Damodaran Valuation

Valuation

Aswath Damodaran http://www.stern.nyu.edu/~adamodar The material for this presentation is available under seminars

Aswath Damodaran

1

Some Initial Thoughts

" One hundred thousand lemmings cannot be wrong" Graffiti

Aswath Damodaran

2

A philosophical basis for Valuation

n

n

n n

Many investors believe that the pursuit of 'true value' based upon financial fundamentals is a fruitless one in markets where prices often seem to have little to do with value. There have always been investors in financial markets who have argued that market prices are determined by the perceptions (and misperceptions) of buyers and sellers, and not by anything as prosaic as cashflows or earnings. Perceptions matter, but they cannot be all the matter. Asset prices cannot be justified by merely using the “bigger fool” theory.

Aswath Damodaran

3

Misconceptions about Valuation

n

Myth 1: A valuation is an objective search for “true” value

• Truth 1.1: All valuations are biased. The only questions are how much and in which direction. • Truth 1.2: The direction and magnitude of the bias in your valuation is directly proportional to who pays you and how much you are paid.

n

Myth 2.: A good valuation provides a precise estimate of value

• Truth 2.1: There are no precise valuations • Truth 2.2: The payoff to valuation is greatest when valuation is least precise.

n

Myth 3: . The more quantitative a model, the better the valuation

• Truth 3.1: One’s understanding of a valuation model is inversely proportional to the number of inputs required for the model. • Truth 3.2: Simpler valuation models do much better than complex ones.

Aswath Damodaran

4

Approaches to Valuation

n

n

n

Discounted cashflow valuation, relates the value of an asset to the present value of expected future cashflows on that asset. Relative valuation, estimates the value of an asset by looking at the pricing of 'comparable' assets relative...