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The Little Book of Valuation: How to Value a Company, Pick a Stock and Profit (Little Books. Big Profits) [Hardcover]

Aswath Damodaran
4.0 out of 5 stars  See all reviews (3 customer reviews)
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Book Description

25 April 2011 Little Books. Big Profits (Book 34)
An accessible, and intuitive, guide to stock valuation Valuation is at the heart of any investment decision, whether that decision is to buy, sell, or hold. In The Little Book of Valuation, expert Aswath Damodaran explains the techniques in language that any investors can understand, so you can make better investment decisions when reviewing stock research reports and engaging in independent efforts to value and pick stocks. Page by page, Damodaran distills the fundamentals of valuation, without glossing over or ignoring key concepts, and develops models that you can easily understand and use. Along the way, he covers various valuation approaches from intrinsic or discounted cash flow valuation and multiples or relative valuation to some elements of real option valuation. Includes case studies and examples that will help build your valuation skills Written by Aswath Damodaran, one of today′s most respected valuation experts Includes an accompanying iPhone application (iVal) that makes the lessons of the book immediately useable Written with the individual investor in mind, this reliable guide will not only help you value a company quickly, but will also help you make sense of valuations done by others or found in comprehensive equity research reports.

Frequently Bought Together

The Little Book of Valuation: How to Value a Company, Pick a Stock and Profit (Little Books. Big Profits) + The Little Book of Value Investing (Little Books. Big Profits) + The Little Book That Still Beats the Market: Your Safe Haven in Good Times or Bad (Little Books. Big Profits)
Price For All Three: 32.93

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Product details

  • Hardcover: 256 pages
  • Publisher: John Wiley & Sons (25 April 2011)
  • Language: English
  • ISBN-10: 1118004779
  • ISBN-13: 978-1118004777
  • Product Dimensions: 18.6 x 13.5 x 2.4 cm
  • Average Customer Review: 4.0 out of 5 stars  See all reviews (3 customer reviews)
  • Amazon Bestsellers Rank: 110,660 in Books (See Top 100 in Books)
  • See Complete Table of Contents

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From the Inside Flap

You buy financial assets for the cash flows you expect to gain. The price of a stock cannot be justified by assuming there will be other investors around who will pay a higher price in the future. That is the equivalent of playing an expensive game of musical chairs. As a prudent investor, you need to value the investment you are considering before buying it. Valuation is at the heart of any investment decision, whether that decision is to buy, sell, or hold. In The Little Book of Valuation, financial expert Aswath Damodaran explains valuation techniques in everyday language so that even those new to investing can understand. Using this important resource, you can make better investment decisions when reviewing stock research reports and engaging in independent efforts to value and select stocks for your portfolio. Page by page, Damodaran distills the fundamentals of valuation, without glossing over or ignoring key concepts, and develops models that you can easily understand and implement. He also makes the case that the two popular, and often divergent, approaches (intrinsic and relative) to valuation can be used in tandem. Damodaran discusses how both of these approaches can significantly improve your odds by helping you select stocks that are undervalued not only on an intrinsic level but also on a relative basis. Once you become familiar with the techniques outlined in this book, you will be able to value a company with confidence. In addition, The Little Book of Valuation: Includes illustrative case studies and examples that will help develop your valuation skills Puts you in a better position to determine which investments are on track to add real value to your portfolio Offers valuable valuation insights from one of the foremost experts in this field Written with the individual investor in mind, this reliable guide will not only allow you to value a company quickly, but will also help you make sense of valuations done by others or found in comprehensive equity research reports.

