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Since I studied finance and investment management and also passed CFA level 1, I have to tell you: How much a company is worth depends on your investment horizo

Since I studied finance and investment management and also passed CFA level 1, I have to tell you: How much a company is worth depends on your investment horizon, which might be more than 1 year or you use more than 1 year's earnings forecast. But mostly you value dividends (discounted of course) and expected growth in price. This holds true for stocks of course. In this (I am talking about the OP) case you would probably estimate how risky the investment is and say if you would invest similarly risky in the stock market, you would want 10% per year. You estimate annual earnings say $500 and use your return to estimate the company's worth: $500/.1=$5000.

patio11 12y ago
Congratulations on successfully completing your studies. A question for you: let us hypothetically assume that you have identified a particular basket of stocks worth $5,000 using this approach, applying your personal estimate of their risk and your investment goals, and purchased them. Three weeks from now you receive a call from the CTO of one company you invested in saying that a vulnerability in the hypervisor at your VPS provider allowed a compromised co-tenant to execute commands in your instance as root. What is your plan of action for preserving the value of your investment, and does this retroactively change your approach to valuing the stocks you have purchased? This is a silly question, of course, because if one invests in publicly traded securities one does not have to operate their businesses for them. That is one of many reasons why owner-operators of businesses do not value them as if they were equivalent to investments in publicly traded companies.
- 20100thibault 12y ago
  I think this is good case of Black Swan (it would be highly improbable the same problem hit all the companies in a diversified portfolio but could happen a la hearthbleed). There's an extremely insightful book written on the subject (the black swan by Mr Taleb). Wich I do recommend. Discounted cashflow = bullshit used to rationalize the sale price ( it can have some use in super long term predictable business like real estate with 10 year lease and well diversified tenants) Hope this was helpfull
- rambazambar 12y ago
  I just included my background to point out the fact that my explanation is purely academic. Right now I cannot say whether your congratulations was sarcastic or not, but thank you ;) To your answer: I wanted to point out what is being valued and how it works. In this case the only thing that is being valued is the income. All risks associated must be accounted for. This was also supposed to be a hint to another question regarding how to value a website that does not yet create revenue: here you value future estimated revenue. To your argument: You are absolutely right, of course. But still you start with expected future income. Similarly, icu argued that you do not have just one figure. I completely agree. But that also happens if you consider a range of assumptions instead of concrete numbers. And even if you have a limited amount of potential buyers and they might pay more or less, you have to have an idea of whatever your are selling is worth.
icu 12y ago
Congrats on passing CFA Level 1, however I would politely ask that you consider that valuation is an art and not a science. I have done lots of work valuing illiquid shares, for example series A in tech companies, as well as established SME businesses. Of course this is a whole different game to valuing publicly listed liquid stocks and their options--which I trade. I also respectfully reject that the best answer to "what is something worth?" is "whatever someone will pay". I know it sounds similarly cryptic but my answer is, "it depends". Therefore IMHO it's best not to get stuck in one point of view but to try different methods and techniques for estimating value. Some people might say, "build it top down and bottom up" but I say, "build it from all sides". By doing this you get a 'range of value'. There would be valid arguments for the price within the range and different buyers will sit on the continuum. I know this is obvious, but if you are an entrepreneur your job would be to convince a buyer to give you the highest premium possible. Relating all this back to the post, I'd say that this entrepreneur is trying to do just that... Basically trying to give arguments for as high a valuation as possible. This is why I believe comments giving an exact figure of $x are invalid insomuch that your method for answering "what something is worth" is not the optimal approach.

patio11 12y ago

Congratulations on successfully completing your studies. A question for you: let us hypothetically assume that you have identified a particular basket of stocks worth $5,000 using this approach, applying your personal estimate of their risk and your investment goals, and purchased them. Three weeks from now you receive a call from the CTO of one company you invested in saying that a vulnerability in the hypervisor at your VPS provider allowed a compromised co-tenant to execute commands in your instance as root. What is your plan of action for preserving the value of your investment, and does this retroactively change your approach to valuing the stocks you have purchased? This is a silly question, of course, because if one invests in publicly traded securities one does not have to operate their businesses for them. That is one of many reasons why owner-operators of businesses do not value them as if they were equivalent to investments in publicly traded companies.

20100thibault 12y ago
I think this is good case of Black Swan (it would be highly improbable the same problem hit all the companies in a diversified portfolio but could happen a la hearthbleed). There's an extremely insightful book written on the subject (the black swan by Mr Taleb). Wich I do recommend. Discounted cashflow = bullshit used to rationalize the sale price ( it can have some use in super long term predictable business like real estate with 10 year lease and well diversified tenants) Hope this was helpfull
rambazambar 12y ago
I just included my background to point out the fact that my explanation is purely academic. Right now I cannot say whether your congratulations was sarcastic or not, but thank you ;) To your answer: I wanted to point out what is being valued and how it works. In this case the only thing that is being valued is the income. All risks associated must be accounted for. This was also supposed to be a hint to another question regarding how to value a website that does not yet create revenue: here you value future estimated revenue. To your argument: You are absolutely right, of course. But still you start with expected future income. Similarly, icu argued that you do not have just one figure. I completely agree. But that also happens if you consider a range of assumptions instead of concrete numbers. And even if you have a limited amount of potential buyers and they might pay more or less, you have to have an idea of whatever your are selling is worth.

icu 12y ago

Congrats on passing CFA Level 1, however I would politely ask that you consider that valuation is an art and not a science. I have done lots of work valuing illiquid shares, for example series A in tech companies, as well as established SME businesses. Of course this is a whole different game to valuing publicly listed liquid stocks and their options--which I trade. I also respectfully reject that the best answer to "what is something worth?" is "whatever someone will pay". I know it sounds similarly cryptic but my answer is, "it depends". Therefore IMHO it's best not to get stuck in one point of view but to try different methods and techniques for estimating value. Some people might say, "build it top down and bottom up" but I say, "build it from all sides". By doing this you get a 'range of value'. There would be valid arguments for the price within the range and different buyers will sit on the continuum. I know this is obvious, but if you are an entrepreneur your job would be to convince a buyer to give you the highest premium possible. Relating all this back to the post, I'd say that this entrepreneur is trying to do just that... Basically trying to give arguments for as high a valuation as possible. This is why I believe comments giving an exact figure of $x are invalid insomuch that your method for answering "what something is worth" is not the optimal approach.