Aswath Damodaran: The Biggest Reason For Bad Valuations

In his recent presentation at Valuation ConFab, Aswath Damodaran discusses the biggest reason for bad valuations. Here’s an excerpt from the presentation:

Damodaran: The biggest reason for bad valuations is bias. You know what I mean by bias? When you sit down to value a business you almost never value it with a blank slate. Why? Because everything you know about that business, that company, comes into the valuation with you.

I’ll give you a personal example. I valued Microsoft every year since 1986, that was the year of their initial public offering. Every time I valued Microsoft I found it to be overvalued. You name the price, I found it overvalued at that price. Three dollars, five dollars, seven dollars.

Strange right. One of the great success stories of U.S equity markets, I wouldn’t have touched it one step away. Now I can give you access to every single valuation I’ve done at Microsoft in the last forty years. You could dig through the numbers looking for clues as to why I found it overvalued. But if you really wanted to see why I found Microsoft to be overvalued.

All you have to do is find a way to get into my house, probably have to break in, walk up to my office in the second floor and stand behind me because here’s what you’re going to see in front of me, you’re going to see a MacBook Pro, which is not working right now, an Apple display above it. To my right my iPhone, to my left my iPad. And in my ears I’ve got my… I’ve been an Apple user since 1981, and to me Microsoft has always been the Darth Vader of technology.

For those of you Star Wars fans let me be very clear about which Darth Vader I’m talking about. I’m not talking Anakin Skywalker Darth Vader, I’m talking Darth Vader the guy who always wears black, never takes a shower you know what I’m talking about it. Lots of bad thoughts about Bill Gates, and when I sit down to value Microsoft they all come bubbling up to the surface.

You know how it shows up right, in valuation you always come to forks in the road, high growth and low growth with Microsoft, wouldn’t buy this rotten product, low growth. High risk or low risk, one virus away from blowing up, high risk, and by the time I make my choices guess what Microsoft always looks overvalued.

What does that mean? I hate the company too much to ever value the company fairly.

You can watch the entire discussion here: