Question

Ques. Carefully explain the upsides (strengths) of The Little Book of Valuation, as it relates to valuing a company, picking a stock, and etc.

Answer 1

The author of Little book of valuation, Aswath Damodaran confesses in the book’s preface that even though valuation models can be elaborate, not all variables are equally important. Some are more significant than others. If you can identify those two or three variables, and make the effort to gather the relevant information on them, you can assess a firm’s valuation with reasonable accuracy. He adds that you don’t need to be perfectly accurate; you only need to arrive at an estimate that is more accurate than those of other investors.

If you want to be an accomplished investor, it is imperative to know how to evaluate the value of an asset. When the markets are buoyant, speculators buy stocks that have turned expensive and justify their purchases with what is called the ‘bigger fool theory’. This refers to the phenomenon during a bull run, when a more naïve investor will come along and buy an already expensive stock at an even higher price. What if the markets turn? Then the buyers for the overvalued asset will be hard to come by.