Equity Valuation Class Introduction

Welcome to my study group for the equity valuation class being given by Professor Aswath Damodaran at NYU Stern this spring. I’m sorry about the delay in getting this started, but I got real busy with some last minute tax filing details.  I’ve gotten a great response for this study group on stock valuation, so I’m excited to finally get started now.

First, I recommend that you start by watching the introduction to Equity Instruments. You will need to install the free Real Player to watch this class video. There will be a webcast for each of the 26 class sessions. For this first class, you will also want to pick up the three handouts, the syllabus, the project description, and the intro class presentation slides

There are also 3 books on valuation by Damodaran that are recommended:

  1. Damodaran on Valuation – newest
  2. Investment Valuation – most comprehensive
  3. The Dark Side of Valuation

I’ll be using the online manuscript for my text for this class since I’m already familiar with it. There are also additional valuation readings that go along with the course.

In this first lecture, Professor Damodaran gives the background history about this class, misleadingly called Equity Instruments and Markets.  Even though the class is called Equity Instruments and Markets, it is really a valuation class. This is the old Ben Graham Security Analysis class, except Professor Damodaran has lopped off most of the material on bonds.

I recommend you skip to minute 14 in this first webcast to get past the housekeeping stuff for this course.  You could even consider skipping the whole first hour if you are tight on time.

Course inspiration: “Everything is a valuation problem ultimately.”

“Every asset has a value; we just don’t know what it is,” states Professor Damodaran as the basic theme of this course.  I’m excited about this class because, we are really going to get into the details of valuing businesses and then the common stock of those businesses.

Damodaran is going to cover 3 approaches to valuation over the semester:

  1. Intrinsic value – discounted cash flow models and beyond
  2. Relative valuation models – compared to other companies. What people are “willing to pay”
  3. Contingent claim valution – option valuation for valuing businesses

The classes will start by looking at the differences in valuation approaches, the advantage and disadvantages of the different approaches, and why you might use the different approaches depending on the situation. After briefly covering those issues, there will be 6 sessions grinding through the details of valution. These session will cover the basics of corporate finance. After getting the mechanics down, there will be 3 sessions on actually valuing companies. After we make it to this point, Damodaran states that we should then be able to value a company every ten minutes. That sounds pretty impressive to me.

The course then moves to relative valution after the 11th session. Most valuations we read about are relative valuations. I’m not a big fan of relative valuations but I’m curious to hear what the professor has to say about how to use relative valuation the right way. The relative valuation sessions will start with PE and move all the way to enterprise value ratios, such as the enterprise value to revenue ratio. I’m most interested in learning how to avoid the obvious traps Professor Damodaran knows about.

The course then covers valuing private businesses. The key issue with private company valuation appears to hinge on estimating cash flows when financials might be full of holes.

Then the class will cover the topic of using the option pricing model to value businesses. Damodaran will provide specific cases when the options model is useful and when it is not. As a value investor, I’m not sure I’ll be using the options pricing model very often but it might serve as a useful mental model.

Finally, the course will cover acquisition valuation and valuation enhancement. The professor made some interesting comments on the 20% control premium rule of thumb in M&A. It is apparently based on the averge premium paid over the market price over all transactions. The data comes from MergerStat. Damodaran speculates, however, that this premium could just be stupidity, ego, etc.

There is a project associated with this class that I would like us to also do.  The project involves valuing companies as a group and applying all the valuation techniques on a real company. We should have each member of the study group take a company.  The professor suggests that we include at least one money loosing company, one high revenue growth company, one non-US company, and one service company.

“There is no such thing as certainty,” states Professor Damodaran when it comes to valuations. Most people don’t believe in valuation according to Damodaran. He explains that he does valuation to fight the lemming effect. “They must know something I don’t know” are the seven deadliest words in valuation according to Damodaran. There is a lemming inside of each of us trying to get out and they can be lumped into three groups:

  1. Proud lemmings – Momentum investor
  2. Yogi bear lemmings – They think they are smarter than the average bear. They go to the edge and then think they can pull away.
  3. Lemmings with a life vest – valuation slows the process down, so we have something else holding us besides hope.

Perception effects price, but fundamentals determine value. I totally agree with that.

