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The Little Book of Valuation: How to Value a Company, Pick a Stock and Profit Hardcover – May 3, 2011

3.9 out of 5 stars 47 customer reviews

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Editorial Reviews

From the Inside Flap

You buy financial assets for the cash flows you expect to gain. The price of a stock cannot be justified by assuming there will be other investors around who will pay a higher price in the future. That is the equivalent of playing an expensive game of musical chairs. As a prudent investor, you need to value the investment you are considering before buying it.

Valuation is at the heart of any investment decision, whether that decision is to buy, sell, or hold. In The Little Book of Valuation, financial expert Aswath Damodaran explains valuation techniques in everyday language so that even those new to investing can understand. Using this important resource, you can make better investment decisions when reviewing stock research reports and engaging in independent efforts to value and select stocks for your portfolio.

Page by page, Damodaran distills the fundamentals of valuation, without glossing over or ignoring key concepts, and develops models that you can easily understand and implement. He also makes the case that the two popular, and often divergent, approaches (intrinsic and relative) to valuation can be used in tandem. Damodaran discusses how both of these approaches can significantly improve your odds by helping you select stocks that are undervalued not only on an intrinsic level but also on a relative basis.

Once you become familiar with the techniques outlined in this book, you will be able to value a company with confidence. In addition, The Little Book of Valuation:

  • Includes illustrative case studies and examples that will help develop your valuation skills
  • Puts you in a better position to determine which investments are on track to add real value to your portfolio
  • Offers valuable valuation insights from one of the foremost experts in this field

Written with the individual investor in mind, this reliable guide will not only allow you to value a company quickly, but will also help you make sense of valuations done by others or found in comprehensive equity research reports.

From the Back Cover

LITTLE BOOK BIG PROFITS®

Praise for
THE LITTLE BOOK OF VALUATION

"There is nothing 'little' about Damodaran's The Little Book of Valuation. The whole gamut of ideas that form the basis for all business valuations— covered in his many multi-hundred page classics-are all here, with the same rigor, clarity, pointedness, and wit."
—Professor Anant K. Sundaram Tuck School of Business, Dartmouth College

"The Little Book of Valuation is a great book that I will recommend to my students and friends. This book is an impressive synthesis of sound theory and best practice. It is completely accessible to the novice. It is also an important addition to the professional library of the finance specialist. Acquire it without hesitation."
—Pablo Fernandez, Professor of Finance IESE Business School, Spain

"Damodaran's fast read book offers valuable insights for both institutional and sophisticated individual investors. Within the confines of 'intrinsic' (income approach) and 'relative' (market approach) analysis, he identifies the 'value drivers' in several broad categories of stocks and the most important factors to look for, and how to treat them in valuation for each category."
—Shannon Pratt Chairman and CEO, Shannon Pratt Valuations

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Product Details

  • Hardcover: 256 pages
  • Publisher: Wiley; 1 edition (May 3, 2011)
  • Language: English
  • ISBN-10: 1118004779
  • ISBN-13: 978-1118004777
  • Product Dimensions: 5.4 x 1 x 7.4 inches
  • Shipping Weight: 6.4 ounces (View shipping rates and policies)
  • Average Customer Review: 3.9 out of 5 stars  See all reviews (47 customer reviews)
  • Amazon Best Sellers Rank: #30,935 in Books (See Top 100 in Books)

Customer Reviews

Top Customer Reviews

By D. CHEN on May 8, 2011
Format: Hardcover Verified Purchase
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.
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Format: Hardcover Verified Purchase
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.
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Format: Hardcover Verified Purchase
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.
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