okay folks can you hear me went around this room and multiplied how much each of you is paying as tuition per session how much money NYU is making right now there's a pie we need a bigger slice of that pie now anyway this room is not my favorite room this is one of my this is a you know I might have said this in one of my emails all of the Ambiance of Madison Square Garden those of you no idea what I'm talking about there is no Ambiance in Madison Square God on a day the Knicks are playing badly which is pretty much any day they're playing so I don't like this room but unfortunately we're trapped in this room because this is the biggest classroom that NYU has to offer and I had four kids and they've all had that faithful decision of where to go to college and I try to convince them each of them to come to NY you not because I think NYU is the greatest place on the face of the Earth but because it have cost me nothing which I thought was a big Factor but for them it was a lesser factor and each of them we went on this University visit they take you through where they tell you lies like the professors are here all the time you can drop in on them their offices are always open all lies but no we've got sell that and every one of them I would hang out with the group and act like another parent they would get on top of sprout that know upstairs and they say there are no big classes at NYU all the classes are personal they're small and I feel like putting up an and that's not true because we do have big classes and this is obviously a very crowded classroom so I'm going to start today in a very strange way you know one of the rules in theater is you should always know your audience so I need to know something about you before I start talking about what this class is about how many of you are not Stern undergraduate this reason I'm asking this question the reason I ask that is have you received any of my emails so far okay you are getting it if you're not if you don't have a Stern email address you are creating one when you take this class and you will need it even if you don't use it as your regular email address because to access some of the materials like Capital IQ which is a data set that Stern students have you need to get your so the first thing the first message is if you don't have a stern. nyu.edu at the end of your email find out what that email address is because there been one that's been created just for this class second question uh how many of you are seniors so basically I've got to get to you before you prematurely graduate is that right which is when March or so you kind of mentally might leave so I'm going to try to cram in as much as I can before March when I teach my second year mbaas I teach them exactly the same class the the same valuation as exactly the same class for the last word they're all graduating MB they all graduate in March I've got to get everything done by the middle of March or I've lost them so if you're a senior hang in there you don't officially graduate till May and I think I might have some influence in whether that actually happen happens so of nothing else keep that in mind as you think about staying on after March now I'm going to get started on what this class is and before I get started I'm going to give you a quiz kind of backhanded right usually you take the class and then you have a quiz we G have the quiz first and then we'll have the class this quiz and this is something you're going to notice every class from this class on we'll start the class with a quiz about what we're going to cover in the next 80 minutes the reason I'm going to do that is to give you a sense that you kind of know what's coming already with common sense you can reason your way there which means the rest of the class gets easier but today's quiz is really about your prior what you think about what's this class called Equity valuation get rid of the equity it's a valuation class I don't know why there's an equity in it because we value just about anything I want you to get a sense of what you think about valuation why we do valuation and how we're going to approach the class so here's my first question and this is about your motive for taking the class you don't have to tell me so I'm not going to ask for a show of hands I want to look Inward and think about hey why am I taking this class is it to get rich you think that by taking this class you're somehow going to find in which case you're going to be deeply disappointed maybe it's to get a job at an investment Bank how many of you are here for that reason okay at least you're putting your hand up right I'm going to teach you everything that investment bankers don't like because I I think investment bankers are actually crappy at valuation they're actually abysmal that doesn't mean when you get there you don't have to do what they do but at least you'll know that they're doing stupid things you don't don't be stupid and mention this on your first day said this is really stupid just do it but you know mentally this is a really stupid thing to do maybe it's to impress your friends I can value Tesla that'll always impress people especially at Thanksgiving and maybe it'll give you the tools to recognize when you're being fooled like when you listen to CNB and that guy has no idea what he's talking about now maybe you think it's an easy a hopefully by the end when I describe my syllabus you'll get rid of the last reason but I wanted to think about why am I taking this class why bother learning valuation is it for a job is it to invest because you're going to see what you take out of this class is going to very much depend on what you want to get out of this class doesn't mean you can't get n with any objective but you got to get a sense of how much how deep do you want to dig this is something we're going to address today there is something that I run into all the time about what kind of discipline is valuation I list out the thoughts and again you don't have to give me your answers but but think about what your priors are there's no right answer I just want your prior valuation is a science that's a first choice valuation is an art and I let you decide what makes an art different from a science valuation is Magic which means you know you at the right buttons the number pops out or maybe it's none of the above maybe you have a different vision of what valuation is as a discipline we'll come back and address this today because I think we need to get this nailed down before we start talking about valuation and here's the final one and this is something again where there is no right answer but there is one that's right for you you heard the legend of the left brain and the right brain it's Legend because it turns out there's no signs for it left brain you know left brain people tend to be good better with numbers right brain is that the or the other way around one part of your brain is supposedly good with numbers the other part of your brain is good with the storytelling each of us has a strong side I want you to think about what your strongest side is I'm going to give a m a few minutes a few seconds for you to to pause and think what is your strongest side is it working with numbers or is it telling stories and don't tell me you don't know you've you've known for a really long time I'll tell you when I knew I knew when I was 12 years old right after my first English literature class I was asked to read more B deck and I did came ready for a discussion of whales and captains in 20 minutes in the discussion there's no talk of a whale I put up my hand and I said when are we going to talk about the whale and I remember what the instructor said she said there's no whale so what did I read the wrong book I distinctly remember a big fish going through this book maybe it was a quasi whale but like a whale she said it's a metaphor my jaw dropped and the rest of the class was about hidden meanings and things I