There are some misconceptions about valuations. Valuations are not objective or scientific. Valutions are more of an art.  We should realize that they are biased. Valuations will also be effected by who is paying you for the valuation.

I got a kick out of Damodaran’s comment on the illusion of extra decimal points. I try to avoid looking at pennies and cents with all the uncertainty involved in valuing companies. But as Damodaran points out, adding those stray decimal points can make you look smart at work.

The other word of wisdom shared by Professor Damodaran is that meeting the management of a company will introduce bias that will really effect your valuation. He thinks it’s best to know nothing about a company to avoid biases. However, I’m not sure this is true for individuals that are really good at reading people. Regardless, I’m not one of those individuals gifted with the ability to judge people accurately based on a face to face meeting.

That’s it for the first lecture. I’ll be sending out an email to everyone who showed interest in joining a study group to let them know that we have started.  We can use the comments section below this post to discuss this class session. Let us know what company you might want to research for the class valuation project.

I plan on completing another class session this week.  After that, we can meet every Tuesday night here to discuss the next class. Time to hit the books.

15 thoughts on “Equity Valuation Class Introduction

  • April 19, 2007 at 2:27 am

    A couple of things to mentions:

    Here is giving Damodaran on Valuaton away for free:

    Thinking about getting a Text to Speech program to read the pdfs to me.

    Also i am converting the real audio streams to mp3 files and listening to them in the car. The video in the real audio is just the slides which are fuzzy at best.

  • April 19, 2007 at 8:02 am

    What program do you use to convert the real to mp3?

  • April 19, 2007 at 11:15 pm

    The program I am using is dBPower AMP Music Converter version 10.1. This is the last freeware version, the new version is shareware. You then have to download a dBPower plug in for real player conversion for their legacy plugin page.


    I had allot of problems saving the real time streams. The download manager that worked for me was Gigaget. I tried two other well known download managers with support for rtsp before that, but they kept failing.

    Clicking the link downloads a .rm file. You have to open the .rm file in notepad to get the rtsp url to download the 140MB file.


    Text to speech with a good voice is going cost $40. This also saves the pdfs as mp3 files.

    There is great Text to Speech freeware out there, but they need a good voice codec. The AT&T voice codec are the best.

  • April 24, 2007 at 12:18 am

    So better software and a good voice cost $55. Hmm, where is Grahmn when you need him.

    Balabolka is freeware and better than natural reader as well.

    Since I have not taken the plunge yet, any voice preference AT&T vs NeoSpeach? I have heard samples of both and depending on who’s site you are on, one sounds better than the other.

  • April 25, 2007 at 10:12 am

    I was able to successfully download all the rm files (and I would have never figured out how to do that, thanks), but I haven’t been able to get the dbpoweramp set up properly. I can convert mp3s into real files (or whatever else I want), but I think I missed a step because it won’t convert real files to mp3 files.


  • May 2, 2007 at 6:37 am

    You might want to check out this link and this link for other tools to convert the Real files. Actually, most of these don’t really convert the files but instead capture the sound as your computer plays the files.

  • May 25, 2007 at 5:14 pm

    I dont know but there is a very funny thing happening with me. As i try to download the webcast, i get a real media file with is only 236kb in size. i dont no y it is happening. I tried both IE and firefox, doing save as, or clicking on the link..both gave me the same problem..any 1 knowing y is it happening…

    Will be grateful if some1 can send me an alternate link to download..i have tried eth..his website damodaran.com and moneyscience as well..same problem..

  • May 25, 2007 at 5:38 pm

    Ashutosh, the links are not actually to downloadable files. The links point to streaming RealAudio webcasts. I recommend going to http://www.real.com to download the free player. After you install that, the webcasts should work.

  • May 25, 2007 at 7:56 pm

    Hey thanks a lot..i understood the problem..

    Its with the browser..in firefox, it starts downloading..n i being a true firefox fan kept trying on it..turned out that it was meant for IE..did there and its running fine..how much i want to download these webcasts now..the internet speed in my country sucks..and watching streaming video can be a horror unimagined!!

  • January 8, 2009 at 12:24 pm


    i am trying to download the lectures but it stops downloading at 99%. if you have the lectures can you plz upload them somewhere and give us a link so that we can also download the lectures. also if you have already converted the transcript and lectures in MP3, request you to do the same with them so that all can benefit.


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