Aswath Damodaran on Valuation

Valuation in modern times

1) Evolving face of valuation in contrast with outdated financial concepts
Disruption in curriculum, nature of education and valuation
There isn't enough stuff in valuation to teach a structured curriculum . But that doesn't mean it cannot be done.
People make valuation unnecessary complex to prove they are sophisticated and complex. 
Beware of outdated finance curriculum. Not keeping with the times and need to reconcile with modern realities.

2)  Relationship between accounting and finance

Accounting	Finance
Backward looking - Record what happened.	Future Looking - project what is going to happen.
Profitable Intangible assets like branding and network effects not recognized Goodwill is a premium for acquisition rather than representative of cash flows. It is not inside the balance sheet until a company is acquired. It is a plug variable purely to justify and correct the difference to balance the books.	Importance of projecting future cash flows from all assets the company has.
Historical Balance Sheet =  At cost	Financial balance sheet =  Historical cost + changes in company over time.
Recognition of historical fixed assets. Procter and Gamble	Distinguishing between Growth assets and fixed Assets. Branding. Software companies
Depends on stability of the company and business , to project future cash flows. Suitable for mature companies. The most reliable way to project cash flows, is to find companies with reliable cash flows.	Use the appropriate valuation to accommodate for different growth stages of different companies. The stories count more than raw numbers.
Using DCF methods to value growth companies is like using a hammer to do surgery. No stable historical data to access company in flux	If you understand the company really well and is competent to value it, you can value it. If you feel uncomfortable, move on to other easier choices

3) Capital Raising Decisions
Use share capital to fund growth companies. Dont expect to repay and long time horizon. Difficult to raise debt from bankers

Use debt capital to fund mature companies. Lower cost of borrowing

4) Misconceptions about valuation

Dont mistake valuation for excel modeling. Sophisticated models does not necessary lead to better valuation.

No matter the nature of the company, the present value of the company depends on the future expected value of cash flows.

Growth by itself can be worth a lot, worth nothing, or destroy value

The need to assess how risky are these cash flows, to be incorporated in risk premium.

Dont mistake tools to estimate risk and valuation, as tools to represent risk and intrinsic value

When will your cash burning fast grower turn into a cash flow positive and profitable business. The longer you have to estimate cash flows, the larger the uncertainty

If you are a numbers person, you have to use narrative to justify the soundness of your numbers

If you are a narrative person, you have to use numbers to concrete your valuation and not get carried away.

Be focused on identifying relevant inputs(Risk and risk premium, RFR, Cash Flow) into your DCF analysis and don't be distracted by market noise and irrelevant news.

It is not the volume of information, but how you convert information to reach a suitable valuation

Intellectual honesty means you have to be transparently wrong than opaquely right

If you cannot value a company, you can simply don't buy the company. Never mistake what others paid for the company with what the company is actually worth buying.

Dangers of blindly following equity research reports. Circumstances of each company is unique and convenient relative valuation methods is not reliable.

Pricing is driven by Mood momentum and direction. Valuation is driven by cash flows, risks and discount rates.

Dangers of buying companies depending on market sentiment. Wall street is valuing social media companies based on number of users, whereby the users / MAU can be manipulated. People are buying users / monkeys just because it is valuable right now.

Internet companies – Foot traffic companies. Supply creates its own demand.

Don't mistake luck for skill. Some people can be inordinately lucky / unlucky for extended periods of time. It is the reliable replica-cation of the results that count.

5) Numbers of Mass destruction

 DCF is merely a tool to convert the story to a number. There are many other tools to gauge the intrinsic value.




If you know the value of something, always haggle for a lower price.
You don't have to justify your exact valuation with others as different people can have widely different valuation about the same company. But it must make sense to you and you could seek a difference in opinion. (Uber as a transportation company or a super-app company could lead to large difference in expected value)

Be careful of up-selling marketing gimmicks such as like control, synergy, brand name, buzzwords (China / India), Strategic acquisition (ignorant buyer that use an excuse to buy companies when numbers don't make sense. Always ignore noise that is peppered with bullshit language. Never use buzzwords to make investing decisions, as they will lead to biased and bad decisions.



If you are buying a company that is losing money forever, it is not worth a dime.
It you are buying a company that is temporary losing money, you must determine when it can turnaround losses to profit at a reasonable length of time.
Young growth companies need to continually consume cash flow to grow larger and scale the business. The growth rate must be large enough to justify the early losses and it is much harder to appraise.