The Little Book of Valuation

Success in investing comes not from being right but from being wrong less often than everyone else.

Relative valuation can be done with less information and more quickly than intrinsic valuation and is more likely to reflect the market mood of the moment. Not surprisingly, most valuations that you see are relative.

After-tax cost of debt = (Risk-free rate + Default spread) ×(1 − Marginal tax rate)

terminal value computation is not what growth rate you use in the valuation, but what excess returns accompany that growth rate.

The discount rate can be viewed as a composite of the expected real return (reflecting consumption preferences), expected inflation (to capture the purchasing power of the cash flow), and a premium for uncertainty associated with the cash flow.

The key lesson from this distribution should be that using the average as a comparison measure can be dangerous with any multiple. It makes far more sense to focus on the median.

The intrinsic value of an asset is determined by the cash flows you expect that asset to generate over its life and how uncertain you feel about these cash flows.

A stock may look cheap relative to comparable companies today, but that assessment can shift dramatically over the next few months.

The growth rate has to be less than the discount rate for the equation to work, but an even tighter constraint is that the growth rate used has to be lower than the nominal growth rate of the economy, since no asset can have cash flows growing faster than that rate forever.

The risk of any asset then becomes the risk added to this “market portfolio,” which is measured with a beta. The beta is a relative risk measure and it is standardized around one; a stock with a beta above one is more exposed to market risk than the average stock, and a stock with a beta below one is less exposed. The expected return on the investm