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Musings on Markets's Blog

Myth 4.1: If you don't like betas (or modern portfolio theory),you cannot do a DCF!

November 4, 2016 Comments (0)

Let’s start by stating the obvious. You need a D(iscount rate) to do D(iscounted) C(ash) F(low) valuation. To get that discount rate, I use a beta to estimate a cost of equity (and cost of capital) in my valuation and it is that input that evokes the biggest backlash from people perusing the valuation. Many investors have a visceral mistrust of anything that emerges from portfolio theory and betas to them symbolize what they see as the academic view of valuation. Consequently, not only do...

Deutsche Bank: A Greek Tragedy at a German Institution?

October 6, 2016 Comments (0)

This may be a stereotype, but the Germans are a precise people and while that precision often gets in the way of more creative pursuits (like cooking and valuation), it lends itself well to engineering and banking. For decades until the introduction of the Euro and the creation of the European Central Bank, there was no central bank in the world that matched the Bundesbank for solidity and reliability. Thus, investors and regulators around the world, I am sure, are looking at the travails of...

Venture Capital: It is a pricing, not a value, game!

October 2, 2016 Comments (0)

Venture capitalists (VCs) don’t value companies, they price them! Before you explode, implode or respond with righteous indignation, this is not a critique of what venture capitalists do, but a recognition of reality. In fact, not only is pricing exactly what you should expect from VCs but it lies at the heart of what separates the elite from the average venture capitalist. I was reminded of this when I read a response from Scott Kupor of Andreessen Horowitz, to a Wall Street Journal article...

Fairness Opinions: Fix them or Get Rid of them!

September 14, 2016 Comments (0)

My post on the Tesla/SCTY deal about the ineptitude and laziness that Lazard and Evercore brought to the valuation process did not win me any friends in the banking M&A world. Not surprisingly, it drew some pushback, not so much from bankers, but from journalists and lawyers, taking me to task for not understanding the context for these valuations. As Matt Levine notes in his Bloomberg column, where he cites my post, "a fairness opinion is not a real valuation, not a pure effort to...

Keystone Kop Valuations: Lazard, Evercore and the TSLA/SCTY Deal

September 7, 2016 Comments (0)

It is get easy to get outraged by events around you, but I have learned, through hard experience, that writing when outraged is dangerous. After all, once you have climbed onto your high horse, it is easy to find fault with others and wallow in self-righteousness. It is for that reason that I have deliberately avoided taking issue with investment banking valuations of specific companies, much as I may disagree with the practices used in many of them. I understand that bankers make money on...

Lazard, Evercore and the TSLA/SCTY Deal: Keystone Kops or Crafty Bankers?

September 6, 2016 Comments (0)

It is get easy to get outraged by events around you, even when that outrage is not merited. I have learned, through hard experience, that writing when outraged can be cathartic but it can also be dangerous. After all, once you have climbed on your high horse, it is easy to find fault with others and wallow in self-righteousness. It is for that reason that I have deliberately avoided taking issue with specific banking valuations of companies, much as I may disagree with the practices. I...

The School Bell Rings! It's Time for Class!

September 1, 2016 Comments (0)

As most teachers do, I mark time in academic rather than in calendar years and as September dawns, it is New Year's eve for me and a new class is set to begin. In just under a week, on September 7, 2016, I will walk into a classroom and face up to a roomful of students, not quite ready for summer to end, and start teaching, as I have every year since 1984. This semester, I will be back to teaching Valuation to MBAs at Stern, and as I have in semesters past, I invite you to join me on this...

Mean Reversion: Gravitational Super Force or Dangerous Delusion?

August 31, 2016 Comments (0)

In my last post on the danger of using  single market metric to time markets, I made the case that though the Shiller CAPE was high, relative to history, it was not a sufficient condition to conclude that US equities were over valued. In the comments that followed, many disagreed. While some took issue with measurement questions, noting that I should have looked at 10-year correlations, not five and one-year numbers, others argued that this metric was never meant for market timing and...

Superman and Stocks: It's not the Cape (CAPE), it's the Kryptonite(Cash flow)!

August 24, 2016 Comments (0)

Just about a week ago, I was on a 13-hour plane trip from Tokyo to New York. I know that this will sound strange but I like long flights for two reasons. The first is that they give me extended stretches of time when I can work without interruption, no knocks on the door or email or phone calls. I readied my lecture notes for next semester and reviewed and edited a manuscript for one of my books in the first half on the trip. The second is that I can go on movie binges with my remaining time,...

The Bonfire of Venture Capital: The Good, Bad and Ugly Side of Cash Burn!

August 19, 2016 Comments (0)

In my last post on Uber, I noted that it was burning through cash and that this cash burn, by itself, is neither unexpected nor a bad sign. Since I got quite a few comments on what I said, I decided to make this post just about the causes and consequences of cash burn. In the process, I hope to dispel two myths held on opposite ends of the investing spectrum, the notion on the part of value investors, that a high cash burn signals a death spiral for a business and the equally strongly held...