Session 16: Value and Price - Discerning the Difference
from Aswath Damodaran Hosted by Aswath Damodaran
In this class, we started by looking at why the value and pricing processes can diverge and the difference between investing and trading. Value is driven by cash flows, growth and risk and price is driven by momentum, liquidity and herd behavior. A trader makes money playing the pricing game (buy low and sell high) and an investor from playing the value game (buy something when its price is less than your assessed value and then wait for the gap to close). Each side has its own weaknesses, but it is important that you decide which game you are playing and choose the right tools for that game. We then looked at the process of relative valuation (pricing) by examining what goes into a multiple. Starting on the process of deconstructing the multiple, starting by defining the multiple and checking to see if it is consistently defined and uniformly estimated. We closed the class by looking at the distributions of multiples (left peak, right tail and skewed) and how these distributions show up in the numbers. Start of the class test: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/tests/dcfandprice.pdfSlides: Part 1: http://www.stern.nyu.edu/~adamodar/podcasts/valfall16/valsession16a.pdfPart 2: http://www.stern.nyu.edu/~adamodar/podcasts/valfall16/valsession16b.pdfPost class test: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/postclass/session16Atest.pdfPost class test solution: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/postclass/session16Asoln.pdf
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