Popular financial theory "even greater fool" half-jokingly says that the value of the asset does not matter if there is "an even bigger jackass' ready to purchase the asset. But what mistakes can and should be avoided when it is necessary to know the real value of the asset?
Oscar Wilde belongs to the definition of a cynic as a man who "knows the value of all things, but not having any idea of ??its value." The writer could have had a description of some analysts, as well as many investors who hold investments in the theory of "even greater fool." According to this theory, the value of the asset does not make any difference if there is "an even bigger jackass," ready to purchase the asset. Although the chance to get some profits in this approach is definitely like the game may be unsafe, as there is no guarantee that at the right moment can find a suitable investor.
In theory evaluation, as in all other analytical disciplines, over time, spread to their own myths. This article explores and debunks some of them.
Myth 1. Objective assessment as to its use of quantitative models
Used to estimate the model and may relate to quantitative, but the input data leave much room for subjective judgments. Accordingly, the total value obtained with a particular model, will be marked by the influence brought to the process of assessing prejudice.
At first glance, it is necessary only to eliminate any bias before the start of the assessment. But that's easier said than done. At the current level of access to external information, thinking and judgment about the firm, barely able to avoid some degree of bias in the resulting estimates. Too often, the decision about whether overvalued or undervalued company, preceded her real assessment, resulting in a very biased analysis. In particular it is shown clearly in the absorption, when the decision to acquire the company often precedes conduct its assessment. Is it any wonder that analysts almost always turn out to supporters of this decision?
Furthermore, when determining the degree of bias estimation and play a role institutional factors. It is known, for example, that analysts who study the stock market is more likely to give a recommendation to buy, what to sell (ie, they are more likely to think the company undervalued than overvalued). Over a long period of time the number of recommendations about buying exceeded the number of recommendations on the sale at a ratio of 10:1. In recent years, this trend has worsened as a result of pressure on the securities analysts who have to deal with problems of promoters' investment-banking activities.
Myth 2. Well-established and well, the evaluation will remain always faithful
The value obtained by any valuation model depends on the specifics of the company, and from the information related to the whole market. As a result, the value will change as new information becomes available. With a constant stream of new information coming to the financial markets, estimates with respect to any company subject to rapid obsolescence and should be updated to reflect new information. This information may concern only certain firms relate to a whole sector of the economy or change the expectations of all the firms in the market.
Finally, all the economic impact assessment of information on the state of the economy and the level of interest rates. The weakening of the economy could lead to widespread reassessment of growth rates, although the impact on earnings will be greatest in firms with different cycles. For example, profitability and, consequently, the share price of a company such as Coca-Cola, are determined by demand for its products, which is seasonal.
If analysts have decided to change their grades, then from them, without a doubt, will require to justify the decision, and in some cases a change in estimates over time is perceived as a problem. In this situation, it would be best to remember the words of John Maynard Keynes. He said them in response to criticism that struck him to change position on one of the fundamental economic problem: "When the facts change, I change my mind. Do you, sir, to do otherwise? "
Myth 3. Qualitatively, the evaluation can accurately determine the value
Even at the end of an extremely meticulous and detailed assessment will be uncertainty about the final cost values, as they will be "painted" assumptions about the future of the company and the economy as a whole.
It appears that the degree of accuracy of the estimates will vary widely depending on the particular investments. Score big and "mature" company with a long history of financing is likely to be far more accurate than the estimate of a young company operating in a volatile sector. If the company is working in the emerging market, which is about the future as there are significant differences, the uncertainty multiplied.
"Mature" companies are usually easier to evaluate than growing, and young, just started the company more difficult to assess than companies with established products and markets. But the problem is not in the model used for estimation and in the challenges that we face, trying to assess the future. Many investors and analysts do not justify a well-founded assessment of the uncertainty of the future, or point to a lack of information. But in reality benefit that can be obtained with a reasonable estimate, is greatest in those firms where the evaluation is the most difficult task.
Myth 4. The more "quantitative" model is, the more precise estimate
It seems clear that a more complex and complete model will lead to improved estimates. However, this is not always the case. As the complexity of the model number of the input data necessary for the evaluation of the company likely to rise, leading to an increased probability of errors in input. This problem is exacerbated when the model becomes so complex that it becomes a "black box", where, on the one hand, the analyst "immersed" in the input data, on the other hand - in the estimates.
There are three aspects that are important to any assessment. The first of these - the principle of economy, whose essence lies in the fact that one should not use more inputs than is required to assess the asset. The second aspect is the need to balance the added benefits of a more detailed assessment and additional costs (and errors) related to obtaining the necessary data. The third aspect is that the company did not estimate the model, and you are. In a world where the problem of evaluation is often not a lack of information, and in its excess, separation of essential information from irrelevant almost as important as the models and methods that you use to assess the firm.
Myth 5. To make money, relying on the assessment, it must be assumed market inefficiencies
By default, the evaluation process is present assumption that markets make mistakes, and we can find these errors. It is often used information that is available to tens of thousands of other investors. Thus, it is reasonable to say that those who believe in the inefficiency of markets, should give of their time and resources to assess, while the people, confident in the efficiency of markets as the best estimate is to take market price.
It is best to approach the issue of market efficiency from a position of cautious skepticism. It must be admitted that, on the one hand, the markets make mistakes, but on the other hand, for the detection of these errors requires a combination of skill and luck. This approach to the markets leads to the following conclusions: first, if something looks too good to be true (for example, security looks like, clearly, undervalued or overvalued), then most likely it is not true. Second, when the estimate, made by the analysis is significantly different from the market price, based on the fact that the market is right.
Myth 6. Only important outcome of the assessment (ie, the set value). The very same process of evaluation does not matter
There is a danger of focusing solely on the result (ie, the values ??of the company and the question of whether the company is overvalued or undervalued), and thus miss out on some important points related to the evaluation process. Meanwhile, in itself it is able to provide us with a huge amount of information on the determinants of value and to assist in answering some fundamental questions. What price you can pay for a high rise? What is the value of the brand (brand)? How important is it to achieve a higher return on the project? What is the impact on the value of the profit? With such a high information content of the assessment process, some use in valuation models can be seen even by those who believe in the efficacy of the market (as well as the fact that the market price is the best estimate of value).
The postulate underlying the common approach to investments, says: "No investor will pay more for an asset that is worth it." This statement seems to be quite reasonable and obvious, but nonetheless, each successive generation has every time to open it again at all, without exception, markets.
References
For preparation of this work were used materials from the site http://www.elitarium.ru/
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