Aswath Damodaran

“me a while to get their valuation can never just be about the numbers a good valuation always has a story embedded in it”

“assets in place would include office and windows and what they already have in place but growth assets is the value that I'm attaching”

“you've never seen the movie other people's money I'd strongly recommend it Danny DeVito plays the role of Larry the liquidator the right CEO”

“a terrible thing and you've heard the story right when companies buy back stock that cash is not being invested back in the company”

“we will build it then they will come I used to think I Amazon was a retail company I no longer think it is”

“that's changing the way we should be doing not just valuation but how we run businesses I think life cycles for companies are getting”

“to which my response is what's wrong with that do you really want GM investing your money back into their business if you look”

“you're a founder the words you used to describe your business can mean the difference between a six billion dollar valuation and a fifty”

“it is right now it's not definitely not behaving like a mature company it's actually behaving like a young growth company with a trillion”

“talk about is this notion of a corporate life cycle and how trying to fight it is the most dangerous thing a business can”

“50% in the next two days but startups are young companies just coming up there's a huge mortality rate most startups don't make it”

“for as long as businesses have been around it's not that you need to make money right from the start but eventually you have”

“The second approach to valuation is relative valuation.”

“Are you running the model?”

“The market price of the company would be the best estimate of the value of the company.”

“We live in a complex world with complex data and complex models and sometimes that gets in the way of the simplicity that should be at the core of valuation.”

“And when you think about those estimates, those estimates are going to come with a great deal of uncertainty.”

“You almost never start with a blank slate when you value a company.”

“Each of these approaches assumes that markets make mistakes.”

“So, having laid the table for valuation, let's look at the three broad approaches that there are to valuing a business.”

“Everything you've read about the company, everything you know about the company is going to become part of that preconception.”

“This is I think one of the fundamental rules in valuation.”

“I don't know the answer to the question, but let's do some collective imagery.”

“Cuz your biases are going to be preset by what your mission is.”

“If you can value a company with three inputs, don't go looking for five.”

“Second big misconception about valuation that valuation is somehow a science.”

“The third approach to valuation, and this is perhaps the only new and perhaps sophisticated aspect that's new to valuation, is applying option pricing models in the context of valuing these assets that have contingent cash flows.”

“If you really want to sell something, you're going to find a way to sell it.”

“So when you do evaluation, one of the tests you ask yourself is, am I comfortable?”

“You can see why the first lemming did it, right?”

“They must know something that you don't.”

“And if you break down a discounted cash flow model, it has three ingredients.”

“And uncertainty scares people.”

“That sounds strange, right?”

“In intrinsic valuation, you value a business.”

“You need to control for differences across these investments, growth and risk and cash flows.”

“If you can pull it off, that's great.”

“You value a company based on its fundamentals, its cash flows, its growth, its risk.”

“And the third is complexity.”

“I'm a lemming and I'm proud to be a lemming.”

“But there are three broad themes I hope to establish in these coming sessions.”

“The longer your time horizon, the better off you are using discounted cash flow valuation.”

“Most people don't believe in valuation.”

“The second approach to valuation I call relative valuation.”

“Make your best estimates and remember that most people give up on these companies.”

“The second is every valuation even though it's about numbers has a story a narrative behind it.”

“Let's give the company a name.”

“But those technology companies with growth potential, those are exactly the companies where you should persevere.”

“Remember, your mission is to get the deal done, you're going to find a way to justify that value.”

“Say, I don't know what the intrinsic value is.”

“Now, when I say the word valuation, most of you think about models and numbers.”

“In hindsight, that was a bad mistake.”

“You sit in front of computers with models and you enter numbers and after a while you tell yourself, well, I'm being objective.”

“You can find those mistakes, but there is no guarantee that those mistakes will get corrected in the next three months or six months or even a year.”

“If you really, really, really want to buy something, you're going to find a way to buy it.”

“Underlying each approach though is an assumption about how markets work or better still how they don't work.”

“If markets never made mistakes, there would be no point to valuing publicly traded companies, right?”

“You're going as fast as you can towards a cliff.”

“To value an asset in relative valuation, you look at what similar assets are being priced at by the market right now.”

“Which brings me to the third and final approach to valuation, which is using option pricing in the context of valuation.”

