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The Little Book of Valuation: How to Value a Company, Pick a Stock and Profit Hardcover – May 3, 2011
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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®
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
Top Customer Reviews
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.Read more ›
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.Read more ›
- 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.Read more ›
Most Recent Customer Reviews
How do you determine if a stock is overpriced or a bargain? NYU finance professor Aswath Damodaran explains. Read morePublished 1 month ago by Andrew Everett
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... Read morePublished 6 months ago by FXguy
Of all the books on value investing I have read, this one has moved to the top. Not only are the formulas included but he explains why he is using certain measures instead of... Read morePublished 7 months ago by Laurel B. Cull
Damodaran has done an excellent job in summarizing the various approaches to this important aspect of investing. Read morePublished 10 months ago by Rob Barnett
All new great book for finance lovers. But i wish it comes without shipping cost. Great book to readPublished 11 months ago by Smriti Bista
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... Read morePublished 12 months ago by Robert Ray
Damodaran does a great job of making a dry topic interesting and easy to digest.Published 12 months ago by Eduardo
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... Read morePublished 16 months ago by Richard Ballina