Aswath Damodaran Session 2: The Bermuda Triangle and Valuation Approaches

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Published on Sep 12, 2016

This class started with a test on whether you can detect the direction bias will take, based on who or why a valuation is done. The solutions are posted online. We then moved on to talk about the three basic approaches to valuation: discounted cash flow valuation, where you estimate the intrinsic value of an asset, relative valuation, where you value an asset based on the pricing of similar assets and option pricing valuation, where you apply option pricing to value businesses. With each approach, we talked about the types of assets that are best priced with that approach and what you need to bring as an analyst/investor to the table. For instance, in our discussion of DCF valuation and how to make it work for you, I suggested that there were two requirements: a long time horizon and the capacity to act as the catalyst for market correction.Today's class started with a test on whether you can detect the direction bias will take, based on who or why a valuation is done. The solutions are posted online. We then moved on to talk about the three basic approaches to valuation: discounted cash flow valuation, where you estimate the intrinsic value of an asset, relative valuation, where you value an asset based on the pricing of similar assets and option pricing valuation, where you apply option pricing to value businesses. With each approach, we talked about the types of assets that are best priced with that approach and what you need to bring as an analyst/investor to the table. For instance, in our discussion of DCF valuation and how to make it work for you, I suggested that there were two requirements: a long time horizon and the capacity to act as the catalyst for market correction. We then started our discussion of intrinsic valuation, with a simple experiment on valuation, which led to three propositions about valuation. In the course of that discussion, I mentioned the weapons of mass distraction that people throw at us, as work through the numbers.

Start of the class test: http://www.stern.nyu.edu/~adamodar/pd...
Slides: (1) http://www.stern.nyu.edu/~adamodar/po...
(2) http://www.stern.nyu.edu/~adamodar/po...
Post class test: http://www.stern.nyu.edu/~adamodar/pd...
Post class test solution: http://www.stern.nyu.edu/~adamodar/pd...

the-bermuda-triangle-of-valuation