Ashwath Damodaran, the professor of finance at NYU Stern Business School, is one of the world’s most well-known financial minds. Damodaran has a particular focus on valuing companies, so much so that he has been dubbed “The Dean of Valuation”. This article looks at Damodaran’s life but also some of his key methods for valuing stocks.
One interesting distinction Damodaran makes is between true valuation and ‘pricing exercises’. A lot of investors will value a company by looking at market multiple – for example price-to-earnings ratio or price-to-book. Some investors will take it a step further and compare a company’s multiples to a group of similar companies. Damodaran does not believe looking at these market multiples can be said to be truly valuing a company. Instead he thinks it is just a pricing exercise.
Valuation is calculating fair value based on the information about the company – i.e. its cash flows today and into the future. When investors determine the value of a company by comparing it to its peers, there is an assumption that the market is rationally pricing the other companies – which is often not the case. Moreover, when you’re looking at a great company that you might want to invest in, you may often struggle to find a true like-for-like comparison.
For investors that want to invest in individual companies, valuation is the name of the game. Finding great companies is the exciting part of the process. Correctly determining the price to buy them at is where the money is made. Ashwath Damodaran is one of the best people to learn from if you’re looking to build that skill.
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