𝐓𝐡𝐞 𝐋𝐢𝐭𝐭𝐥𝐞 𝐁𝐨𝐨𝐤 𝐨𝐟 𝐕𝐚𝐥𝐮𝐚𝐭𝐢𝐨𝐧 - 𝐀 𝐑𝐞𝐯𝐢𝐞𝐰

I normally stay away from controversial articles, however... I finished listening to this book today. This is what I think.

Aswath Damodaran is a renowned professor of finance at the Stern School of Business at New York University. He's often referred to as the "Dean of Valuation" due to his expertise in corporate finance and valuation. Damodaran is well-known for his insightful analysis of companies and markets.

The Fundamentals of All Investments:

Cashflows

Expected Growth

Risk

A Quick Summary

Two approaches:

Intrinsic Valuation: "Given this company's cashflows and risk, is it overvalued or undervalued?"

Relative Valuation: "Is this company cheap or expensive, given how the market is pricing other companies just like this one?"

Both approaches can yield very different results but rest on three key ingredients:

1. Cashflows from existing assets

2. Expected growth from these cashflows

3. The discount rate reflecting the risk to these cashflows
   

The choices we make regarding inputs change the results. Ultimately, whether you get a payoff from your investment depends on three variables:

1. The quality of the valuation (e.g., higher quality information)

2. Market feedback, which applies more to public firms where markets are more efficient

3. Luck, yes, luck! Diversification still pays off, aimed at spreading risk among a portfolio of assets.

   
   

"Value is more than a number"

Value is not in the eye of the beholder for assets (maybe for a nice painting or a sunset, but not a financial asset). "You buy financial assets for the cashflows that you expect to receive."

Intrinsic Valuation

The value of an asset is determined by the cashflows you expect to get from that asset over its lifetime, and how uncertain you feel about those cashflows. Assets with high and stable cashflows will be worth more than assets with low and volatile cashflows. Think back to a rental property: one in a good suburb with long-term tenants paying high rent, versus a run-down property where the tenants seem to change every six months. Which one, intuitively, is the better asset?

My Thoughts

There is much more in this book and Damodaran is obviously a master of his trade. It is a comprehensive text that would be a great tool for a finance student or institutional analyst who wants to better understand the valuation of company shares. Even in-house Finance Managers of New Zealand's large firms would benefit greatly from this book. However, for most of New Zealand's business landscape, this book is another international example of business education that is out of reach for many practitioners.

We are a nation of small businesses. Yes, there are good points from Damodaran on understanding and calculating your firm's weighted cost of capital and using that in your Free Cash Flow analyses. For firms with 50+ staff or revenues over (for example) $20m, this information can be critical for valuing your business.

That said, we have a business landscape where most firms are classified as micro or small, based on international standards. Most of our firms have fewer than 20 staff, with around 570,000 in NZ contributing 1/4 of the total GDP. The terms used in this book will be beyond most of these operators, primarily because there is little need to understand different PE ratio valuation methods when their own firm is not public.

As a reader of many international business books, while I find some useful bits of information in each, rarely do I find something that fits with New Zealand's small business frame of reference. It is a hard conundrum to lament that our local small business heroes don't have enough business acumen on one hand, while the available information (mostly from the US & Europe) is geared towards firms many magnitudes larger than we have here.

Listening to this book on Audible was painful at times. Reading numbers and equations in a book is one thing; listening to someone read them out is another altogether. I am a bit of a geek and generally like this type of information, but even I found it tough going. Maybe I am just getting older and becoming more discerning about the information I subject myself to. Perhaps that is an article for another day...