The Efficient Market Hypothesis (EMH) posits that publicly traded security prices reflect all published information. (Variants posit that they also reflect non-published “insider” information or that they instantly adjust when new information becomes available.)
There is a huge debate as to whether the EMH holds for individual securities or entire markets. If it does [...]
My holiday vacation reading included a terrific, brief book by Emanuel Derman titled “Models Behaving Badly.” Do not get excited: it is not about the inappropriate behavior of individuals like Petra Nemcova (sigh) and others. Do get excited: it is about the unavoidable imperfection of financial theory.
The author, a finance professor, started his [...]
As I wrote in my last post, in most situations, our responsibility is to express value as a single number or point estimate, even though it really is a reasonable range. The same thing applies to every assumption (what will next year’s sales be?) or intermediate result (the discount for lack of marketability).
When we [...]
Control of a business can transfer in many ways, among them:
1. Sale of the entire business (asset or stock sale)
2. Sale of a controlling stock interest
3. Redemption of an interest: if initially the ownership is 45%-27.5%-27.5%, and one 27.5% interest is redeemed, the new ownership will be 62%-38%.
4. Purchase of an interest: if initially the ownership is 50%-50%, and [...]
In any valuation context with the exception of actual transactions, litigation settlement negotiations (which are really actual transactions) and certain expert testimonies, the rule is that value has to be opined as a single number – a point estimate, or an “amount certain” – rather than as a range. This is because (for example), [...]
I am fascinated, and quite flattered, by the rising number of blog replies received from those of you outside the United States. The power of free, unfettered global communications never ceases to be amazing.
Most of what I write about is, I believe, globally applicable because I focus on the practical aspects of valuation: gathering [...]
Yesterday’s post laid out a way to analyze how a business generates cash flow to equity using a series of ratios multiplied together. Here are some follow-up thoughts:
1. You can use this procedure with any desired value metric, not just cash flow to equity.
2. You can use whatever ratios you like or make sense. For [...]
This might seem like a dumb question, but in my view, there are no dumb questions, only dumb answers.
If you define “making money” as earning a profit, then the obvious answer is that this happens when revenues exceed expenses. Accounting profit, however, is not the same thing as generating cash flow to equity! [...]
My marketing professors taught that to be successful in business, we have to find a need and meet it. We learned by the case study method. The professor started every class by asking, “What is this business selling?” (What need did it meet?) Some cases I remember are:
1. A cosmetics company was [...]
The subject of this post has been simmering on my mental back burner for several years. It has many threads, all of which I was finally able to weave together because of a colleague’s comments. Each thread involves appraisals with atypical complicating facts or situations, some examples of which are:
1. A contingent event (such [...]
