Risk-Based Haircut

"Haircut," as in: "You're going to trim back the amount you'd pay for something that's very risky."

So...if you're an investor in early GOOG, and you think that the odds of them growing 25% a year for a long time are really good, and that they'll probably do better, with their stock at 25x earnings, you think that's a good risk...and you pay up and buy a share for, say, $100.

But then you look at AMZN in the same era. It's hemorraging cash. It's growing revenues fast, but no end in sight for profitability any time soon. Way more risk. Way more discounting you'll need on their price to make it worth investing.

So maybe you look at projected earnings for GOOG 3 years out at $7 a share; and projected earnings form AMZN at $7 a share. You'd pay a whole lot more for GOOG...or a whole lot less for AMZN, since AMZN in 2008 looks a whole lot riskier, and would warrant a risk-based haircut.

So you do that. And, in fact, AMZN performed vastly better as a stock from there. Both companies executed well, but because AMZN was so much riskier in this period, its rewards were all the more...Prime.