Course: Valuation by Damodaran

SESSION 2

(First 45 mins.)

BIAS and MISCONCEPTIONS

Bias: The Effects
1. Preconceptions and Priors
The more you know about a company, the more likely it is that you will be biased when valuing the company.
The closer you get to the management/owners of a company, the more biased your valuation of the company becomes.
2. Price First, Valuation to Follow
Correct Method: Value before you decide how much to pay for an assets

2. Bias: The Sources
1. The Power of Subconscious
More the no. people who like the stock, the more the resistance to dislike that stock.
If you already the outcome of your valuation, then it will affect your valuation.
2. The Power of Suggestion
Mostly in the case of publicly-traded companies
Tip: Avoid any suggestions from people while valuing your Co.
3. The Power of Money
Valuation is directly proportional to who pays you and how much are you being paid.
You’ve got a bias while valuing a company you already have a position in.

3. Bias in Intrinsic Value

4. Bias in Pricing
1. Follow the similar companies to get to the price — which companies to choose, why only? and how did you come to EBITDA

5. Bottom Line: Bias will always be part of the game.
1. Accept the Bias; instead of denial
2. Be clear about your bias and priors

Deadly 7 words in Investment: “THEY MUST KNOW SOMETHING YOU DON’T KNOW”

6. Misconception about valuation
1. A valuation is an objective search for ‘true’ value.
Truth: Valuations are always biased and the bias is directly proportional to the amount of money involved.
2. A good valuation provides a precise estimate of value
Truth: There are no precise valuations, no correct answer. The payoff to valuation is greatest when the valuation is least precise.
3. The more quantitative model, the better the valuation
Advice: Simpler valuation models do much better than complex ones.