My Valuation Class: The Fall 2015 Model Preview
It is almost September and as the academic clock resets for a new year, I get ready to teach a new valuation class. With three hundred registered students, it is about as diverse a class as any I have every taught, with a mix of full-time and part-time MBA students, law and engineering graduate students and a few dozen undergraduates. And with a market meltdown framing discussions, it will be interesting to see how the class plays out. As always, I cannot wait for the class to start and as I have, each semester, for the last few years, I invite you to follow the class, if you are so inclined.
Setting the table
Valuation is an intimidating title for a class, stirring up visions (and nightmares) about spreadsheets, accounting statements and financial theory. This may be the default version of the class and it serves experts in the topic well to preserve this air of mystery and intimidation. I have neither the expertise nor the desire to teach such a class, and I hope that you will not only take my class, no matter what your background and experience, but that you will also learn to enjoy valuation as much as I do. The best way for me to start describing my class is to tell you what it is not about, rather than what it covers. So, here we go:
- It is not an accounting class: Much of the raw data in my valuations comes from accounting statements, but once I get that raw data, I lose interest in the rest of the accounting details. In fact, one of my first in-practice webcasts (short webcasts about practical issues in valuation) uses the Procter and Gamble 10K to illustrate how little of a typical accounting filing gets used in valuation and how much is irrelevant or useless. I admire people who can forecast our full financial statements (income statements, balance sheets and cash flow statements) decades out, but I have never ever felt the urge to do so and I am not sure that I have the accounting skills to even do so.
- It is not a modeling class: As someone who did his first valuation on an old fashioned columned paper sheet with a calculator, I have mixed feelings about spreadsheets, in general, and Microsoft Excel, in particular. I like the time that I save in computational details, but I have to weigh that against the time I lose, playing pointless what-if games with the data that I would never have considered in my calculator days. I admire Excel Ninjas but I have also seen what happens when analysts become the spreadsheet’s tools, rather than the other way around. Needless to say, I have never taught a session (let alone a class) built around Excel spreadsheets, though I have no qualms about using one to illustrate fundamental valuation principles.
- It is not a financial theory class: To be able to teach this class at a research university, I had to go through the rites of passage of a Finance doctoral student, traversing the path that finance has followed, starting with Harry Markowitz and modern portfolio theory, moving through its Greek phase (with alphas and betas dominating the conversation first and then leading on to the expropriation of the rest of the Greek alphabet by the options theorists) to the counter-revolutionaries of behavioral finance. Unlike some who make you choose whether you are for financial theory or against it, I view it as a buffet, where I can partake on the portions of the theory that I find useful and leave behind that which I do not. In my valuation class, in particular, I would be surprised if I spent more than 5% of my time on financial theory, and if I do, it is only because I am trying to get to some place more interesting.
Now that I have established what the class is about, let me lay out the five themes around which this class is built.
- Valuation is a craft, not an art or a science: I start my class with a question, “Is valuation an art or a science?”, a trick since the answer, in my view, is neither. Unlike physics and mathematics, indisputably sciences with immutable laws, valuation has principles but none that meet the precision threshold of a science. At the other extreme, valuation is not an art, where your creative instincts can guide you to wherever you want to go and geniuses can make up their own rules. I believe that valuation is a craft, akin to cooking and carpentry, and that you learn what works and what does not by doing it, not by reading or listening to others talk about it. That is the reason that each week during the course of the semester, I post my valuation of a company, with a Google shared spreadsheet for everyone in the class to try their hand at valuing the same company and coming to a very different conclusion than I do.
- Valuing an asset is different from pricing it: I will not bore you by repeating this distinction that I drew first in this post but have returned to over and over again. It is my belief that much of what passes for valuation, in practice, is really pricing, sometimes disguised as valuation and sometimes not, but I also think that there is nothing wrong with pricing an asset, if that is what your job entails. Thus, though the bulk of this class is built around intrinsic value and its determinants, a significant portion of the class is dedicated to better pricing techniques, through the judicious use of multiples, comparable assets and statistics.
- Anything can be priced and most almost anything can be valued: This may be stubborn side speaking, but I have always believed that you can value any cash-flow generating asset (as I have attempted to, in these posts on valuing tracking stock on a professional athlete, a sports team, a trophy asset and young companies) and that you can price any asset (as I tried to to, in these posts on Gold and Bitcoins). While this class is centered around valuing publicly traded companies, I deviate from that script often enough, that by the end of the class, you should be able to value and price any asset.
- Valuation = Story + Numbers: As readers of this blog, you have heard me get on the soapbox often enough, but to me the essence of valuation is connecting stories to numbers. As I noted in this most recent post of mine, this requires me to push people out of their comfort zones, encouraging numbers people to tell more stories and stories people to work more with numbers. No matter how far on either end of the numbers/ story spectrum you are, I think that no one is beyond reach.
- Valuation without action is pointless: I have never felt the need to use a case study in my valuation class or value a widget company in my class, because I not only find valuing real companies in real time more interesting, but I can act on my own valuations and I usually do, though not always with conviction. Investing requires faith in both your capacity to value companies and in markets correcting over time and I try to let people see both the source of my faith and challenges to that faith.
I did put together a short (about two minutes) YouTube video of my class that summarize my perspective on this class.
