Value Investing, Videos

Damodaran – Laws Of Valuation: Revealing The Myths And Misconceptions

Aswath Damodaran discusses the laws of valuation and reveals the myths and misconceptions involved. Damodaran is the Kerschner Family Chair Professor of Finance at the Stern School of Business at New York University. He teaches the corporate finance and valuation courses in the MBA program. He received his MBA and Ph.D from the University of California at Los Angeles. His research interests lie in valuation, portfolio management and applied corporate finance. He has published in the Journal of Financial and Quantitative Analysis, the Journal of Finance, the Journal of Financial Economics and the Review of Financial Studies. He has also written four books on valuation (Damodaran on Valuation, Investment Valuation, The Dark Side of Valuation, The Little Book of Valuation), and two on corporate finance (Corporate Finance: Theory and Practice, Applied Corporate Finance: A User’s Manual).

Damodaran - Laws Of Valuation

Aswath Damodaran – Laws of Valuation: Revealing the Myths and Misconceptions (FULL PRESENTATION)

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Transcript

The two things that terrify me right now. The first is that Grobart behind me I'm not sure what it's going to do. The other is twenty five minutes on the dial simply because I'm so used to spending all day talking that twenty five minutes to me is about how long it takes me to get warmed up. So I'm going to compress what I planned to say today. Right at the start. If I don't get to it you kind of leave with the message. The first thing I want to talk about is what I call a corporate lifecycle that every company just like human beings. Is born it grows and matures and like every human being. It declines. And just as human beings don't like to age. Companies don't like to get old. So the first message I want to talk about is this notion of a corporate lifecycle and how trying to fight it is the most dangerous thing a business can do. The second message I want to deliver is the focus of a company needs to change as it moves through the lifecycle from startup to grow to mature to declining companies. And more value is destroyed around the world by companies not acting their age. Young companies are trying to act old. And old companies trying to be young again. And there's an entire ecosystem that feeds these companies consultants bankers sencha I call them the plastic surgeons of business essentially and I'll give you a facelift. You can be young again. And companies keep buying into this notion over and over again. The third message I want to talk about is very specifically connected to the topic I teach which is valuation. Now when I say evaluation for most of you what comes to your mind is spreadsheets and margins and numbers right. That's what we're trained to think about valuations. In 32 years of teaching valuation I've learnt a very important lesson It took me a while to get that. Valuation can never just be about the numbers. A good valuation always has a story embedded in it and one of the things I wanted to talk about is how that balance between story and numbers changes as a company goes from being a young company to an older company. And the final message I wanted to deliver is we often talk about great CEOs and I'm going argue that what makes for a great CEO is going to change. As you move through the lifecycle what makes for a great CEO at a young company is very different than what makes for a great CEO in a mature company which makes it very different from what makes for a great CEO in a declining company. So a lot on the menus. I want to get started when I teach finance.

I use a couple of structures to kind of bring through some of the broad lessons in finance and one of the things that I find useful is the notion of a balance sheet not an accounting balance sheet. I'm not an accountant and thank God for that a financial badge. Let me explain how a financial balance sheet is very different from an accounting balance sheet. At one level it looks very similar. It has assets and liabilities. But in the asset side of the balance sheet instead of breaking things down the way accountants do into fixed assets and current assets and financial assets and intangible assets I divide the assets of the business into assets and place investments it's already made as a company and grow us to look at a company like Microsoft as its employees would include offers in windows in what they already have in place. But growth is the value that I'm attaching to what I expect you to do next year two years out five years or 10 years out forever. Assets in place of growth.