Valuation theory

Valuation is not an exact science. In fact, it is regarded by most valuation practitioners to be more art than science, because valuations can be done by different methods (with very different results), and even if only one method is used, the valuation result varies from one valuator to the other. Valuation of a company without reference to values of similar companies requires projections and assumptions about the company's future performance - all this is very tentative, as nobody really knows what will happen in the future. Real world does not allow for controlled experiments with real companies. There are just too many factors that could influence a business - most of them of inherently unpredictable nature (such as innovation, changes in social behavior and government regulation - just to name a few).

There is such a discipline as valuation, nonetheless. It introduces specific principles, that, if applied consistently to different companies, at least make possible determination of their relative values (whether one company is more valuable than the other and approximately by how much).

Even though the end result of the valuation process may be a number or a range, it should be treated with a certain degree of healthy skepticism: the valuation process vastly oversimplifies the real world and totally omits factors that cannot be estimated or forecasted. In a way, it is not that much different from trying to predict what future awaits a person. By the way, the younger the person or the company is, the higher the degree of uncertainty. For a newly-born it is an absolute mystery.

Nonetheless, it is better to have at least some crude measuring instrument than no instrument at all.

The valuation theory we describe here is a work in progress. Below is the list of completed chapters. We will publish new chapters as soon as they are written. Chapters already published will be undergoing revisions, if necessary. We will be grateful for your comments and suggestions.

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VALUATION THEORY       ASSET ALLOCATION

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