Session 2: The Bermuda Triangle of Valuation

Today's class started with a test on whether you can detect the direction bias will take, based on who or why a valuation is done. The solutions are posted online on the webcast page for the class. Bringing in the effects of uncertainty and complexity, I argued that these three (bias, uncertainty and complexity) forces are the biggest challenges to good valuation. In fact, they represent the Bermuda Triangle of Valuation, a place where good sense goes to disappear. If you have the time to watch a much, much longer version of this topic, try this:https://www.youtube.com/watch?v=-lL5qj_h1REWe then moved on to talk about the three basic approaches to valuation: discounted cash flow valuation, where you estimate the intrinsic value of an asset, relative valuation, where you value an asset based on the pricing of similar assets and option pricing valuation, where you apply option pricing to value businesses. With each approach, we talked about the types of assets that are best priced with that approach and what you need to bring as an analyst/investor to the table. For instance, in our discussion of DCF valuation and how to make it work for you, I suggested that there were two requirements: a long time horizon and the capacity to act as the catalyst for market correction. We will be starting on the first lecture note packet on Monday. So, please have it downloaded and ready to go.Start of the class test: https://pages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/tests/biasshort.pdfSlides: https://pages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/ValIntroSpr25.pdfPost class test: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/postclass/session2atest.pdfPost class solution: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/postclass/session2asoln.pdf