From the Back Cover

Praise for The Little Book of Valuation "There is nothing ′little′ about Damodaran′s The Little Book of Valuation.The whole gamut of ideas that form the basis for all business valuations–covered in his many multi–hundred page classics–are all here, with the same rigor, clarity, pointedness, and wit."—Professor Anant K. Sundaram Tuck School of Business, Dartmouth College "The Little Book of Valuation is a great book that I will recommend to my students and friends. This book is an impressive synthesis of sound theory and best practice. It is completely accessible to the novice. It is also an important addition to the professional library of the finance specialist. Acquire it without hesitation."—Pablo Fernandez, Professor of Finance IESE Business School, Spain "Damodaran′s fast read book offers valuable insights for both institutional and sophisticated individual investors. Within the confines of ′intrinsic′ (income approach) and ′relative′ (market approach) analysis, he identifies the ′value drivers′ in several broad categories of stocks and the most important factors to look for, and how to treat them in valuation for each category."—Shannon PrattChairman and CEO, Shannon Pratt Valuations

Inside This Book (Learn More)
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Front Cover | Copyright | Table of Contents | Excerpt | Back Cover
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Customer Reviews

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Most Helpful Customer Reviews
1 of 2 people found the following review helpful
5.0 out of 5 stars I'm Playing all the notes, Sunshine.... 10 May 2013
Format:Hardcover|Verified Purchase
In the famous sketch with Andre Previn (Mr Preview) Eric Morecambe went on to explain that the notes may not necessarily be in the right order, an apt analogy for this book. Explanations of terms may appear up to 10 pages away from where the formula was first mentioned but they are, nevertheless, there. Enough moaning, if you want to get to grips with this book, then study it. It is well worth it. I mean get a pencil and paper and take notes. Then organize the stuff to suit you. You need to work through it stage by stage, because it does build up an overall method eventually. My suggestion is to try to work out a spreadsheet for each section. As an example Glenn Martin does this beautifully in "How to Value Shares and Outperform the Market" (Harriman House).

Buy this book if you want to feel confident that you have done everything you can to check out the financials of a stock before committing to it. May your disappointments be few.
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4 of 7 people found the following review helpful
2.0 out of 5 stars i must be missing something.... 25 Feb 2012
By Gcrikey
Format:Hardcover|Verified Purchase
this is the third book i have read in the "little book..." range. what i like about these books are that they are concise, give very good explanations and after reading them i normally feel that i have learnt a hell of a lot of valuable investment theory/advice that can be applied at a later date. so what went wrong with this book?

first of all the style is incredibly dry and very poorly written. a couple of examples are that the author will ask the reader to refer to diagram 5.1 but the chart will be for a different company than the author is talking about. the author also refers to "beta" and lots of formulas - sadly he doesn't describe what "beta" is or breakdown the formulas or tell you where he got the ratios from - this makes it very confusing.

also i feel that this book is geared toward people who have accountancy knowledge - by this i mean that you have to have a lot of accountancy knowledge so it renders the "little book" series completely obsolete - as they are designed to be easy to read for beginners.

so why 2 stars? well it does give a small, very small amount of advice to investment - in that one should create their own indicators to test the value of an investment and not always trust the published indicators - i.e create ratios from data of an entire industry. sadly whatever else is of vale in the book is completely hidden.
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0 of 2 people found the following review helpful
5.0 out of 5 stars Excellent 26 July 2013
Format:Hardcover|Verified Purchase
Writing this only cause its needed... a bit stupid isnt it? you could just rate... It's a far more objective metric
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Amazon.com: 3.8 out of 5 stars  31 reviews
39 of 39 people found the following review helpful
5.0 out of 5 stars Training Wheels for Valuation . . . 9 May 2011
By D. CHEN - Published on Amazon.com
Format:Hardcover|Verified Purchase
This book echoes some of the author's earlier works but whereas his other books are largely geared towards professional practitioners, The Little Book of Valuation is targeted at individual investors.

In my opinion, Damodaran has carved a unique niche among authors of this genre. As a professor at a respected university, his books always draw on a solid theoretical foundation. A lot of other authors do the same. Where I think he distinguishes himself is the ability to bring pragmatic, real world slant to these topics. I have found his publications to be very readable yet hardly "dumbed down". In fact, I think this particular volume would make a great introduction on valuation for aspiring MBAs and finance students.

