Book recommentations on how to determine multiples when valuing a company

[adventurer]

Hello everyone,

 

does anyone have recommendations on how to determine a multiple when valuing a company? I have seen several calculations when valuing companies but I can`t figure out how the multiple was determined in the first place. 

 

Perhaps there have been topics created in the past on this matter?

 

 

Thank you. 

[DooDiligence]

I think one of the best ways is to start reading company threads on here (from beginning to end) and see how members were and are thinking. I'd arbitrarily pick real estate since the products are pretty understandable (even if the machinations of management temas are not necessarily so). The first 20 or so pages of JOE will give you a good perspective across a wide ranging time period. You may spend quite a while reading through the JOE thread, and while you're doing that, bookmark a stopping point and go through the significantly shorter but nonetheless valuable, Equity Commonwealth (EQC) and Preferred Apartment Communities (APTS) threads for a well rounded look at RE. There are other threads RE here.

 

Semper Augustus gives a lot of thought to valuing Berkshire and if you're here and aren't interested in Berkshire, well...

 

There's also been a lot of quality analysis on another board favorite, Fairfax. I'm not a shareholder and can't remember who wrote it, but there's a comprehensive document by a very astute guy (Viking?) to give you a completely different business to learn from.

 

Or just start picking business threads and reading them from the beginning. You'll see a lot of changes in perspectives and valuation guestimates based on what was going on in the past with politics, the overall news cycle and more importantly with stories and filings that were (and are) coming out about each individual business and industry. History is a great teacher and you ignore it to your peril.

 

There is no one magic bullet of a book. Not saying that it's not worth reading them, or that everyone won't have a favorite, but I believe there's nothing that equals all the historical thoughts available on this board.

 

Almost forgot, start with the oldest thread in the books category and work back to present day. Lot's of dusty old forgotten tomes of wisdom.

[gfp]

3 hours ago, adventurer said:

Hello everyone,

 

does anyone have recommendations on how to determine a multiple when valuing a company? I have seen several calculations when valuing companies but I can`t figure out how the multiple was determined in the first place. 

 

Perhaps there have been topics created in the past on this matter?

 

 

Thank you. 

 

A lot of people recommend Aswath Damodaran's books on valuation.  It's been so long since I've read anything like that I don't honestly remember if those types of books are helpful or not.  Different types of businesses get valued differently and it's best not to take somebody else's "price target" valuation.  You have your return hurdles that you are looking to get - work backwards from the returns you want to get - that's what Warren does and that is a main reason he hasn't been able to do any major acquisitions in a while.  He doesn't really budge much.

[giulio]

No book is going to help because as Munger said "there is no formula I can give you". 

The best approach is what @DooDiligence suggested, i.e. case studies. Look at some of the best investors' deals and their rationale,  try to understand what they saw and how it played out. Importantly, focus on the business dynamics not consensus views.

Buffett has written extensively about valuation, remember that multiples are just the inverse of discount rates.

No approach is equal. Buffett, Munger, Ackman, Rochon, Howley, John Huber are all worth studying but in the end, YOU must do the work.

Start practicing and with time you'll get better and understand what works for you.

It is more art than science.

 

Best,

G

 

 

[73 Reds]

3 hours ago, adventurer said:

Hello everyone,

 

does anyone have recommendations on how to determine a multiple when valuing a company? I have seen several calculations when valuing companies but I can`t figure out how the multiple was determined in the first place. 

 

Perhaps there have been topics created in the past on this matter?

 

 

Thank you. 

Multiples don't tell a complete story and can often be misleading.  Quality of earnings, consistency of earnings, predictability of earnings and optionality of earnings are most important in determining value.  There are many variables that contribute to each of these; not sure how any book would be helpful.  Otherwise if you're looking at an average company, look to comparisons with other companies in the same industry or sector.  

[Pellom]

I am still learning myself, so I don't want to come off as an expert here, but my recommendation would be, if you are doing this work to make active investment decisions, to run your models and then conservatively cut growth projections. 

 

The truth is any valuation tool can be altered to spit out the recommendation you want. "More fiction has been written in Excel than in Word.” - Morgan Housel

 

Agree with others that you have to do your own work and make decisions based on that work. How your investments play out over long periods is the only way to know if you're doing it right. By cutting your growth forecasts, you can protect yourself a bit. 

[DooDiligence]

Can't remember who originally posted this but I'm pretty sure it was someone here on CoBF.

 

I really like these rules. #2 is the hardest one to do, but it's pretty valuable if you can avoid anchoring to someone else's price. I'm looking for a fat pitch (aren't we all) for a single long term position, and am trying to stick to these rules. Especially #2.

 

All value investing requires being able to make dispassionate decisions, and a process that minimizes bias. That's why Charlie and Warren recommend reading

Cialdini's "Influence" and why Buffett's process includes:

1. Never reading analyst reports. Throws them right in the garbage lest their opinions infect his. This also extends to never using other peoples estimates, and always try to go to source material to make your own.
2. Never checking stock price before estimating intrinsic value. If he finds himself falling in love with a business as he's reading their 10K, he doesn't want to have a target price in the back of his mind as he thinks of a reasonable valuation range for it.
3. Trying to filter out news and current events and focus on what will be true in the long term. I admit I'm unclear how they do this given they admit to reading a lot of newspapers and Warren allegedly keeps CNBC on in the background of his office. But they are big proponents of Graham's Mr Market parable.

https://fs.blog/mr-market/