The Bermuda Triangle of Valuation

Today's class started with a test on whether you can detect the direction bias will take, based on who or why a valuation is done. The solutions are posted online on the webcast page for the class. We then moved on to talk about the three basic approaches to valuation: discounted cash flow valuation, where you estimate the intrinsic value of an asset, relative valuation, where you value an asset based on the pricing of similar assets and option pricing valuation, where you apply option pricing to value businesses. In our discussion of DCF valuation and how to make it work for you, I suggested that there were two requirements: a long time horizon and the capacity to act as the catalyst for market correction. We will start the next class with both the time horizon and catalyst questions, but there is one group of investors that may be able to provide the catalysts for market corrections: activist investors (people like Carl Icahn, Bill Ackman(. If you are interested in getting a sense of who these investors are, take a look at this site, which lists the biggest ones (and the names of the entities that they use as vehicles… Start of the class test: Post class solution: