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Attended a brilliant session on valuations by Professor AswathDamodaran today. Applicable to all countries and markets.
Valuation is neither art nor science. It’s a craft like cooking. You can’t learn cooking through cook books
Pick a company and value it. Just like first time you cook it will most probably be a disaster. Keep doing it and you’ll get better. Are you number cruncher or a story teller naturally? Find that out first. Number crunchers are/were happy in their algebra class and hated English. On the other hand, people in English class loved hidden meanings and hated numbers.Number crunchers think they have the upper hand. A good valuation is never ever all about the numbers and never all about stories. Good valuation is a bridge between stories and numbers.Every story should have a number attached and every number should have a story attached
If you know the valuation of something don’t bid at the same value. (This is in context when professor handed over a $20 bill in an envelope to some one and asked how much he would pay for. He and an overwhelming majority of the audience said $20). Weapons and words of mass distraction - ‘control’, ‘synergy’, ‘brand name’, ‘strategic’. Use it only when you want to sell your business at a higher valuation (laughter). A typical ‘strategic’ deal is a really stupid deal. Dangerous word - China. You can get away with anything by using this word. Why are US interest rates rising? - China. Why is xyz growing at 10%? - China. (Laughter)
First rule in valuation - don’t pay for words. Number crunchers suffer from delusion of precision, delusion of being objective and delusion of being in control as though one can’t be bad and go wrong with numbers. Story tellers on the other hand suffer from delusion of creative exclusivity. Big story not equal to big valuation. Story tellers love to give anecdotal evidence. ‘15 years ago... I did xyz and succeeded’. Value companies to act on them. Without a story you will have no faith in your own valuations. Every story can find a number. Talk to people who will be the devils advocate. Keep the feedback loop open. It’s ok to disagree
. Venture Capitalists don’t value business; they price the business.If a company says ‘I will be $7 billion revenue 10 years from now’. Ask them the story and not the growth rates
Sometimes stories are too good that you want it to be true. Then you stop asking questions. High growth, high investment and high risk is fine. High growth, low investment and low risk always needs an explanation and almost impossible. Low revenue grwth, terrible margins and constant R&D characterizes the auto industry = bad business. But Ferrari’s strength is low growth because low growth = exclusivity. They sell only 7200 cars a year which is prob the no of cars GM rejects in their line daily (laughter). Never ever spoken to the top management of a company. Won’t get details about the company. More insights from worker level
. Companies have to act their age. If it’s an old company, it will show. GE shouldn’t behave like a start up
thanks for reading...
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