The Little Book of Valuation starts by explaining the nuts and bolts of finance including topics such as time value of money and the concept of risk. A short explanation of financial statements is also included. Damodaran then goes on to describe intrinsic valuations including the subtle differences between cash flows to equity holders versus cash flow to the firm. Along with that the appropriate discount rates that apply to each are also explained. The book then quickly compares intrinsic valuation to relative valuation methodologies, stressing along the way the merits and disadvantages of each. When using multiples (price/earnings, price/book, price/sales) to do comparative valuations, he points out which financial metrics are the underlying drivers for each multiple.

From there, the book delves further into subtopics such as valuing companies at different stages in their life cycles: early stage companies, mature companies and declining companies. There are also separate chapters that discuss valuation issues/techniques for banks and other financial entities, cyclical/commodity companies and a final chapter on valuing companies with significant intangibles.

While the nature of the "Little Book" series means that they will be succinct and perhaps a little light on mind-numbing detail, I think this particular volume provides a very readable, even-handed approach to the topic of valuing financial assets. Damodaran consistently provides examples after he makes a point. Furthermore, the examples are real life rather than hypothetical situations.

I struggled to get through the Copeland tome on Valuation. I wish Professor Damodaran had published his Little Book of Valuation years earlier . . . it would have been like having a nice set of training wheels to get me started . . . .
64 of 69 people found the following review helpful
5.0 out of 5 stars A Book Absolutely Full of GEMS - 5 STARS for a MASTER TEACHER !!!! 14 May 2011
By Richad of Connecticut - Published on Amazon.com
Format:Hardcover|Verified Purchase
This is not a romance novel. You read The Little Book of Valuation in order to gain valuable skill sets and methodologies for making money in the stock market. Professor Damodaran is a full professor at the New York University Stern School of Business. He is deemed to be the expert on valuation in this country, certainly on an academic level. There are real world experts in Wall Street and in corporate consulting firms like McKinsey & Company, but none have had the academic impact that this man has.

What Damodaran brings to the table is unique. He is the first person that I have encountered who has been able to distill what many people consider to be a very difficult topic down to a simplistic discussion. After you read this book, you will understand valuation, which seems to be difficult even for those with decades of experience on Wall Street.

There are 11 chapters spread out over 225 pages, every one of which proved to be interesting, and highly readable. I found three chapters to be particularly worthwhile. They were

Chapter 2 Power Tools of the Trade

Chapter 4 It's All Relative

Chapter 11 Invisible Value

The professor uses a series of companies to explore different valuation techniques. They include Under Armor, Hormel Foods, Exxon Mobil, Wells Fargo, and Amgen. He explores intrinsic value and relative value techniques and tells the reader when to use which, and more importantly how to uniquely blend the techniques to obtain an even more meaningful valuation.

It is obvious that aside from being a master of valuation Damodaran has intellectually thought about his topic for many years. These are just some of the concepts that are uniquely explained in this book:

* The bias starts with the company you choose to value

* Be honest about your biases

* Most valuations are WRONG

* Avoiding uncertainty doesn't make it go away

In the last chapter, entitled 10 Rules for the Road, the author lays out for you the most important conclusions he has formulated in his long academic career. There were three that I personally found highly significant.

1) Risk affects Value

2) Growth is not FREE

3) All good things including growth come to an end. Nothing is forever.

CONCLUSION:

You have a choice if you want to learn about how to value a company. You can read a 1000 page textbook written by the same author, or you can read the Little Book of Valuation. By reading this little gem of a book, you will get the big picture, a framework by which to understand the major concepts of valuation. You can then move on to other more complex mathematically oriented works. This book should be your first choice however, and thank you for reading this review.

Richard Stoyeck
9 of 10 people found the following review helpful
3.0 out of 5 stars Too much theory, not enough practical value 10 Nov 2012
By Ant Gara - Published on Amazon.com
Format:Hardcover|Verified Purchase
The author is a noted valuation author with several other books, much more indepth than this one. As an introduction to security valuation, it's good enough to get the job done, but I take issue with some of his methods.

