Valuation Introduction

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An Introduction to Valuation
Aswath Damodaran

Aswath Damodaran

Some Initial Thoughts

" One hundred thousand lemmings cannot be wrong"

We thought we were in the top of the eighth inning,
when we were in the bottom of the ninth..

Aswath Damodaran


A philosophical basis for Valuation

“Valuation is often not a helpful tool in determining when to sell
hyper-growth stocks”, Henry Blodget, Merrill Lynch Equity
Research Analyst in January 2000, in a report on Internet Capital
Group, which was trading at $174 then.
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”
Postscript: Internet Capital Group was trading at $ 3 in January 2001.

Aswath Damodaran

Misconceptions about Valuation

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.

The models that we use in valuation may be quantitative, but the
inputs leave plenty of room for subjective judgments. Thus, the final
value that we obtain from these models is colored by the bias that we
bring into the process. In fact, in many valuations, the price gets set
first and the valuation follows.
How to avoid bias?
to avoid taking strong public positions on the value of a firm before
the valuation is complete
Aswath Damodaran

Misconceptions about Valuation

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

Even at the end of the most careful and detailed valuation, there will
be uncertainty about the final numbers.
Valuation colored by the assumptions that we make about the future
of the company and the economy.
It is unrealistic to expect or demand absolute certainty in valuation,
since cash flows and discount rates are estimated with error.
This also means that you have to give yourself a reasonable margin for
error in making recommendations on the basis of valuations.
Factors :- Size and stability (mat...
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An Introduction to Valuation
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