You buy financial assets for the cash flows you expect to gain. The price of a stock cannot be justified by assuming there will be other investors around who will pay a higher price in the future. That is the equivalent of playing an expensive game of musical chairs. As a prudent investor, you need to value the investment you are considering before buying it. Valuation is at the heart of any investment decision, whether that decision is to buy, sell, or hold. In The Little Book of Valuation, financial expert Aswath Damodaran explains valuation techniques in everyday language so that even those new to investing can understand. Using this important resource, you can make better investment decisions when reviewing stock research reports and engaging in independent efforts to value and select stocks for your portfolio.
"This book is, perhaps, the best resource you will come across for learning the basics of this subject. Being able to assess a stock's valuation properly is a powerful ability." Economic Times
"Aswath Damodaran, professor of finance at NYU’s Stern School of Business, has written extensively on valuation. In "The Little Book of Valuation" (Wiley, 2011) he makes the process accessible to any individual investor who can—to quote one of his “rules for the road”—convert stories to numbers." Seeking Galpha
"If you get a chance to take a look at the book, you will notice that the chapters are structured around different types of companies and that each chapter is centered around identifying the "value drivers" for that type of company and the "value plays" that emerge from these drivers."Aswath Damodaran Blog
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Avoid financial service firms that overreach—investing in riskier, higher growth business—without setting aside sufficient regulatory capital buffers.
Invest in financial service firms that not only deliver high dividends, but also generate high returns on equity from relatively safe investments.
If you invest in distressed companies, your hope is that those companies that manage to turn themselves around will offer high enough returns to cover your losses on the many companies that will fail.
For over-levered firms to recover there has to be a reduction in debt, coming either from improving operating performance or recognition of the debt terms.
A firm with solid operating assets can become distressed because of its overuse of debt. Search for over-levered firms with valuable assets, in otherwise healthy business.
Look for firms with low operating margins relative to the sector, low returns on capital relative to cost of capital, and very low debt ratios.
Not all mature companies are large companies. Many small companies reach their growth ceiling quickly and essentially stay on as small mature firms.
Mature firms will register growth rates in revenues that, if not equal to, will converge on the nominal growth rate for the economy.
Mature companies tend to have stable margins, with the exceptions being commodity and cyclical firms, where margins will vary as a function of macroeconomic variables.
If growth companies get the bulk of their value from growth assets, mature companies must get the bulk of their value from existing investments.
While multiples such as PEG (Price Earning to Growth) ratios have their limitations, use PEG ratios to screen for companies that are cheap.
Look for firms that are able to preserve profit margins and returns as they grow. Steer away from firms that have to trade off lower margins and returns for higher growth.
Focus on firms that are able to diversify their product offerings and cater to a wider customer base as they grow. They will see more growth as they scale up than firms that do not have this capability.
Expected revenue growth rates will tend to drop over time for all growth companies, but the pace of the drop will vary across companies.
Even if growth companies are publicly traded, they generally have stock price data going back for only short periods, and even that data is unstable.
Growth firms in any business will tend to carry less debt, relative to their value, than more stable firms in the same business, simply because they do not have existing assets to support more debt.
The market values of growth companies, if they are publicly traded, are often much higher than the book values, since markets incorporate the value of growth assets and accountants do not.
Not only can earnings and book value numbers for the latest year be very different from numbers in the prior year, but they can change dramatically even over shorter time periods.
you can improve your odds by investing in stocks that are undervalued not only on an intrinsic basis but also on a relative one.
Intrinsic valuation provides a fuller picture of what drives the value of a business or stock, but there are times when relative valuation will yield a more realistic estimate of value.
When valuing an asset, use the simplest model that you can. If you can value an asset with three inputs, don’t use five.
Refusing to value a business because you are too uncertain about its future prospects makes no sense, since everyone else looking at the business faces the same uncertainty.
Collecting more information and doing more analysis will not necessarily translate into less uncertainty. In some cases, ironically, it can generate more uncertainty.
As a general rule, the more bias there is in the process, the less weight you should attach to the valuation judgment.
As the companies get larger and decide to go public, valuations determine the prices at which they are offered to the market in the public offering.
For small private business thinking about expanding, valuation plays a key role when they approach venture capital and private equity investors for more capital.
Increasingly, the need to assess value has moved beyond investments and portfolio management. There is a role for valuation at every stage of a firm’s life cycle.
While the focus in principle should be on intrinsic valuation, most assets are valued by looking at how the market prices similar assets.
You should pay more for a property that has long-term renters paying a high rent than for a more speculative property with not only lower rental income, but more variable vacancy rates from period to period.
The intrinsic value of an asset is determined by the cash flows you expect that asset to generate over its life and how uncertain you feel about these cash flows.
The price of a stock cannot be justified by merely using the argument that there will be other investors around who will pay a higher price in the future.