Aswath Damodaran: The One Thing You Need To Do To More Accurately Value Businesses

Here’s a great presentation with Aswath Damodaran and the team at Google. During the presentation Damodaran reveals the one thing investors need to do to more accurately value businesses.

Here’s an excerpt from the presentation:

So here’s my final point about valuation. One of my favorite movies of all time is – The Wizard of Oz. Remember the story. Dorothy gets sucked out of Kansas. She gets dumped in Oz. She wants to go back to Kansas. Don’t ask me why. I’d have stayed in Oz.

So of course the movie starts with… I need to go back, and of course she’s given the classic advice – go meet the Wizard of Oz, he has all the answers. The entire movie is about her going on the yellow brick road and this motley crew of characters she collects.

The Scarecrow, who needs this, the Tin Man, the Lion. They all get to Oz expecting the Wizard to be this all-powerful person. They walk into the chamber. They each tell the Wizard what they want, and the Wizard has this deep voice, until the curtain drops and you realize it’s a small guy behind the curtain who’s been pulling… That there’s really no Wizard of Oz. But it turns out that they all got what they needed during the course of the journey.

What’s this got to do with valuation? I firmly believe that you learn valuation by doing!

You really want to learn valuation here’s what you need to do. Value a company. First time you do it, it will be like pulling teeth. Then value another company that’s different from the first company.

Next week I’m putting up a valuation. It’s a crowd valuation of Uber posts that I did on my website where at each stage I ask you to decide what Uber is. Is it a car service company or a transportation company? Is it a local networking benefit or a global networking benefit? I can tell you my story, but at the end of the process, based on your story, this is Uber’s value. And the value for Uber range is anywhere from $800 million to $95 billion depending on the story you tell.

When we get big differences in value it’s not because our numbers are different, it’s because we have different narratives. Not all of these narratives are equally likely and that’s really the question you’ve got to ask… What is the right narrative?

I promised I would not talk about Google, but I will leave you with this thought. If you’re thinking about Google as a company going forward as an investor, here’s the question I’m asking. What is the narrative I’m telling about this company? What do I see this company doing? Because that’s what’s going to drive the valuation of Google. Not the fact that, because of exchange rate movements you did not deliver the growth… Who cares!

In the largest scheme of things those things don’t change your narrative. If investors react to it let them react to it. This is about telling a story and delivering the kinds of decisions that back up that story.

(Source: YouTube)