Mini Review of Valuation: Measuring and Managing the Value of Companies and Biases
Let me first be up front with you about my bias against DCF (discounted cash flow) valuation, which is what this book overwhelmingly talks about.
There are several reasons why DCF valuation does not make sense to me from a practical perspective on a way to value companies:
- 1) If you go through all the work it takes to do a proper DCF valuation, but you are off by 1% on one important number, your valuation could be off by more than 10%. There are so many inputs in a DCF valuation that the margin for error seems astronomical to me.
- 2) Lets say you are very good at DCF valuations and get all of the numbers correct, you still have to forecast out 5-10 years in the valuation. If Warren Buffett, who is a certifiable genius, cannot forecast months or even a year in advance, why should I think that I can forecast out 5-10 years?
- 3) Lastly, why do you have to do something as complex and time consuming as DCF valuation when you could just do relative/multiple valuations and come to pretty much the same conclusions in a fraction of the time. Time you could be using to think about the how the company and its competitors operate, and the strategy the company should use going forward, or finding another company to evaluate.
I am interested to see what some other people think who might be keen on DCF valuations, feel free to write your thoughts or rebuttal.
On to the review
The first 200 pages, out of 860 plus, I read completely, learned some things, and was very excited for the rest of the book.
Part 2 on to the end of the book is unfortunately techniques and concepts I have learned in various other places such as Aswath Damodaran’s free online valuation course, Bruce Greenwald’s books, and other various books I have read.
The book is not bad by any means I just did not want to go over DCF valuation techniques again after having just finished up Damodaran’s class that was almost exclusively going over those same techniques.
Valuation is mainly a book that talks about how to do DCF valuation and how to master the techniques that it entails. Throwing in some strategy, and some things to look for like high ROIC. There was one major thing in the book that bothered me though while I scanned through the remaining 650 plus pages.
- He talks about how markets are mostly efficient, except in rare cases, whose opportunities only last for a short time. If he thinks markets are mostly efficient, except in rare cases, which only last for a short time, why does he need to value companies at all, shouldn’t they already be properly valued?
Individually I would recommend:
- Learning how to do DCF valuations: Aswath Damodaran’s free online valuation course. I took his free course on Coursekit, which is now Lore here. I learned an enormous amount about how to think about doing valuations and things I need to watch for that I could apply to relative valuation. Here is a different link to his free course on Academic Earth.
- Thinking about strategy: Bruce Grenwald’s Competition Demystified..
- Learning why ROIC is important: Various books, some of which I list here.
Collectively I would recommend Valuation to people who are just starting to learn about valuation techniques, how to do them properly with a little bit of strategy thrown in, and/or people who want to learn DCF valuation specifically. Especially if you download the free book from Csinvesting’s site that I wrote about here.
Now it is time for me to get back to valuing and evaluating companies. My next post will be showing you some of the new valuation techniques I have been working on.