So, both number crunchers and story tellers, welcome to the class and we can learn from each other!
Prepping for the class
As a realist, there are a few skills that will stand you in good stead in this class and none of these skills are difficult to acquire.
- Read financial statements: For better or worse, our raw data comes from accounting statements and you need to be able to navigate your way through these statements. If you have a tough time deciphering the difference between gross, operating and net income, and don’t quite understand what goes into book value of equity, you will have a tough time valuing companies. Don’t remember your accounting classes? Don’t want to go back there? Never fear! I have a primer on accounting that takes you through the absolute basics (which is about all I know anyway) and you can get to it by clicking on this link.
- Understand basic statistics: Statistics, I was taught in my first class, is designed to help us make sense of large and contradictory data. Since that is precisely our problem in pricing assets today, i.e., that we have too much data pulling us in too many directions, it may be time to dust off that statistics book (I hope that you did not sell it back or burn it after your last statistics class) and reacquaint yourself with simple statistics. So, start with the averages, medians and standard deviations, move on to correlations and regressions and if you can handle it, to statistical distributions. If you are lost, try this link for my statistics primer.
- Get comfortable with rudimentary finance: I have always found it unfair that to take some classes, you have to take the equivalent of a lifetime in pre-requisites. While having taken a corporate finance class eases the way in valuation, it is not required, nor is any other finance course. That said, your life will be easier if you have nailed down the basics of time value of money and computing present value, as well as understand the roots of modern portfolio theory, even if you don ‘t quite get the specifics. This link has my time value of money primer.
Getting down to Specifics
It’s taken me a while to get to specifics, but the class starts on September 2, 2015 and classes are every Monday and Wednesday from 10.30 am -11.50 am (with Sept 7, 14 and 23 being holidays) until December 14. The calendar for the class is available at this link. The class content will follow a familiar path, starting with a big picture perspective on valuing/pricing, followed by intrinsic valuation (DCF), relative valuation (pricing and multiples), asset-based valuation (accounting, liquidation & sum of the parts) and it will end with real options. There will be two add-on sessions on acquisition valuation and value enhancement.
If you are one of the 300 registered in the class, I hope to see you in class. If not, the classes will be recorded and webcast, usually by the end of each session day, and there are three forums you can use to follow the class:
- My website: Everything I do in this class will be accessible on this page for the class. As you will notice on the page, you can not only access the webcasts for the lectures, but you can download the lecture notes, try your hand at the valuations of the week and even take quizzes/exams (though you have to grade them yourself). If you want, you can read the emails that I send to the class at this link.
- iTunes U: This has become one of my favorite platforms for delivering my class and it works flawlessly, if you have an Apple device, with an iPad providing a much better experience than an iPhone. (You have to download the iTunes U app, but it is free and the learning curve is barely uphill.) However, you can tweak it to work on an Android, with an add-on app. This semester’s version will be available at this link.
- YouTube: This was my add-on platform last semester and while it was never intended for delivering full classes, it worked surprisingly well. The webcasts come naturally to it, though the 80 minutes is a stretch, but I will add on the presentation material and the post-class tests to the webcasts to supplement them. This semester, the lectures and supporting material will be found at this channel.
This is not the first time that I have put my classes online and this may not be the first time that you have thought about taking this particular class. As with other online classes, I know that life gets in the way, with family and work commitments taking priority, as they should, over an online valuation class that provides no credit or certification. You can follow one of the following four paths, each requiring more time and brain commitment than the prior one:
- Watch an occasional lecture or lectures: Rather than watch all 26 lectures, you can pick and choose a few on the topics that interest you the most. This strategy works best for those who cannot commit the time and/or are already experienced enough in valuation that they need just a brushing up of skill sets.
- Watch every lecture, do post class tests/solutions: You could watch every lecture, a significant time commitment at 80 minutes apiece, and do just the post-class tests (designed to take about 5-10 minutes). Remember that you don’t have to take this in real time, since the course will stay online for at least a year.
- Watch lectures and take quizzes/exam: In addition to watching the lectures, you can put your knowledge to the test and take the quizzes and final exam. I will post my solutions with a grading template and you can grade yourself (My advice: Be an easy grader!). Since the exams are all open-book, open-notes all you have to do is honor the time constraint (30 minutes for quizzes, 2 hours for the final).
- Watch lectures, take quizzes exam & value a company: In addition to doing all of the tasks in the prior path, you also pick a company to value (just as everyone else in my class will be) and try to apply what you learn in the class in that valuation. Unfortunately, there is little chance that I can offer you the feedback that I offer to those in my class, but I will try to answer a question or two, if you are stuck, and will provide my feedback template, when the time comes due.
If all of these pathways all sound like too much work/time commitment and/or watching 80 minute videos of valuation lectures on your phone or tablet is not your idea of fun, I do have an alternative. Try my online valuation class, where the sessions are about 10-15 minutes apiece, onmy website, YouTube or iTunes U.
Pass on it or pass it on!
If you try the class and don’t like it, I will not be offended and I am sure that you will find a better use for your time. If you try the class and you like it, I would like something in return. Please pass on a bit of what you know or have learned to at least one other person, and perhaps more. Knowledge is one of the few things in life that we can share, without being left poorer for the sharing, and while the return on this investment will be not be financial, the emotional dividends will be make it worthwhile.