Pros:
- Explains with clarity the different types of discounted cash flows (annunities, perpetuity, etc).
- Gives good explanation as to the significant metrics behind valuation multiples (ROE in PE, etc, Net PM in P/S, etc).
- Details why you should use historical averages, and not simply the most recently available metric for these calculations.
- Financial institutions are notoriously hard to value, and his method here is probably the best I've come across.

Cons:
- My biggest complaint is his over-reliance on CAPM beta as a risk-metric. Numerous studies have shown that stocks with low betas routinely out-perform those with high betas, which is the exact opposite of what's supposed to happen, according to financial theory. In fact, the author even briefly glosses over why beta may not be a great metric to use, but then continues to do so through out the entire book. As Buffett says, any time you see finance use a Greek symbol, they're substituting theory for experience.
- Doesn't give any alternatives to beta (WACC is no better, as it also includes beta) towards measuring risk. Should ignore beta completely and simply use the average market return over the past 200 or so years of 8 - 10% (I typically use 9).
- The regression analysis part seems completely out of place in a book like this.
- Likewise, his over-reliance on DCF is borderline absurd. Again, numerous studies have shown that most PROFESSIONAL analyst fail to accurately predict a firm's earnings over a short-term horizon (David Dremen has published many of these studies), so to assume a non-professional investor can with even remote accuracy predict cash flows 10 years into the future is ridiculous.

Overall, it's good for an introduction on discounting cash flows and being able to value a financial institution, but his use of beta and 10 years worth of forecasting is what holds this down.
21 of 27 people found the following review helpful
3.0 out of 5 stars Necessary but inadequate 27 Dec 2011
By TS 2912 - Published on Amazon.com
Format:Hardcover|Verified Purchase
The Little Book of Valuation: How to Value a Company, Pick a Stock and Profit by Aswath Damodaran

This book has given me a good basic understanding on valuing a company from an accounting perspective. Reading this book has also resulted in my understanding basic accounting terms (not having an accounting background, I had to look up various terms while reading the book).

This book is limited in providing (me) a reasonably accurate mechanism for valuing a company from a financial perspective (i.e. valuation based on expected performance). I tested various equities at various time-periods and could not accurately determine their future medium-term values based on the formulae provided.

Which is why I gave it a 3-star; ultimately (at least for me) the main purpose of trying to value a company is to arrive at a valuation at which the price will climb/descend to in the medium-term. Which this book does not do.
4 of 4 people found the following review helpful
3.0 out of 5 stars Good introduction, but lacks depth for the practitioner 25 April 2012
By Nick - Published on Amazon.com
Format:Kindle Edition|Verified Purchase
If you want a short and lightweight introduction to the subject and have basic compound interest and financial statement analysis this book is useful. If you are looking for more than an introduction/overview then the book lacks some depth. It is short, clearly written, and covers the ground with minimal mathematics. I do recommend it as an introduction and overview of the subject area. However, if you can't do basic compound interest or have not looked at basic financial statement analysis it would be helpful to brush up on these topics before using this book to get into valuation.

For knowledgeable readers the book is less useful. To much time is spent presenting an answer on the mechanics of valuing a company and not enough time is spent on the nuances, tradeoffs, and implications of various valuation assumptions. The mechanics are important, but the book does not really grapple adequately with some of the big difficulties in valuation, which include the selection of discount rates and estimation of terminal value. For example, there is no discussion on merits or otherwise of using the average weighted cost of capital (AWCC) for discounting or presenting any alternatives. I don't claim that the approach is wrong just that it carries certain implications that deserve discussion.

Risk is dealt with simplistically through the discount rate, which is not inherently bad, but alternative actuarial approaches exist that I personally think deserve discussion, if only to inform the reader of the scope of the subject matter. Finally, success is as much about managing risk as it is about placing a value on a business. I feel that this most important point is lost.

Is the book worth reading? Absolutely. However, if you are hoping for a tool kit that will provide you with crystal ball to gaze on the future then you are surely going to be disappointed, because none exists.
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