“When I see a valuation cross my desk, before I look at the numbers and the assumptions, I ask two questions.”

“Even though you might be using numbers, those numbers are estimates.”

“You get all the upside of momentum and none of the downside.”

“They have a contingent payoff and they have a limited life.”

“So if you ask me what the hidden ingredient for using discounted cash flow valuation is, you need a long time horizon because markets can make mistakes.”

“I do valuation to fight the lemming in me.”

“You've given up an intrinsic valuation when you do relative valuation.”

“The second ingredient you need for relative valuation is you need to find other investments that look just like yours.”

“You'll see a discount rate that reflects a risk in those cash flows.”

“It's not going to stop you from doing really stupid things.”

“What we're talking about though is using those option pricing models to value businesses or assets that have option-like characteristics.”

“It gives you something to hold on to when everybody else changes their mind and goes in the other direction.”

“But put yourself in the shoes of the very last lemming in that group.”

“Could be any technology company with a patent that's not viable right now but potentially could be viable in the future.”

“And one of the great ironies in valuation is the more uncomfortable you feel valuing a company, the greater the payoff to doing a valuation.”

“Let's start with discounted cash flow valuation or intrinsic valuation.”

“Most people when they sit down to value a company or a business already have a preconception of what they expect to see as the value.”

“But the key in intrinsic valuation is it's all about the business.”

“You're trying to estimate the intrinsic value of a business based on its cash flows.”

“Who paid them to do this valuation?”

“In fact, you can divide all investors into three groups of lemmings.”

“The first as I pointed out is a natural resource company with undeveloped reserves.”

“If you can value a company with three years of forecast, don't do 10.”

“There are lots of models and lots of numbers.”

“You're valuing a technology company with a lot of growth potential, you are going to be more uncomfortable than when you value a stable company where everything is pretty much set.”

“And the third example, and this is fairly unusual, is if you buy stock in a deeply troubled company, a money losing company with a lot of debt, I'm going to argue that you're effectively buying an option.”

“Nothing more, nothing less.”

“Here's the first and biggest problem in valuation.”

“And once you find them, you use that as your basis for valuing this asset.”

“So, what you will often find is analysts defining something as comparable, then waving their hands and saying, you know what, they're probably not that comparable.”

“There the option is those undeveloped reserves that the company can choose to develop but will do so only if the price is right.”

“Those two approaches to valuation by far dominate all of valuation.”

“So, having laid that foundation, let me actually go on and talk about what I call the Bermuda Triangle of valuation.”

“And you'll see a life for the asset you're valuing which could be 5 years, 10 years, it could be forever.”

“Based on how these other companies are being valued, I think this company is cheap or expensive.”

“And when you use discounted cash flow valuation, you are assuming that markets make mistakes in valuing individual companies and that they correct these mistakes over time.”

“The first is that valuation is simple.”

“Well, this asset will have value only if something happens.”

“So if I think a company is a great company guess what my valuation is going to deliver a high value.”

“You are essentially comparing numbers which are comparable.”

“By the end of this class, I would like you to be able to value just about any asset.”

“Valuation slows the process down.”

“Options derive their value from an underlying asset.”

“So let me start off by explaining why I do valuation before I start delving into the details.”

“After a while, it's not clear who's running whom.”

“If you look at an equity research report, what do you see?”

“And third when valuations go bad it's not because of the numbers.”

“As you look at valuations, one of the first things you should try to do is be parsimmonious.”

“Find me a company that's similar to Microsoft or Apple.”

“One is these models become black boxes.”

“At some point in time, as you start entering those numbers, it becomes garbage in, garbage out.”

“Those oil reserves will have value only if oil prices go up beyond a certain level.”

“In relative valuation, you value an asset based on how similar assets are priced.”

“That's why we do valuation.”

“I would assume you have second thoughts about what you were planning to do.”

“A gold mining company with gold reserves.”

“We're not very good about dealing with uncertainty.”

“They're always going to be wrong because you're forecasting the future.”

“You come in with preconceptions and they find their way into your valuation.”

“When I first started teaching valuation 26 years ago at NYU, I made the mistake of assuming that everybody else was as interested in valuation as I was.”

“They want to run with the crowd till the very edge of the cliff and at the last moment veer away.”