Session 1 (Val MBAs): Valuation - Broad Themes and Logistical Details

Summary notes created by Deciphr AI


In this introductory lecture, Professor Aswath Damodaran sets the stage for his valuation class, emphasizing that valuation is not a science or an art, but a craft that improves with practice. He distinguishes between price, driven by market perceptions, and value, based on cash flows, growth, and risk. Students will learn to value a wide range of assets, from public and private companies to individual assets, with the goal of bridging stories and numbers to create coherent narratives for their valuations. The course will cover various approaches, including intrinsic valuation, pricing, private company valuation, and option pricing, culminating in a project where students will apply these concepts to a company of their choice. Damodaran encourages active participation and promises regular communication through emails, quizzes, and a final exam to reinforce learning. The class is designed to be interactive, with a focus on building intuition and the ability to value "just about anything" by the end of the semester.

Summary Notes

Introduction to the Valuation Class

  • The professor noticed familiar faces from the previous corporate finance class.
  • Some students were not Stern MBAs but were receiving emails.
  • Students were advised to organize emails and questions for both corporate finance and valuation classes to avoid confusion.
  • The professor emphasized the importance of specifying which class questions relate to.

"So already you got the corporate finance email; there's another one coming in valuation."

  • The quote indicates that students are receiving communications for both classes and need to manage them separately.

Evolution of the Valuation Class

  • The professor started teaching at NYU in 1986 and was assigned to teach security analysis.
  • Security analysis was an outdated class that focused on stocks, bonds, futures, options, and institutional details.
  • The professor proposed teaching a valuation class, which at the time was a novel idea with little existing material.

"I said I'd like to teach a valuation class; nobody was doing it anywhere in the country."

  • This quote shows the professor’s initiative to start a new course in valuation, which was unconventional at the time.

Development of Valuation Materials

  • Ben Graham's "Security Analysis" was the only major book on valuation, emphasizing risk avoidance and dividends.
  • There was a lack of resources on valuation, which was considered too practical for academia.
  • The professor had to develop the valuation course content subversively due to the lack of formal support.

"There wasn't enough stuff in valuation to fill a class; there were no books in valuation."

  • This quote reflects the scarcity of valuation materials when the professor began teaching the course.

Official Recognition of the Valuation Class

  • The valuation class was unofficially taught by hijacking other classes until 2008.
  • The global financial crisis coincided with the official listing of the valuation class at NYU.

"We here teaching a valuation class. I said yes, I've been doing it for 22 years."

  • This quote reveals the length of time the professor had been teaching valuation before it was officially recognized.

Learning from Teaching Valuation

  • The professor learned about valuation through teaching the class and responding to student questions.
  • The Black Monday crash of 1987 prompted discussions on market crises and valuation.
  • Valuing young companies like Amazon in the 1990s challenged existing valuation methods due to a lack of historical data.

"Everything I know about valuation I've learned in the course of teaching this class."

  • This quote summarizes the professor's experiential learning approach to understanding valuation.

Valuation of Young Companies

  • In the 1990s, young companies with unclear business models began going public.
  • The Amazon valuation in 1997 required the professor to develop new valuation techniques for young companies.
  • This experience led to the creation of the book "The Dark Side of Valuation."

"Almost every input I needed for that valuation, there was nothing in the literature."

  • The quote indicates the lack of existing knowledge on valuing young, unconventional companies.

Systemic Risk and Bank Behavior

  • The 2008 financial crisis raised questions about systemic risk when banks behave badly.
  • The class discussed how the actions of banks can impact the broader economy and other companies.

"When banks behave badly, we all feel the pain; it's called systemic risk."

  • This quote introduces the concept of systemic risk and its significance in valuation.

Valuation of Subscribers and Users

  • The advent of companies like Facebook and Uber shifted focus to valuing ecosystems and users.
  • Valuing a Netflix subscriber involved estimating subscription revenues, churn rates, and servicing costs.
  • Valuing an Uber rider was more complex due to varying usage patterns.

"Can you value what the value of a rider is to Uber?"

  • This question from a student led to discussions on the valuation of individual users or subscribers within a company.

Valuation in Times of Crisis

  • The COVID-19 pandemic in 2020 posed new challenges for valuation during a global economic shutdown.
  • The professor chose to Value Boeing during this period, despite the aviation industry being at a standstill.

