Ebook The Little Book of Valuation: How to Value a Company, Pick a Stock and Profit, by Aswath Damodaran
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The Little Book of Valuation: How to Value a Company, Pick a Stock and Profit, by Aswath Damodaran
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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.
- Sales Rank: #48711 in Books
- Published on: 2011-05-03
- Original language: English
- Number of items: 1
- Dimensions: 7.40" h x .95" w x 5.40" l, .63 pounds
- Binding: Hardcover
- 256 pages
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
LITTLE BOOK BIG PROFITS®
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 Pratt Chairman and CEO, Shannon Pratt Valuations
About the Author
ASWATH DAMODARAN is Professor of Finance at New York University's Leonard N. Stern School of Business. He has been the recipient of numerous awards for outstanding teaching, including the NYU universitywide Distinguished Teaching Award, and was named one of the nation's top business school teachers by BusinessWeek in 1994. He has written or coedited numerous books, including Damodaran on Valuation, Investment Valuation, Corporate Finance, Investment Management, Investment Philosophies, and Applied Corporate Finance (all published by Wiley), as well as The Dark Side of Valuation, Investment Fables, and Strategic Risk Taking.
Most helpful customer reviews
52 of 53 people found the following review helpful.
Training Wheels for Valuation . . .
By D. CHEN
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 . . . .
7 of 7 people found the following review helpful.
Good introduction, but lacks depth for the practitioner
By Nick
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.
35 of 38 people found the following review helpful.
Too much theory, not enough practical value
By Ant Gara
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.
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