Investment Valuation: Tools and Techniques for Determining the Value of Any Asset (Wiley Finance) Hardcover – 20 Apr 2012
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"Aswath Damodaran′s work is always worth reading.... For investors and students of the financial markets who want to embark on serious fundamental analysis, it is critical to understand how to go about valuing stocks and other instruments. There is no short cut.... Damodaran′s Investment Valuation explains the hard work part." ( Seeking Alpha, May 2012)
From the Inside Flap
Since the last edition of Investment Valuation was published over a decade ago, much has changed in the world of finance. For those interested in valuation, these years have been extremely eventful.
Now, in the Third Edition of Investment Valuation, New York University Stern Business School Professor Aswath Damodaran one of the nation′s top business school professors returns with a fully updated edition of his classic text.
While written to reflect current market conditions, this reliable resource also stays true to previous editions with coverage of a wide range of tools and techniques, both new and old, for determining the value of any asset, including the valuation of stocks, bonds, options, futures, real assets, and much more.
Using updated examples and the most current valuation tools, this Third Edition addresses a variety of new issues that pose complex valuation problems. Page by page, Damodaran guides you through the theory and application of different valuation models and clarifies the entire process from cash flow valuation and relative valuation to acquisition valuation.
Engaging and accessible, this revised Third Edition of Investment Valuation:
- Explores important valuation lessons gleaned from the recent market crisis and provides valuable insights on financial fundamentals such as risk–free rates, risk premiums, and cash flow estimation that came to light during this time
- Offers an increased focus on emerging market companies, which have come to the forefront with the growth of Asia and Latin America
- Includes valuation practices across the life cycle of companies and emphasizes value enhancement measures such as economic value–added (EVA) and cash flow return on investment (CFROI)
- Contains a new chapter on probabilistic valuation techniques that includes scenario analysis, decision trees, and simulations
- Discusses how to choose the right valuation model for any given asset valuation scenario
- And much more
Investment Valuation, Third Edition thoroughly explains the valuation process from the ground up and offers you some of the most flexible approaches to valuing assets. Now you can easily access a significant number of datasets and spreadsheets associated with this book online at damodaran.com. In fact, the valuations will constantly be updated online, so you can have a closer link to real–time valuations.
Filled with detailed case studies and proven valuation models, this indispensable guide is a must–read for anyone wishing to gain a better understanding of investment valuation and its methods. With it, you can take the insights and advice of a recognized authority on the valuation process and immediately put them to work for you.See all Product Description
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Top Customer Reviews
Regarding the book, is a must have for those studying or working within Valuation.
Most Helpful Customer Reviews on Amazon.com (beta)
- Unlike many, many, MANY other investment books out there, which mismatch numerators and denominators when constructing various ratios, the author is VERY consistent in his application of these ratios. For instance, Return on Assets is typically calculated as Net Income/Total Assets. However, the numerator, net income, is what's available to equity-holders after bond-holders have been paid, whereas the denominator, total assets, is funded by both debt AND equity. The author explicitly points out the flaws of this ratio, as well as Price/Sales (Again, the numerator is an equity measure, whereas the denominator, revenues, is what's generated via both bond-holders and equity-holders), and stresses that numerators and denominators should be consistent with what they're measuring. This is a big plus, as almost every other investment book out there makes this mistake at some point within their text.
- Sufficient detail is given to both "intrinsic" valuation (DCF, EVA, etc.) and "relative" valuation (P/E, EV/EBITDA, etc.)
- His explanation on what drives different multiples is fantastic.
- The accompanied spreadsheets on his website are very good.
- Both the pros and cons for each valuation method are given honestly.
- The valuation methods for financial service firms, which are notoriously hard to value, is amongst the best I've seen.
- The biggest issue I have is the authors strict adherence to CAPM and beta when calculating a discount rate. This was even more frustrating as he specifically cites the Fama/French study that showed low beta stocks outperform the market, and high beta stocks underperform, which is the exact opposite of what the model says should happen. Rather than attempt to use the other possibilities for beta that he mentions (such as fundamental and accounting betas, which IMHO, make 10x more sense than traditional beta), the regular CAPM beta is used throughout the text. CAPM may be the academically "correct" way to quantify "risk," but it's well known errors should warrant another method.
- It's not exactly clear who the book is written for: the individual investor, or the potential securities analysis. There is a certain level of finance knowledge implied from the start, yet the author feels the need to present a whole chapter on elementary financial statement interpretation (Current assets are listed from most liquid to least liquid? I had no idea!). Further, when estimating growth rates, one of the proposed solutions is to use whatever growth rate the analyst gives, as these are shown to be, in the short run, more accurate. Okay, fine. But then on the topic of Discounted Cash Flow, the author consistently projects earnings out up to 10 years. Plenty of studies have shown that beyond 2 - 3 years, professional analysts tend to get their numbers wrong. So if this book is for the individual investor, why on earth would they attempt a 10-year DCF model, when the professionals so often get it wrong? And if the book is for potential analysts, why is the author recommending to use given analyst numbers?
- The author LOVES DCF. LOVES it. While I believe that DCF is the THEORETICALLY correct way to value an asset, there's so much room for error that beyond 2 - 3 years, it's fairly unreliable. Yet the author repeatedly stretches the DCF valuation out to 10 years. Entirely unrealistic, even if it is theoretically correct.
- Lots of statistics and greek letters. As Buffett says, any time you see greek symbols, they're most likely substituting theory for experience.
- Free cash flow, according to the author, should factor in new debt issued by the firm netted against debt retired. This is the only book I've seen that considers proceeds from debt issuance to be part of free cash flow. Free cash flow is supposed to be the funds available to equity holders after all obligations have been met. Unless it's a rare case like Apple recently (that issued debt to pay dividends since the majority of their cash balance was held overseas, and thus subject to taxation (at a higher rate than the interest its paying on the debt) should it be brought back to the U.S.), factoring in new debt as part of free cash flow seems entirely counter-intuitive.
- "Earnings quality" is based on how consistent the earnings are, rather than the actual accrual/cash component of them.
- Residual earnings is mentioned as Economic Value Added, but there is no discussion of Abnormal Earnings.
- Only real "performance" metrics mentioned are ROE and ROIC. No FCFF/IC, no RNOA, no GPA.
- The chapter on acquisitions is rather lacking. No detail given for leveraged buyouts.
Overall, this is a very useful book in your valuation toolkit, but shouldn't be your only reference. For a better, more complete valuation text, I'd HIGHLY recommend Stephen Penman's "Financial Statement Analysis and Security Valuation."
Overall, this is still an excellent valuation book. Especially for someone that has not read the 2nd edition, this is an excellent resource. I would describe Damodaran's writing style as "honest," which means that he gives you both the good and the bad. He acknowledges that valuation is inherently a subjective process, which, in my opinion, can only be really done well with experience. I find this book as kind of a road map to good valuation fundamentals, as Damodaran shows you what alternatives you can do and what things to avoid.