Use of Theory of Real OptionMy paper will analyze how real options theory can be effectively used in the area of financial management. Real options theory makes it possible for managers to better analyze different opportunities with several options available. These opportunities have varying risk factors and being flexible is a more useful resource for investments. I will also explain new items in the real options theory along with my own experiences as a business owner. My personal experiences in different aspects of life has helped me to understand this theory although I may not have known about it while I was living it.
The Real Options Theory is not a new concept but has gained interest. According to Financial Modeling Guide, Real options or strategic options, are opportunities that are embedded in projects or investments that are available and could have a real economic impact on cash flow and risk. The real options that are embedded in a project will impact the project’s strategic net present value or NPV. This value differs from the traditional NPV as follow: Traditional NPV + Value of real options = Strategic NPV (Financial Modeling Guide, 2011).
In my career that has included a few jobs, had retirement investment options available. These investments were ranked by what risk was involved and what the potential earnings could be. As an example I worked at General Motors for around 15 years. When I first started with the company we only had our original retirement package. When I was at General Motors for about 5 years, they came to use with an investment company called Fidelity Investments. These investments were going to be managed by us with the aid of an investment broker. The broker’s job was to inform us on these investments weighing the risks and possible rewards. My broker asked what my priorities were for an investment. I was under 30 so I felt risk was worth the possible reward. The broker proceeded to tell me about a balanced portfolio that offered stability over a higher potential payoff. I decided to follow his advice and built up a nice portfolio.
After doing this balanced portfolio for a few years I decided to go for the higher reward investment that I had been investing into for a few years. This investment had constantly paid off in double digits so I felt I would drop the low risk investments that only paid barely single digit returns. The gamble worked well up until 2006 right before the bubble started to burst at General Motors. In the month of January I was laid off for the first time in over 10 years. I thought about taking out my 401k but decided to let it ride. I had made thousands of dollars in returns over the years and felt it was safe. In April 2006 I was told I was no longer safe at General Motors and that they were downsizing. I was told that I was going to be let go but I could either take a buyout or I would be laid off indefinitely since there was nowhere to transfer to. My department was
I was let go of in January 2008. And in late May 2007 I was told that my future investments were terminated and that they were being taken over. I had made almost $50.00 a month as well and the prospect of retirement was in my bag. The company was in the midst of going into bankruptcy. I felt it was time to get out of the business. They would make my life worth living once I came back. I did not feel it was worth my time to stay or leave, especially since I didn’t want to put $100,000 down as I saw a positive result for my retirement at the time. I left at 9 months and was working full time now in my own business. My goal was to retire by 2008.
In a nutshell, that’s how the entire business came to be. Since the initial investors I’ve had are:
An accountant and a financial planner
An experienced and very good coach
There have only been three other investors that I know since 2000(the first was Jeff Bezos) that had a different set of beliefs and principles. And they don’t all want to lose their money back if they feel that the “money was in the wrong place.” I’ve heard both stories from other investors. But ultimately these investors do feel that they don’t really have all that much influence as their money is at risk. Most of the time they don’t like the loss of money. And that’s because they can’t manage it. They hate it because of the high transaction fees. In the beginning these investors gave up the $50k of a 401(k). And there was $2,000 in short term debt due to this failure that they had to take when we finally found out what would happen. But after the initial funding raised by the investors (and from the general public) it never really crossed their minds as to what their future was going to be. They decided that it was for the benefit of all the investors and that most of their savings from the “loss” were invested in stock and not stock or bonds. And it worked. My funds were invested and paid back and now almost all of (the 4 million dollars) I have has come back to the way I felt for so many years.
In one way, this may be the first time I’ve worked in the stock market and it’s very flattering. The stock market is all about money and there is no way for a person with little experience to be able to sell shares in a stock market and take a risk. When people try to get rich by trying to get rich in the stock market, there is nothing to succeed and that you have to give up the idea and take ownership of it. On the other hand when I tell guys in the stock markets that I would sell my stocks to anybody who could afford them and not just their money, they tend to go into a rage because they know how much money they have left. They want to sell the stock they want to buy and not have the money to take control or continue as if nothing were in the future. What they think their financial future is in this financial marketplace is really dependent wholly upon their financial and financial decisions.
The other thing is, I have been able to have a greater sense of confidence that I have been able to make great contributions when I took on a portfolio of stocks and stocks were trading at roughly the same