# The Little Book of Valuation ## Metadata * Author: [Aswath Damodaran](https://www.amazon.comundefined) * ASIN: B004SI4A4C * Reference: https://www.amazon.com/dp/B004SI4A4C * [Kindle link](kindle://book?action=open&asin=B004SI4A4C) ## Highlights While valuation models can be filled with details, the value of any company rests on a few key drivers, which will vary from company to company. In the search for these value drivers, — location: [145](kindle://book?action=open&asin=B004SI4A4C&location=145) ^ref-46326 --- two valuation approaches: intrinsic and relative. In intrinsic valuation, we begin with a simple proposition: The intrinsic value of an asset is determined by the cash flows you expect that asset to generate over its life and how uncertain you feel about these cash flows. Assets with high and stable cash flows should be worth more than assets with low and volatile cash flows. You should pay more for a property that has long-term renters paying a high rent than for a more speculative property with not only lower rental income, but more variable vacancy rates from period to period. While the focus in principle should be on intrinsic valuation, most assets are valued on a relative basis. In relative valuation, assets are valued by looking at how the market prices similar assets. Thus, when determining what to pay for a house, you would look at what similar houses in the neighborhood sold for. With a stock, that means comparing its pricing to similar stocks, usually in its “peer group.” Thus, Exxon Mobil will be viewed as a stock to buy if it is trading at 8 times earnings while other oil companies trade at 12 times earnings. — location: [172](kindle://book?action=open&asin=B004SI4A4C&location=172) ^ref-53786 --- generates more complicated and opaque models. Drawing from the principle of parsimony, common in the physical sciences, here is a simple rule: When valuing an asset, use the simplest model that you can. — location: [250](kindle://book?action=open&asin=B004SI4A4C&location=250) ^ref-41551 --- process by which future cash flows are adjusted to reflect these factors is called discounting, — location: [276](kindle://book?action=open&asin=B004SI4A4C&location=276) ^ref-48040 --- discount rate can be viewed as a composite of the expected real return (reflecting consumption preferences), expected inflation (to capture the purchasing power of the cash flow), and a premium for uncertainty associated with the cash flow. — location: [277](kindle://book?action=open&asin=B004SI4A4C&location=277) ^ref-42170 --- There are five types of cash flows—simple cash flows, annuities, growing annuities, perpetuities, and growing perpetuities. — location: [280](kindle://book?action=open&asin=B004SI4A4C&location=280) ^ref-3097 --- specified future time period. Discounting a cash flow converts it into today’s dollars (or present value) and enables the user to compare cash flows at different points in time. — location: [282](kindle://book?action=open&asin=B004SI4A4C&location=282) ^ref-46370 --- The risk of any asset then becomes the risk added to this “market portfolio,” which is measured with a beta. — location: [346](kindle://book?action=open&asin=B004SI4A4C&location=346) ^ref-24716 --- rate + Beta (Risk premium for average risk investment) The CAPM is intuitive and simple to use, but it is based on unrealistic assumptions. — location: [349](kindle://book?action=open&asin=B004SI4A4C&location=349) ^ref-3301 --- There are four basic inputs that we need for a value estimate: cash flows from existing assets (net of reinvestment needs and taxes); expected growth in these cash flows for a forecast period; the cost of financing the assets; and an estimate of what the firm will be worth at the end of the forecast period. — location: [505](kindle://book?action=open&asin=B004SI4A4C&location=505) ^ref-47895 --- A more conservative version of cash flows to equity, which Warren Buffett calls “owners’ earnings,” ignores the net cash flow from debt. For 3M, the owner’s earnings in 2007 would have been $2,878 million. — location: [542](kindle://book?action=open&asin=B004SI4A4C&location=542) ^ref-20890 --- how would we differentiate between mature firms and firms in decline? Firms in decline generally have little in terms of growth potential and even their existing assets often deliver returns lower than their cost of capital; they are value destroying. The best case scenario is for orderly decline and liquidation and the worst case is that they go bankrupt, unable to cover debt obligations. — location: [1553](kindle://book?action=open&asin=B004SI4A4C&location=1553) ^ref-36280 --- Stagnant or declining revenues: — location: [1557](kindle://book?action=open&asin=B004SI4A4C&location=1557) ^ref-5633 ---