For some investors, the trajectory of Facebook (FB) shares — which have hit an all-time low and may not recover as lock-up periods for Facebook shares expire in phases over the coming months — has proven to be an expensive lesson on the difference between trades based on market pricing versus corporate valuation. As professor of finance and David Margolis Teaching Fellow Aswath Damodaran of the Leonard N. Stern School of Business at New York University explains on his blog:
Pricing is an exercise of gauging demand and supply, reading investor moods and determining what people will pay for an asset, rather than what it is worth. Valuation is about estimating what an asset is worth, given its earning potential, growth and risk. You can tell whether an investor or analyst is a “pricer” or “valuer” by looking at the tools that he or she uses.
In the same post, Damodaran goes on to note that “a great deal of what passes for valuation in corporate board rooms, investment banks and portfolio management is pricing, not valuation, and the evidence is clear, especially with Facebook.”
Damodaran also discusses the tools that he uses for corporate valuation on his Musings on Markets blog and writes about activist value investing, screening for bargains to perform passive value investing, and calculating the equity risk premium in greater detail. During earnings season, he outlined ways to make money from corporate earnings announcements.
In support of his work on corporate valuation, Damodaran co-created uValue, a free corporate valuation app for the iPad, iPhone, and iPod Touch. The app allows users to value firms using the weighted average cost of capital, adjusted present value, dividend growth model, or real option valuation methods.
Attendees at the 66th CFA Institute Annual Conference in Singapore will have an opportunity to hear directly from Damodaran in a special double-length session on corporate valuation. You can register to attend the conference and follow this blog for more speaker updates as the event draws closer.