Insider: The challenge of value investing

One must question whether a discount rate of 8 per cent on an asset can be sustainable when bond yields are at an all-time low, writes John Looby.

12th February, 2012
Insider: The challenge of value investing
Warren Buffett: refuses to use high discount rates to compensate for risk. Photo: Bloomberg

The choice of a discount rate to assess the value of an asset is a challenge for every investor. It is the crucial prerequisite to deciding whether or not an asset should be bought, and is used in conjunction with a reasonable assessment of the likely, sustainable earnings flow at the current price.

The father of value investing, Ben Graham, chose a simple formula that incorporated his assessment of the sustainable earnings of the asset...

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