The Time Value of Money
General Motors just hit a 60-year low this week. From a market standpoint, Microsoft may be the modern-day equivalent of General Motors. If Microsoft could go under in 60 years, then what multiple do you assign to its current earnings?
Michael Ashbaugh, The Technical Indicator – MarketWatch
The time value of money is based on the premise we would rather receive a sum of money now rather than at some point in the future. The point Ashbaugh brings up above, is one I’ve always wondered with regards to other assets – how does a long term lease on a property of say 99 years, manage to sell for the same price as a comparable freehold? It is not a given that public companies will go bankrupt, but a leasehold tending to zero is a certainty.
And on the flipside, when will the eventual collapse of world oil supply begin to affect price? Is it fair to say the collapse of the recent oil spike shows us the market is not ready to rationalise this inevitability into pricing yet.
Does the market rely on mass head-in-the-sand behaviour to enable ‘smooth’ flow of prices? Long term undeniable facts which would cause widespread price displacement are discounted in favour of historical valuation tools which by definition will not reflect these future realities.
The markets ability to deny the Elephant in the room should not be underestimated.