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on May 8, 2011
This book echoes some of the author's earlier works but whereas his other books are largely geared towards professional practitioners, The Little Book of Valuation is targeted at individual investors.

In my opinion, Damodaran has carved a unique niche among authors of this genre. As a professor at a respected university, his books always draw on a solid theoretical foundation. A lot of other authors do the same. Where I think he distinguishes himself is the ability to bring pragmatic, real world slant to these topics. I have found his publications to be very readable yet hardly "dumbed down". In fact, I think this particular volume would make a great introduction on valuation for aspiring MBAs and finance students.

The Little Book of Valuation starts by explaining the nuts and bolts of finance including topics such as time value of money and the concept of risk. A short explanation of financial statements is also included. Damodaran then goes on to describe intrinsic valuations including the subtle differences between cash flows to equity holders versus cash flow to the firm. Along with that the appropriate discount rates that apply to each are also explained. The book then quickly compares intrinsic valuation to relative valuation methodologies, stressing along the way the merits and disadvantages of each. When using multiples (price/earnings, price/book, price/sales) to do comparative valuations, he points out which financial metrics are the underlying drivers for each multiple.

From there, the book delves further into subtopics such as valuing companies at different stages in their life cycles: early stage companies, mature companies and declining companies. There are also separate chapters that discuss valuation issues/techniques for banks and other financial entities, cyclical/commodity companies and a final chapter on valuing companies with significant intangibles.

While the nature of the "Little Book" series means that they will be succinct and perhaps a little light on mind-numbing detail, I think this particular volume provides a very readable, even-handed approach to the topic of valuing financial assets. Damodaran consistently provides examples after he makes a point. Furthermore, the examples are real life rather than hypothetical situations.

I struggled to get through the Copeland tome on Valuation. I wish Professor Damodaran had published his Little Book of Valuation years earlier . . . it would have been like having a nice set of training wheels to get me started . . . .
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This is not a romance novel. You read The Little Book of Valuation in order to gain valuable skill sets and methodologies for making money in the stock market. Professor Damodaran is a full professor at the New York University Stern School of Business. He is deemed to be the expert on valuation in this country, certainly on an academic level. There are real world experts in Wall Street and in corporate consulting firms like McKinsey & Company, but none have had the academic impact that this man has.

What Damodaran brings to the table is unique. He is the first person that I have encountered who has been able to distill what many people consider to be a very difficult topic down to a simplistic discussion. After you read this book, you will understand valuation, which seems to be difficult even for those with decades of experience on Wall Street.

There are 11 chapters spread out over 225 pages, every one of which proved to be interesting, and highly readable. I found three chapters to be particularly worthwhile. They were

Chapter 2 Power Tools of the Trade

Chapter 4 It's All Relative

Chapter 11 Invisible Value

The professor uses a series of companies to explore different valuation techniques. They include Under Armor, Hormel Foods, Exxon Mobil, Wells Fargo, and Amgen. He explores intrinsic value and relative value techniques and tells the reader when to use which, and more importantly how to uniquely blend the techniques to obtain an even more meaningful valuation.

It is obvious that aside from being a master of valuation Damodaran has intellectually thought about his topic for many years. These are just some of the concepts that are uniquely explained in this book:

* The bias starts with the company you choose to value

* Be honest about your biases

* Most valuations are WRONG

* Avoiding uncertainty doesn't make it go away

In the last chapter, entitled 10 Rules for the Road, the author lays out for you the most important conclusions he has formulated in his long academic career. There were three that I personally found highly significant.

1) Risk affects Value

2) Growth is not FREE

3) All good things including growth come to an end. Nothing is forever.

CONCLUSION:

You have a choice if you want to learn about how to value a company. You can read a 1000 page textbook written by the same author, or you can read the Little Book of Valuation. By reading this little gem of a book, you will get the big picture, a framework by which to understand the major concepts of valuation. You can then move on to other more complex mathematically oriented works. This book should be your first choice however, and thank you for reading this review.

Richard Stoyeck
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on November 9, 2012
The author is a noted valuation author with several other books, much more indepth than this one. As an introduction to security valuation, it's good enough to get the job done, but I take issue with some of his methods.

Pros:
- Explains with clarity the different types of discounted cash flows (annunities, perpetuity, etc).
- Gives good explanation as to the significant metrics behind valuation multiples (ROE in PE, etc, Net PM in P/S, etc).
- Details why you should use historical averages, and not simply the most recently available metric for these calculations.
- Financial institutions are notoriously hard to value, and his method here is probably the best I've come across.

Cons:
- My biggest complaint is his over-reliance on CAPM beta as a risk-metric. Numerous studies have shown that stocks with low betas routinely out-perform those with high betas, which is the exact opposite of what's supposed to happen, according to financial theory. In fact, the author even briefly glosses over why beta may not be a great metric to use, but then continues to do so through out the entire book. As Buffett says, any time you see finance use a Greek symbol, they're substituting theory for experience.
- Doesn't give any alternatives to beta (WACC is no better, as it also includes beta) towards measuring risk. Should ignore beta completely and simply use the average market return over the past 200 or so years of 8 - 10% (I typically use 9).
- The regression analysis part seems completely out of place in a book like this.
- Likewise, his over-reliance on DCF is borderline absurd. Again, numerous studies have shown that most PROFESSIONAL analyst fail to accurately predict a firm's earnings over a short-term horizon (David Dremen has published many of these studies), so to assume a non-professional investor can with even remote accuracy predict cash flows 10 years into the future is ridiculous.

