I’ve known Aswath Damodaran is great, but this may well be the most entertaining investment lecture there is.
This whole 45-minute lecture on the WORST VALUATION MISTAKES AND HOW TO AVOID THEM is worth watching but summarizing best bits in this post.
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“It takes me 45 mins to get into any topic, so I thought I'd pick something very specific. I thought I'd talk about deferred taxes for 45 mins.
If you think I'm serious, you're sick.”
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“Most people who claim to do valuation are not doing valuation. They're doing pricing.
Pick up an equity research report. What do you see? You see a company. You see a multiple. You see comparables. So much of what passes for valuation out there is pricing.”
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“Three demons that cause bad valuations; bias, uncertainty, complexity.
I've discovered sexy titles are biggest part of selling books and presentations. Bermuda Triangle; ships would go there and disappear.
This is where valuations go to die.”
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”I tend to see people think of a number first, and then come up with a valuation to back up the number they already have. It's backwards, right?
Value comes first, valuation to follow.”
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“You almost never sit down to value a company with a blank slate. In other words, you already have pre-credit.
The more you know about a company, the more biases you have about the company.”
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“Some of my easiest valuations have been of companies I don't know anything about. List of Slovenian companies, closed my eyes, picked Kirka.
Never heard of it before, didn't even know what they did. One of the cleanest valuations I've ever done. Because I had no biases.”
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“The more you know about a company, the more difficult it becomes for you to put distance between you and the company. And if you get to know the managers of the company, God help you.
You play golf with the CEO? Don't even show me your valuation. I am not interested.”
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“Valuations magically move towards the market price.
And the more, and the less confidence you have in this process, the more likely it is that it's to happen.
And being at the market price basically means, hey, I screwed up, but so did everybody else.”
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“I ask you to value AOL for Time Warner in 1999.
It's impossible to take out hindsight bias from this process. If you're going to do valuation, it has to be with real companies and real time. Because once you know the outcome, all is lost.”
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”I'm going to let you in on a little secret. If you're ever asked to value something, never, ever come back with a nice round number.
Don't tell me the target price is $40. Tell me it's $38.87. It's amazing what that second decimal will do. When in doubt, add decimals.”
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“The intimidation factor is amazing.
Excel, you can go 10 decimals, 15, 20. . 20, 25. Just keep doing it. At some point, people step back and say, I'm not asking this guy questions. He's got the 25th decimal point nailed down.”
QUICK WORD TO MY FINNISH READERS!
Teen näitä kirjoituksia palosta oppia, selkeyttää ja säästää sijoittamisesta kiinnostuneiden aikaa. Olen lukenut yli 100 sijoituskirjaa ja hävinnyt yli 300,000 euroa, jottei sinun tarvitsisi tehdä kumpaakaan.
Mikäli ajan ja rahan säästö siis kiinnostaa, Tähtäimessä osakkeet -kirja sekä -sijoituskurssi tähtäävät molempiin! Liity kymmenien tuhansien lukijoiden ja satojen kurssikävijöiden joukkoon.
Jokaista myytyä sijoittamisen verkkokurssia kohden jaetaan yksi ilmaiskappale nuorille oppilaitoksiin.
Nyt kuitenkin takaisin Damodaranin pariin... / Now back to Damodaran...
“But one of the nice things about doing valuation is it's okay to be wrong, because all you have to do is be less wrong than the next guy.
And they all screw up so much.”
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“If you have a valuation model and you have real bias, there are ways in which you can make that model sing the tune you want it to sing.”
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“If you let me pick the multiple and you let me choose the comparables, I'm going to find a way to justify whatever number I want.”
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“You think real estate in Mumbai is expensive? All I need to do is compare to real estate in Tokyo. Just find something even more overpriced and say, that's cheap.
You let me pick multiple and comparables. You've essentially let me decide what the final number is.”
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”I've got this fairness opinion signed off.
Who the heck cares? You know there's a fairness opinion for the worst deals done in history? The Time Warner AOL deal? There's a fairness opinion somewhere saying that's fair.”
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“Fair value accounting is an oxymoron.
Make up your mind. Do you want to do valuation? Do you want to do accounting? Don't do both because you'll do neither.”
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“You have an analyst who tracks 15 companies for the rest of his life. You can't ask him to be honest about these companies because if he's honest about these companies, they're going to cut him off.
That's the rest of his life.”
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“The nature of the process is an equity research analyst cannot afford to be unbiased. M&A?
I'm going to the deal maker and ask him, does this deal make sense? The analogy I use is like asking a plastic surgeon, is there something wrong with my face?”
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”He can give you the honest answer, say, don't do this deal. It's a terrible deal. In which case, what does he get?
The undying gratitude of my stockholders, but try paying bonuses with that.”
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“Until we fix the processes, the valuations are not going to get fixed.
Let's be honest at least with ourselves. Maybe when you're in the bathroom, look in the mirror and say, today, I made up some numbers.”
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”You should have a practice in equity research;
The analyst says up front, I really love this company. Now let me go through the numbers and see if in fact I can show you my love. It'll be good to know where people come from.”
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”Uncertainty in valuation, it comes from lots of different places. It can be estimation uncertainty or economic uncertainty.
People mix up the two. Estimation uncertainty is mistakes you're making in estimation. Economic uncertainty comes from the outside.”
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“There's this illusion that if you spend more time doing valuation, you can make uncertainty go away.
Try valuing a Greek company. You can spend from now through eternity refining your valuation, and guess what? You're still going to face uncertainty.”
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”Let's say you value a Venezuelan company or a Russian company.
If your company looks really, really, really good, what might happen? Hugo Chavez on his deathbed might say, hey, I've nationalized the company. That's uncertainty. It's a very different kind of uncertainty.”
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“The payoff to doing valuation is not how uncertain you are about the value of a company, but how uncertain relative to other people valuing the company.
The payoff to doing valuation is greatest with companies that feel most uncertain about the future.”
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Thanks a lot for reading! Hope you enjoyed this post on the worst investment mistakes and how to avoid them.
If you liked and learned something new, appreciate you forwarding this to other possibly interested ones so that they can find it too.