Aswath Damodaran: The Biggest Misconception About Valuing Companies

In his recent interview with Lunches With Legends, Aswath Damodaran discussed the biggest misconception about valuing companies. Here’s an excerpt from the intervew:

Damodaran: I think it’s not even drivers of value, they mistake what valuation is.

I mean and I think it’s become worse over the last 40 years is we have access to more data and more models, in a strange way we have more data than we’ve ever had in our lifetime. We have more powerful models than we’ve ever had in anybody’s lifetimes and where our valuations are actually getting worse, rather than better because we’ve made valuation into financial modelling, you become an excel ninja.

And I think in a sense we’ve lost our way and it’s part of what I’ve been pushing for and one of the reasons I wrote the narrative in numbers book is we need to rediscover the truth which is, when you value a company you value a business. You’re essentially telling a story whether you like it or not your numbers are telling a story, and you better make that story explicit and make sure it’s a story that you can buy into before you buy based on the numbers.

So to me that’s that’s the biggest misconception about valuation is to do valuation you need to understand every single detail of accounting and know how to build a big excel spreadsheets because that’s all you can do.

You’re not valuing companies you just doing financial modelling. To me every other mistake comes out of that misconception because most people value… who do valuation for a living don’t even realize there are drivers of valuation.

Because if you built an excel spreadsheet with 500 line items you have no idea what’s driving your valuation. It could be any one of those line items. They’ve lost sight of the forest because they’re so stuck looking at individual trees.

You can watch the entire discussion here: