About Valuation

Valuation techniques have been for a long time the focus of many analysts and market participants. I have also researched for the holy grail of finance, trying to find the one-size-fits-all formula that will give you the precise value for any given stock.

Guess what? That does not exists. You have a wide range of valuation models available, but there is no way for you to input a couple of numbers and get down to one number, based on what you will make your decisions. Every case is unique, and the analyst must be able to tweak and adapt the model.

Let’s get back to the valuation models for a moment. I believe that the utility of theses models is the mental exercise behind them. If you want to be an expert on this kind of subject I recommend reading “The Theory of Investment Value” by John Burr Williams. This treaty on Investment Value was the origin of most of the models that are now used to value Bonds and Stocks. The concept of present value was first presented in that book. There are several examples of the application of the models suggested, and as you can acknowledge if you read the book, you cannot apply the same model to every company.

Now if you have also read the “European Jewels – Banco Santander” you will see that I don’t use directly the present value model. That happens because I rather use a multiple approach to the valuation process. I prefer this approach (as many M&A firms do) because it allows you to incorporate market sentiment into the valuation. This also allows me to get an interval of value, and not a single “price target” which I consider useless since you will never get it right, it is preferable to have a rough estimation of the interval where the value might be.

Therefore an investment analyst should comprehend and easily work with valuation models, but nevertheless, more important than the model itself is the inputs that you use in the model, if those are wrong no magical model can save you.

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