10: Risk and the Cost of Capital

In my first year as an undergraduate student at Oxford, I lived in a room off a stairway in the Cloisters of Magdalen College. Each stairway had six to eight rooms and the inhabitants usually got to know one another quite well, often meeting for informal afternoon tea that sometimes morphed into sherry and wine, which in those days were available in good quality at very affordable prices from the college cellars. At one such gathering, one of our number announced his decision to drop out for a year or two to finish a theatrical production that he had started to write. In fact, he had a business proposition for us. He estimated that he would need £1,000 to finance the venture. He was offering 10% to each of us for £100 a share, a sum of money that I could, in fact, have afforded from a scholarship that I had been awarded on top of my parental allowance. Nevertheless, even at this early stage of my Oxford experience, I had realised the place was full of brilliant but hopeless idealists and I rolled my eyes. What was the probability of receiving my £100 back, let alone earning a return? Needless to say, I declined to make my £100 investment.