"I decide I want to value Boeing; think about it, you're in the middle of a shutdown, there are no planes flying, and you're valuing a company at the heart of this."

  • This quote reflects the professor's decision to tackle real-time valuation challenges presented by the pandemic.

Response to Crisis and Investment Decisions

  • Evaluating companies during times of crisis is crucial to avoid rolling from one crisis to another without progress.
  • Investing in companies like Boeing during market downturns can be a strategic choice.
  • The S&P 500 experienced a significant drop of 36% between February 14th and March 20th, 2020.
  • Valuation exercises can be conducted even when the economy is facing severe challenges.

"The storm right, it makes aircraft that nobody but one choice is why don't you wait for the crisis to pass this is often the response here because if you do this you'll just roll from crisis to crisis you'll never never get anything done and what's the point of waiting you have to invest in in Boeing today that's a choice you have to make."

  • The quote emphasizes the importance of taking action during a crisis rather than waiting for it to pass, using Boeing as an example of a potential investment opportunity during the market downturn of 2020.

Valuing Companies in Difficult Times

  • Valuation is essential even when external circumstances, such as a pandemic, cause economic turmoil.
  • The process involves making informed judgments based on available information, despite the surrounding uncertainty.

"On March 23rd, at the peak of that market crisis, I actually valued Boeing in class. I recorded it; it's on YouTube now. It's basically about valuing companies essentially when the world is melting down around you when the economy is shut down."

  • The quote describes a real-time valuation exercise conducted during the peak of the market crisis, illustrating how to approach the valuation of companies in extreme situations.

Valuation and Market Influence

  • Valuation can be influenced by marketable personalities, such as Lionel Messi and Taylor Swift.
  • Messi's move to Miami and the subsequent doubling of MLS subscriptions demonstrate the tangible impact of individuals on a company's value.
  • Taylor Swift's involvement with the NFL could potentially attract a new demographic and increase advertising rates.

"How much value has Lionel Messi added to Apple? What's Messi got to do with Apple? You know Apple has the exclusive rights to Major League Soccer in the US. The number of MLS subscriptions doubled after Messi joined."

  • This quote connects the signing of a high-profile athlete to a measurable increase in subscriptions for a service provided by Apple, highlighting the direct impact on valuation.

Valuation as a Skill and Teaching Approach

  • Valuation is not just about knowing the answers but about trying to find them.
  • The teaching approach includes quizzes not about the past material but about upcoming content to encourage self-discovery.
  • Valuation is described as a craft, similar to cooking, where practice and application are key to mastery.

"Here's what I'm going to do, and this is something you're going to notice with every single class through the semester: I'm going to start the class with a quiz not about the previous class but about what's coming."

  • The quote explains the pedagogical strategy of using quizzes to prepare students for upcoming lessons, reinforcing the idea that valuation is a skill that can be developed through practice.

Purpose of Learning Valuation

  • The course aims to provide tools for understanding personal investment biases rather than guaranteeing financial riches.
  • Valuation skills can lead to various career opportunities in investment banking or private equity.
  • Understanding valuation can also be impressive in conversations and help avoid self-deception as an investor.

"Maybe this class will give you the tools to understand when you're fooling yourself. Let's face it, the biggest enemy you have as an investor looks at you when you look in the mirror."

  • The quote highlights the importance of self-awareness in investment decisions and suggests that learning valuation can help in recognizing and avoiding personal biases.

Valuation: Art, Science, or Craft?

  • Valuation is not a definitive science like mathematics or physics because it involves uncertainties and changing variables.
  • It is also not an art that cannot be taught, as valuation can be learned and improved upon.
  • Valuation is compared to a craft, where practice and experience lead to improvement, similar to cooking.

"Valuation is a craft. I'll give you the discipline that I think is closest to valuation; it's cooking."

  • This quote likens valuation to cooking, emphasizing that it is a skill that improves with practice and is not purely scientific or artistic.

Course Logistics and Resources

  • The course will utilize various resources, including a homepage with class materials and a Google shared spreadsheet for valuation exercises.
  • Teaching assistants are available to help students, and office hours are provided for additional support.
  • The course encourages active participation and application of concepts through valuation exercises.

"These 26 sessions with me are kind of useless all the books you will read won't help you that much. You will learn valuation by valuing companies."

  • This quote stresses the importance of practical experience in learning valuation, suggesting that active participation in valuation exercises is more beneficial than passive learning.

