Investment Valuation: Tools and Techniques for Determining the Value of Any Asset, Second Edition

Tools and Techniques for Determining the Value of Any Asset

Valuation is at the heart of every investment decision, whether that decision is to buy, sell, or hold. But the pricing of any financial asset has become a more complex task in modern financial markets. Now completely revised and fully updated to reflect changing market conditions, Investment Valuation, Second Edition, provides expert instruction on how to value virtually any type of asset-stocks, bonds, options, futures, real assets, and much more.

Noted valuation authority and acclaimed NYU finance professor Aswath Damodaran uses real-world examples and the most current valuation tools, as he guides you through the theory and application of valuation models and highlights their strengths and weaknesses.

Expanded coverage addresses:

• Valuation of unconventional assets, financial service firms, start-ups, private companies, dot-coms, and many other traditionally valued assets
• Risk in foreign countries and how best to deal with it
• Using real option theory and option pricing models in valuing business and equity
• The models used to value different types of assets and the elements of these models
• How to choose the right model for any given asset valuation scenario
• Online real-time valuations that are continually updated

A perfect guide for those who need to know more about the tricky business of valuation, Investment Valuation, Second Edition, will be a valuable asset for anyone learning about this critical part of the investment process.

But since I can buy as many books as I want, it would be more important to tell what this book does not do. First, it's always important to get a second opinion. In this case, it would be something other than DCF. Currently, DCF and relative valuation (such as PE and PV) are the dominent valuation methods used in the U.S. And yes, they are both covered in-depth by this book, in addition to the Economic Value Addded method which is gaining momentum in recent years. But this book essentially dismisses the income statements in favor of cash flows statements for valuing securities, preferring DCF to relative valuation. This is certainly understandable in lights of recent manipulation of GAAP income by offenders like Enron, WorldCom and Tyco. But I believe it's important for investors to hear the voice for income statements valuation method. For that investors should get James English's Applied Equity Analysis - another must-have - as a second valuation reference book. Secondly, this book uses CAPM model for finding the discount rate. Again, it is true that CAPM is the most widely used model in the U.S., but I came to a conclusion, after reading close to a hundred critically acclaimed articles published in the last fifty years as part of my MBA requirements, that factor models provide better tracking of stock prices than CAPM does. Unfortunately, there is no good book available. For institutional investors, they can have models from BARRA and Wilshire, etc, but individual investors would have to construct their own, probably (like me) using the Fama-French three-factor model. Description of their model is available mostly from theirs and other published papers. Data are available from Kenneth French's own website at Dartmouth. Now since you read all the way through my review, here is your reward: go to Damodaran's website and download the manuscript of this book for free if you are really frugal.


Extremely Valuable Resource!   March 28, 2002
Craig Matteson (Ann Arbor, MI)
43 out of 44 found this review helpful

This is one of the very best books I have used while working on an MBA. It will occupy a prominent place on my business resources bookshelf. What makes it so special is that it covers the field of investment valuation very broadly, but each topic is handled concisely and with clarity. The author also supplies a healthy amount of context and supporting information as well as the technical matters around valuation.

Another virtue is that it is laid out very well. If you are interested in a specific topic, for example valuing a company with negative earnings or a private company or even contracts for natural resources, it is easy to look up the specific information and study what is relevant to the task at hand.

Plus the author has a wonderful website with supporting spreadsheets and valuable information on companies that can help a great deal in thinking through the topics raised in the book.

If I could only have two or three books of all those I have used during my work at the University of Michigan Business School, this would be one of the keepers.


Valuation Enclopaedia   January 2, 2003
Fiona Wee (Perth, Australia)
16 out of 17 found this review helpful

I have both the 1st edition and 2nd editions. It is the most logical and complete valuation text around. Takes you through valuation processes as well as compares various methods step-by-step, logically and rationally. I also have the McKinsey edition and although it's good, it cannot compare with Damodaran's in clarity of language and logical reasoning.


The number one book on investment valuation   September 24, 2006
Leonard J. Wilson (VA United States)
11 out of 11 found this review helpful

Investment Valuation by Aswath Damodaran, professor of finance at NYU's Stern School of Business, is essential reading for any financial analyst or serious individual investor. Damodaran develops detailed explanations of how to estimate the value of any asset but focuses primarily on the valuation of common stocks using both intrinsic and relative methods.

Intrinsic valuation views an asset's current value as the discounted sum of future flows of funds. Depending on the asset and the analyst's preferences, the future flow of funds could be dividends, earnings, cash flow (earnings plus non-cash expenses), or free cash flow (cash flow minus net capital expenditures). In developing the intrinsic valuation models, Damodaran carefully points out several of the problems that one can encounter: Estimating future growth rates, Selecting an appropriate discount rate, How to value an asset with a high current growth rate that is certain to moderate (since no asset can grow faster than the overall economy forever).

Relative valuation compares measures of value across several similar assets to determine which are overvalued and which are under valued. The multitude of possible comparisons include the: Price to Earnings (PE) ratio, PE to Growth (PEG) ratio, Price to Book Value (PBV) ratio, Price to Sales (PS) ratio. Here again, Damodaran identifies many of the problems and constraints an analyst might encounter, especially the need to calculate the ratios in a consistent manner. For example, PE and PEG could be computed using earnings and growth rates as reported for the last fiscal year, current fiscal year, next fiscal year, trailing twelve months, next twelve months, or twelve months centered on the current date. The choice of the timeframe is less important than its consistent application. However, I have found that I'm personally more comfortable using an average growth rate calculated over about six years (three in the past, three in the future) to smooth out annual variations.

The beauty of Investment Valuation is that it is mathematically rigorous but does not require any mathematical training beyond high school algebra. (OK, a little calculus would help in understanding growth rates and sums of infinite series, but it's really not essential.) The book is highly readable and free of typographical errors. It doesn't offer any half-baked formulas on how to get rich; it provides useful tools for making your own investment decisions. If you are looking for a rigorous book on investment valuation techniques, this is the top choice and a terrific bargain at Amazon's price.



Best book of its kind   March 25, 2005
Michael B. Rizik Jr. (Grand Blanc, Mich USA)
7 out of 8 found this review helpful

I purchased this book as an adjunct to my masters degree work in finance and to assist personal investment valuations. Professor Damodaran's book covers the basics and then some to help value bonds, stocks, businesses, real estate and more. I'm carrying it in my car for use during the day, and refer to it when I read the Wall Street Journal in the morning. If you don't have time to work on a degree in finance, or even if you do, this book is invaluable.