6/23/2021 Aswath Damodaran - CV - Evernote

Notes from Professor Damodaran's Videos

1. Valuation is simple and we make it complex
2. Valuation is more about story telling than simply numbers - narrative
3. When valuations go bad, it's not because of numbers but :- a) Bias/ preconceptions b) uncertainty -
inability to deal with it c) complexity - gets in the way of simplicity that is in the core of valuation

You should be able to value just about any asset

"They must know something that you don't" (Most dangerous words in investing)

Three groups of Lemmings

1. Proud Lemmings : Momentum Investors (Don't bother about the reason behind investing but just do
it because others are doing it)
2. Yogi Bear Lemmings : Think they're smarter than the average lemming. They want to go all up to the
edge and then pull it away. If you can do this, it's great as you get all the upside and no downside.
3. Lemming with a Life Vest

Valuation is a life vest. It does not stop you from jumping but slows the process.

Bermuda triangle of Valuation

1. Preconception about value of the company : The irony is that the more you know about the company,
the higher your preconceptions. [Ask 2 questions: Who did this valuation? Who paid them to do this
valuation?]
2. Myth : Valuation is about science. Numbers are just estimates. The more uncomfortable you are with
the numbers and doing the valuation, the greater the payoff.
3. Myth : If you make a model bigger, it is going to be better. You are making assumptions. As the models
grow more complex, they become a black box. Are you running the model or is the model running
you? Input fatigue. Be parsimonious. Less is more.

Three approaches to valuation

1. Intrinsic Valuation : Based on fundamentals. All about business. Cashflows, growth, risk. Eg. DCF   
2. Relative Valuation : what similar assets are being priced. You use this as basis.         
3. Options Pricing Model :  Based on contingent cashflows.  Value only if certain condition is met.

Each of the above valuations is based on the assumption that markets make mistakes. There would be no
point in valuing the companies if markets never made mistakes as market price would be the actual price.
The approaches differ in how the markets make mistakes.

DCF (Intrinsic Valuation)

Value of the asset is the discounted value of future cash flows. Trying to estimate intrinsic value of a
business.
1. Cashflows
2. Discount rate that reflects risk
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6/23/2021 Aswath Damodaran - CV - Evernote

3. Life of the asset

Assumption : Markets make mistakes in valuing individual companies and they correct these mistakes over
time.
You need long time horizon as there is no guarantee that the mistakes would correct soon.
             
Relative Valuation
How similar assets are priced. You have given up on intrinsic value and depend on the market price.
1. Scaled measure of price (different sizes of company, etc. is taken care of). You are essentially
comparing numbers that are comparable (multiples).
2. Find other investments that look just like yours. Easy in some cases, difficult in others (Is there
another Apple?)
3. Control for differences across the companies.
Assumption : Markets are right on average but wrong on individual companies. Those mistakes will get
corrected sooner than later.

Option Pricing Models

Using option pricing in the context of valuation. Using the models for valuing businesses/assets that have
option like characteristics. Derive value from underlying assets, have contingent payoffs, and limited life.
Eg. Natural reserve companies with undeveloped reserves, gold reserve, pharma company with potential of
patent stock in a deeply troubled company that is debt-laden

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