Crowd Valuation and Individual Analysis

  • Valuation exercises in the class involve a large number of participants, leading to a "crowd valuation" of a company.
  • The true indication that the class is effective is when students arrive at different valuations from the professor, demonstrating independent analysis.
  • Students are encouraged to engage in the valuation exercises, as it is seen as a more effective learning tool than reading additional material.
  • The class is structured to accommodate the limited time students have, allowing them to choose what to focus on.

"You get 500-600 people; it's like a crowd valuation of the company. Now early on, as I said, you feel said I don't enough changes the third decimal on the risk-free rate come up with the value very close to mine and say, 'I got a value exactly like yours.' You know when I know this class is working? It's somewhere on the fifth or the sixth week; I'm going to value a company, and you're going to come back to me and say, 'I got a very different value,' expecting me to push back. And I'm going to say, 'Congratulations, the class is working.'"

  • The quote explains that a diverse range of valuations from students is a positive sign, indicating that they are applying their own analysis rather than simply mirroring the instructor's approach.

Price vs. Value Distinction

  • The class emphasizes the difference between price and value, a distinction often conflated in both academia and practice.
  • Academia, influenced by the efficient market hypothesis, tends to treat price and value as synonymous.
  • Value is determined by cash flows, growth, and risk, which are long-standing fundamentals of company valuation.
  • Price, however, can be influenced by factors such as market mood, momentum, and even revenge, as illustrated by the GameStop short squeeze incident.

"There are two words in investing markets appraisal that people use interchangeably. And I blame both Academia and practitioners for this, and the words are price and value... Value is driven by cash flows, growth, and risk... Price [is driven by] demand and supply... they might be but they're also driven by mood and momentum and revenge."

  • This quote delineates the conceptual difference between price and value, highlighting that while value is based on fundamental financial metrics, price can be swayed by psychological factors and market dynamics.

Valuation Methodology: DCF and Behavioral Finance

  • A discounted cash flow (DCF) valuation is not a theory but a practical tool that incorporates cash flows, growth, and risk into a single valuation.
  • Behavioral finance acknowledges that human emotions can cause prices to deviate from intrinsic value.
  • Pricing a company involves considering market sentiment and may benefit from technical analysis or charting to anticipate mood and momentum shifts.
  • Comparables and multiples are used in pricing but should not be confused with true valuation.

"A discounted cash flow valuation is not a theory; it's just a way of bringing cash flows, growth, and risk into one valuation... Behavioral Finance... says that there are human emotions that can cause the price to be different from value."

  • This quote explains that DCF is a method to integrate fundamental valuation drivers, while behavioral finance explores why market prices may diverge from these fundamental values due to psychological factors.

Valuation Scope and Practical Application

  • The class will explore the valuation of various entities, including publicly traded companies, private businesses, individual assets, and even intangible assets like celebrity value.
  • Valuation is not just about numbers but involves connecting financials to the underlying story of the company or asset.
  • A good valuation acts as a bridge between the narrative and the quantitative aspects, with each informing the other.

"Third, what are we going to try to value in this class? Pretty much everything... Valuation being a bridge between stories and numbers, every number in your valuation has to have a story behind it, and every story you tell me about the company has to have a number that calls it."

  • The quote emphasizes the comprehensive approach to valuation in the class, stressing the importance of narrative in informing and justifying the numerical aspects of valuation.

Storytelling and Number Crunching in Valuation

  • The class aims to balance storytelling with discipline in numbers, helping students to become disciplined storytellers or imaginative number crunchers.
  • Storytelling in valuation is not about creating fairy tales but about constructing a coherent and plausible narrative that can be supported with numbers.
  • The instructor shares his own evolution from a numbers-focused approach to incorporating storytelling into valuations, underscoring the importance of having faith in one's valuation to act upon it.

"I hope you become a disciplined Storyteller and if you're a number cruncher... I hope you trust your imagination enough to let it fly... A good valuation is a bridge between stories and what the heck does that even mean... Every number in your valuation has to have a story behind it and every story you tell me about the company has to have a number that calls it."

  • This quote captures the essence of the class's philosophy on valuation: that a robust valuation is rooted in a narrative that is supported by and reflected in the financial numbers.

The study notes above capture the key themes and ideas discussed in the transcript, providing a meticulous and exhaustive overview of the concepts presented, along with verbatim quotes and explanations for each.