Overall, it's good for an introduction on discounting cash flows and being able to value a financial institution, but his use of beta and 10 years worth of forecasting is what holds this down.
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on April 25, 2012
If you want a short and lightweight introduction to the subject and have basic compound interest and financial statement analysis this book is useful. If you are looking for more than an introduction/overview then the book lacks some depth. It is short, clearly written, and covers the ground with minimal mathematics. I do recommend it as an introduction and overview of the subject area. However, if you can't do basic compound interest or have not looked at basic financial statement analysis it would be helpful to brush up on these topics before using this book to get into valuation.

For knowledgeable readers the book is less useful. To much time is spent presenting an answer on the mechanics of valuing a company and not enough time is spent on the nuances, tradeoffs, and implications of various valuation assumptions. The mechanics are important, but the book does not really grapple adequately with some of the big difficulties in valuation, which include the selection of discount rates and estimation of terminal value. For example, there is no discussion on merits or otherwise of using the average weighted cost of capital (AWCC) for discounting or presenting any alternatives. I don't claim that the approach is wrong just that it carries certain implications that deserve discussion.

Risk is dealt with simplistically through the discount rate, which is not inherently bad, but alternative actuarial approaches exist that I personally think deserve discussion, if only to inform the reader of the scope of the subject matter. Finally, success is as much about managing risk as it is about placing a value on a business. I feel that this most important point is lost.

Is the book worth reading? Absolutely. However, if you are hoping for a tool kit that will provide you with crystal ball to gaze on the future then you are surely going to be disappointed, because none exists.
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on December 27, 2011
The Little Book of Valuation: How to Value a Company, Pick a Stock and Profit by Aswath Damodaran

This book has given me a good basic understanding on valuing a company from an accounting perspective. Reading this book has also resulted in my understanding basic accounting terms (not having an accounting background, I had to look up various terms while reading the book).

This book is limited in providing (me) a reasonably accurate mechanism for valuing a company from a financial perspective (i.e. valuation based on expected performance). I tested various equities at various time-periods and could not accurately determine their future medium-term values based on the formulae provided.

Which is why I gave it a 3-star; ultimately (at least for me) the main purpose of trying to value a company is to arrive at a valuation at which the price will climb/descend to in the medium-term. Which this book does not do.
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on November 6, 2013
Weak. If you've read his other books, this is very much watered down. If you are a fan of Damodaran then SKIP this book. If you have no idea who Damodaran is...skip this book. He's great at teaching the complex for university classes but if you want the simple then go with another author more skilled at addressing the masses.
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on June 30, 2013
This book is essentially an abridged version of the other works from the author. I bet first time student of valuation or finance would not be able to comprehend the various models and formulas presented within as the book is TOO concise, omitted many related but crucial explanation or formulas. The presentation and organization are somewhat wanting. I stumbled upon roadblocks when reading this book. I don't get what he was trying to say until I reached for his other book, Damodaran on Valuation. The latter is well organized and the theories are better explained.

Therefore, I feel this book is too simplified. Maybe it's for those who had studied his other books prior to this Little Book. But then why should he/she when after having read his other more authoritative manuscript on valuation, he/she would have no need for this "TOO Little" Book. Those reviews here recommending this book to any novice of valuation or finance had in fact did them a disservice.
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on August 10, 2015
The author's problem seems to be that he can't say much in 200 pages (his textbooks are several times as long) so he just discusses discounted cash flow methods (intrinsic valuation) and the usual comparative valuation ratios (PE,...). It is all based on the income and cash flow statements, there is nothing at all about using the balance sheet or trying to estimate asset values, even when writing about oil companies. The difficulty with DCF is that one has to estimate cash flows for 5 to 10 years, when predicting the future is difficult. His DCF methods are also based on the CAPM theory which doesn't really have much to do with reality (volatility and risk are two different things for example). He doesn't have much to say about the problems of relying on valuations; mention of Graham's Margin of Safety ideas would have been appropriate. All in all there isn't a lot here for experienced investors, and beginners would be better to start somewhere else.
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on February 9, 2016
Too much fluff and not enough practical examples and mathematical calculations. He also uses his own terminology rather than industry standard terms (ex: free cash flow to equity vs. dividends) so for beginners, it may be a bit confusing. Damodaran does do a good job of conceptually going through everything and giving the theory behind it, but it's too brief of a book to help you grasp the concepts clearly. Better to just use resources like street of walls or Pearl and Rosenbaum's "Investment Banking" book in combination with "financial statement analysis" by Wiley books.
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on April 6, 2015
It seems like it should be a simple little book, but it actually packs quite a wallop. Aswath gives helpful and specific advice on how different approaches work best in specific situations when valuing companies. For example, the considerations in valuing a growth company are different from those when valuing a company that seems to be winding down. His writing is easy to follow and well explained without the pedantic academic rhetoric you would probably find in a text book. If you want to go further, he generously links to a lot more material on his university website. There is also a Youtube series of 15 minute videos that follows the content somewhat closely. Tremendous value and great instruction from a good teacher.

This Little Book series of finance books is really excellent, with great writers and high quality content, and if the publishers should ever see my review, I hope they might consider adding a book on stock screening with an assessment of the metrics commonly available. Or is that already "What Works On Wall Street"?
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