end… When a market is booming, there are benefciaries From the boom whose best interest require that the boom continue. When the price rise becomes unsustainable or unexplainable using current metrics, there will be many who try to explain it away using one oF three tactics: Distraction: Telling a big story that may be true at its essence but that cannot be connected to prices. “The paradigm shiFt”: Arguing that the rules have changed and don’t apply any more.
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Aswath Damodaran 5 But there is always a downside…
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Aswath Damodaran 6 Followed by ex-post rationalization… The same analysts who talked about paradigm shifts and used the big story now are perfectly sanguine about explaining why the correction had to happen. The defenses/ rationalizations vary but can be categorized into the following: 1. Don’t blame me. Everyone else messed up too. 2. This is what I thought would happen all along. I just never got around to saying it. 3. Distraction: Spin another big story to counter the previous one.
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Aswath Damodaran 7 2. There is no arbitrage (File under: There is no free lunch) The essence of arbitrage is that you take no risks, invest no money and walk away with a proFt. In practice, what passes for arbitrage can be categorized into either pseudo or fake arbitrage. Under pseudo arbitrage, we would categorize most arbitrage based upon option and
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DangerandOpportunity - Danger and Opportunity: Musings on...

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