the elusive terminal value

“Zinda hathi lakh ka mara hua hathi sawa lakh la” (the terminal value of a dead elephant is worth more than a live one because of the ivory)

In real life there might not be many examples but financial jugglery is filled with examples where investors are lured by promises of unimaginable riches if they hold the asset for perpetuity. Terminal value, as the term would suggest is the value of your assets beyond the visible horizon/useful life.

When I started using computers, WinAmp was the best music player, Real was the best movie player, Netscape was the best internet browser, hotmail, yahoo & Aol were the default mailboxes etc. I wonder if the owners of these products were able to realize any terminal value. If you believe technology firms are different then go to typewriter manufacturers. A decade ago MG road, Bangalore was the commercial hub, now most of its buildings are either derelict or vacant.

The dividend yield of nifty is paltry 1.46% indicating that most people don’t invest for the dividend income but believe that their wealth will be generated due to the ability of the portfolio stocks doubling its price every 2-4 years. One can argue that companies are going-concerns and have perpetual existence (although I am sure <10% of the companies incorporated 100 years ago are still functional), But apartments or any concrete structure will crumble and deteriorate over time.

The rental of a residential apartment/house is roughly 0.25% of the property value. which means that without discounting for time value of money, it will take roughly 400 months (33 years) to recover your initial investment (annual rental hike is typically less than the interest rate so a proper DCF would be even more unfavorable). Yet people believe that that value of 100sq feet of land (1000 sq feet equally shared between 10 floors) would be worth more than the whole apartment that they have bought today.

It is said that in the long-run everybody is dead, but looks like the MBAs from Finance have discovered the elusive elixir of immortality.

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