Working on Weaknesses and the Importance of Faith in Valuation

  • Emphasizes the necessity of focusing on weaker areas rather than just reinforcing strengths.
  • Discusses the need to have faith in one's own valuation and the market's ability to adjust to that valuation.
  • Acknowledges the difficulty in having faith due to the possibility of being wrong.
  • Uses religious faith as an analogy for faith in valuation, highlighting that both cannot be proven and must be believed.
  • Faith in valuation will be tested when market prices fluctuate against one's valuation.

"Don't expect this to come easily; you'll have to work at it, but working on your weak side is what this class should be about. It's not reinforcing your strong because here's where the faith comes in: to act on evaluation, you have to have faith in your own valuation of the company."

  • This quote underlines the challenge of valuation and the need for conviction in one's own analysis.

"I have to have faith in that Val... I know it could be wrong... I've got to have faith the 182 will become 192, the price will adjust back."

  • The speaker is expressing the need for belief in their valuation estimate and the market's eventual correction.

"The essence of faith is you cannot prove it... if you come to me and say, 'Can you prove to me that your valuation is right?' I can't. I can't even prove it to myself."

  • The quote captures the essence of faith in valuation, which is similar to religious faith – both require belief without proof.

"Every time the market moves against you, it's a test of your faith."

  • Market fluctuations are described as challenges to the investor's faith in their valuation.

The Journey of Valuation and Open-Mindedness

  • Discusses the journey from having faith in one's valuation to dealing with market tests.
  • Emphasizes the importance of accepting the possibility of being wrong and the strength in being open to changing one's mind.
  • Critiques the notion of absolute faith in valuation as being dogmatic rather than faithful.
  • Shares a personal anecdote involving Mother Teresa to illustrate the value of questioning and open-mindedness.

"The accepting that you can be wrong and you might have to change your mind is not a sign of weakness; it's a sign of strength."

  • This quote highlights the importance of flexibility and the ability to adapt one's views in the face of new information.

Class Structure and Valuation Approach

  • Outlines the class schedule and approach to teaching valuation.
  • Explains that the class will start with different ways of approaching valuation and then delve into the inputs of valuation.
  • Emphasizes patience as the class will not immediately value a single company throughout but will instead dissect various components of valuation.
  • Mentions that later sessions will focus on pricing, valuing private companies, and insights from option pricing.
  • The class will eventually cover acquisition valuation, discussing control and synergy.
  • Session 25 will shift focus to how to increase a company's value from the inside.
  • The final session will be a culmination of all the learned material.

"Next class, I'm going to look at different ways of approaching valuation, then we're going to spend about nine sessions essentially visiting the inputs into valuation... Session 12 through 15, I'm going to essentially just value company after company... Then section 16 to 19, I'm going to talk about doing pricing better."

  • This quote outlines the progression of the class from theoretical approaches to practical applications of valuation.

"Session 24, I'm going to spend on acquisition valuation... Session 25, I'm going to talk about changing the value for the company."

  • These quotes detail the specific sessions dedicated to acquisition valuation and strategies for enhancing company value.

Class Logistics and Expectations

  • Discusses the need for lecture notes and the digital availability of class materials.
  • Encourages class attendance but provides alternatives such as Zoom and YouTube recordings for those who must miss a class.
  • Describes the availability of valuation books and an intrinsic valuation app for Apple devices.
  • Explains that grading will be based on the ability to value companies, with a project spanning the semester.
  • Details the quiz and exam schedule, including the policy for missed quizzes and the availability of past quizzes for practice.
  • Emphasizes group work for the project and individual work for quizzes and exams.
  • Encourages participation in class discussions and the use of name plates for engagement.

"The entire class is structured around making that divide. So here's what's going to drive your grade: first, there will be a project where you pick a company and value it over the course of the entire semester."

  • This quote explains the primary component of the class grading system, which is a semester-long valuation project.

"In terms of quizzes, there will be three quizzes... each is worth 10%, open book, open notes, and a final exam... that'll be 30%, open book, open notes."

  • The quote provides details on the weight and format of quizzes and the final exam in the grading structure.

"If you miss a quiz... that 10% will be moved to what's left in the class... if you take all three quizzes, I will take the worst quiz you had and move the score on that quiz to the average score on everything else."

  • This quote outlines the policy for missed quizzes and the potential benefit of taking all quizzes even if unprepared.

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