Kerschner Family Chair Professor of Finance
Stern School of Business, New York University
Considering valuation principles in light of the COVID-19 crisis:
- Valuation first principles have not changed just because of the crisis, but investors have to be willing not only to make estimates about the damage that the crisis will cause to corporate earnings but also to think about what a company will look like in the post-coronavirus economy.
- If you are tempted to use multiples and pricing because you don’t want to make assumptions in the fact of uncertainty, you will find uncertainty affecting you in different ways, with trailing numbers moving dramatically and multiples becoming either not meaningful or not usable.
- Difficult times require dynamic models, where forecasts of the past are not anchored in past numbers. In other words, mechanical models (which is what many DCF models have become in practice) will yield strange-looking numbers.
- Ultimately, crises are crucibles that test investor faith and philosophies, and this crisis will be the acid test for active investing, in general, and value investing, in particular.