Top critical review
29 people found this helpful
Too much theory, not enough practical value
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.
- 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.
- 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.