Valuation Analysis (Part III) - Who needs it?
People normally see valuation analysis as a task needed to invest in stocks. Valuation analysis is simply learning about a company before you chose to become a part owner. It is therefore a paradoxical outcome that nearly every investor (including myself) at some point in their investing careers has bought a stock without knowing the slightest thing about it. Whether it be because it was a tip, because you've been monitoring volume and price dynamics over the previous weeks, or it represents a hunch, when you invest in this manner it is actually no different than placing your money on the roulette table. This isn't going to stop people from buying into equities, especially if Kochie tells you that is where you should be putting your money. But stop and think about it this way. Would you buy a car without taking it for a test drive? Would you buy a new golf set without hitting a ball? Would you move into a place not knowing its contents? The answer most people would provide is I suspect a flat NO! These examples are however, analogous to the investment theme. In the previous set of examples, we expect some form of utility. From the golf clubs, we expects our drivers to take us 200+ yards, we expect our cars not to need servicing every 6 weeks and we expect a house we are about to rent to be reasonably clean.
Having made, and probably laboured the point to exhaustion, what are some of the other uses of valuation analysis? Here are a couple: 1) firms are required to make investment decisions to maximise their return on capital - without valuation analysis how does one choose between alternative projects. 2) IPO's - when private firms grow to a certain level and decide to list how do they decide how much they are going to try to raise? 3) Mergers and Acquisitions - Investment bankers are paid very handsome fees to decide what firm A is worth and how much firm B should offer and whether this is reasonable - this requires valuation analysis as do those providing fairness opinions about whether asset A is reasonably priced. 4) Real estate - how does one decide how much they will spend on a piece of property? Is the modeled against the house next door, the growth prospects of the area or however much the bank is willing to offer you (*a snide remark against the American housing system*)?
These are just a few of the possible uses of valuation analysis and as is clearly evident almost every human being on a daily basis will utilise some valuation technique when buying, selling, leasing etc...That is in a nutshell, why we need to become good at it!
Having made, and probably laboured the point to exhaustion, what are some of the other uses of valuation analysis? Here are a couple: 1) firms are required to make investment decisions to maximise their return on capital - without valuation analysis how does one choose between alternative projects. 2) IPO's - when private firms grow to a certain level and decide to list how do they decide how much they are going to try to raise? 3) Mergers and Acquisitions - Investment bankers are paid very handsome fees to decide what firm A is worth and how much firm B should offer and whether this is reasonable - this requires valuation analysis as do those providing fairness opinions about whether asset A is reasonably priced. 4) Real estate - how does one decide how much they will spend on a piece of property? Is the modeled against the house next door, the growth prospects of the area or however much the bank is willing to offer you (*a snide remark against the American housing system*)?
These are just a few of the possible uses of valuation analysis and as is clearly evident almost every human being on a daily basis will utilise some valuation technique when buying, selling, leasing etc...That is in a nutshell, why we need to become good at it!
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