Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

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gathering.Itwillbelessofanissueforlong-terminvestment
strategiesbased uponpublicinformationand forcontrarian
strategies.


Costs of Trading Nontraded Assets


Ifthecostoftradingstockscanbesubstantial,itshouldbe
evenmoresignificantforassetsthatarenottradedregularly
such as real assets or equity positions in private companies.



  • Realassetscanrangefromgoldtorealestatetofine
    art,andthetransactionscostsassociatedwithtrading
    theseassetscanalsovarysubstantially.Thesmallest
    transactions costs are associated with
    commodities—gold,silver,oroil—sincetheytendto
    come in standardized units. With residential real
    estate, thecommissionthatyou havetopay a real
    estatebrokerorsalespersoncanbe 5 to 6 percentof
    thevalueoftheasset.Withcommercialrealestate,
    commissionsmaybesmallerforlargertransactions,
    but theywillbewellin excessof commissionson
    financial assets. With fine art or collectibles, the
    commissions become even higher. If you sell a
    valuablepaintingthroughoneoftheauctionhouses,
    youmayhavetopay 15 to 20 percentoftheselling
    price of the painting as a commission.


Whyarethecostssohigh?Thefirstreason isthat
there are far fewer intermediaries in real asset
businesses than there are in the stock or bond
markets.Thesecondisthatrealestateandfineartare
not standardized products. In other words, one
Picassocanbeverydifferentfromanother,andyou
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