didn't even know had a meaning in the first place I remember coming out of that class with a singular conclusion I said never again am I going to subject myself to this kind of and the rest of my high school life was laid out for me I avoided the literature classes like the plagues Algebra 1 Algebra 2 algebra 3 out of high school these were the good old days you know what happened in the good old days you went to college and you picked the courses you wanted to there was no two-year required course you know what they make you take you know it's require you have to take history why it rounds out your Ed complete lie you know why they make you take history because if they didn't make you take history there would be no history Department its reason for existence would go away a Core Curriculum come on we know to stretch your degree out for you years collect more tuition from you in those days you could do numbers class numbers class numbers degree like what accounting engineering you got a numbers job and who do you hang out with other numbers people you lived your entire life among numbers people and you are in your preferred domain so if you're in that group a numbers person you've always found algebra to be more palatable than history or a numbers person hang in there because I'm going to come back and talk about whether you're going to you're going to be at an advantage or a disadvantage of this class some of you might be sto how many of you numbers people let's let's get a show of hands okay okay what are the story people these are the people who love your your delayed numbers person or your numbers still a numbers person okay I didn't even ask about story people yet so you're a story well let's go back and think about that same 12-year-old story person in that class they love hidden meanings in everything they like they write poetry my youngest son writes poetry and he showed me his first poem I don't think he's going to show me anymore he said dad what do you think and I said aren't the words supposed to rhyme that's why I think about poetry nursery rhymes right the last words don't rhyme it's not P to me he said Dad you'll never be a poet and they said you're right you take story class after Story class then you get a story degree like what it could be literature it could be history or you could come to business school and take all the strategy classes take every class with the word strategy in its name you'll never see a number in four years it's start everything is strategic and they need a numbers job and you I'm sorry a story job and you hang out with story people we live almost in two tribes if you ever seen a banker talk to a venture capitalist it's almost laughable because they don't understand what either side is saying the bank eight times I've been done but there's a big story here I want to tell you about how big the market is we're going to talk about which side has the advant Vantage in valuation you're going to be surprised but because when you think of valuation what do you think of numbers or stories you think numbers Excel spreadsheets because that's the way we think about valuation you're going to be surprised at how much stories matter in valuation and how without a story you cannot value a company so those are the prior kind of set them to the side we come back and address at least a couple of them today and over the course of the class we'll keep returning to these let's move on now to the syllabus if you notice I don't have any physical stuff the reason is very simple logistically handing out copies to go around will take up half the class it's not worth it so everything is going to be delivered digitally to you and if you've been receiving my emails you already got the first the the syllabus the project the first set of lecture notes the entire lecture notes for the class the second p it will be ready tomorrow day after so the entire class should be ready by the end of the week you're welcome to download it bring your iPads and follow along or your computers and follow along you want to print it you can on one condition don't do it from the downstairs printers because then I hear about it because there's about 700 pages of lecture notes if you multiply that by 300 people in the class I will single-handedly break down the printing system its turn and I have no desire to do it so do it at work or something you know you have one of those part-time jobs they have no idea what's printing off in the printer so I don't know some lecture notes somebody's printed off so do whatever makes you take the one thing I've stopped doing this year is I used to print it and make it a packet at the bookstore and here's the reason I've stop one it takes them about three weeks so by the time they actually get it ready it's too late and then they charge you no bleed prices because they don't charge you enough for tuition I guess they going to charge you an extra premium for the lecture note packet if any of you feel intensely that you want to pay the bookstore to keep it going let me know I will print off a copy just for you and allow them to price it for you and you can buy it directly but everything you see on these slides you should be able to download and essentially have digitally or in physical so let's talk about this class start with some very simple logistical detail details my office is in the other building the business school is very confusing now there are three buildings this is the KAC building which is 44 West Forth Street 969 or cyberspace you can find me my email through my email address my homepage which you will be visiting frequently because I will force you to visit it because I keep count of the numbers and I want the numbers to keep going up so I'll ask you to go there even when you don't need to and my I will actually have physical office out where I will be in my office just before the afternoon class I teach a 1:30 class for the MBA so 12: to 1:15 but I have a very simple principle called the fair game principle which is if you find me I'm fair game which means my job for the rest of the semester is make it difficult for you to find me which means I always take the stairs I've noticed you guys are too late lazy always take the elevators so you want to find me take the stairs up and down keep going up and down one of you know one of those times you'll run into me yeah restrooms are off limits because it would be unfair right because only one half of you roughly half of you will be able to find me I can't allow that unfairness and I can't go into the women's room just to make it fair so let's let's re rest and I'm going to take gyms off the mix as well in the old days it used to be a gy and Coal's which now is of course this Mega building there and I used to show up and get on a treadmill and every day somebody from one of these class would show get on the next treadmill every single time I was there and ask me questions so I created a new rule if my pulse rate exceeds 120 I can't be responsible for any of the answers I give and my pulse rate very quickly hits 120 on the treadmark but the de the fair game Jake is here today he's one of the Tas and deep was they both I mean Jake used to sit here deep used to sit here they kind of anchored themselves in the front row last year when they took the class so they're intimately aware of the torture I put people through on this class so they will send they will directly contact you in office hours and they will run a review session each week where effectively they'll take you to the material for that week and apply it on problems from past quizzes so you have a sense of what to come so take advantage of that so let's take that first question I asked you is valuation of science or not what makes a science a science take a mathematics it's the only pure science in fact mathematicians are convinced the rest of us are imposters what is it about mathematics that makes it a science anybody want to give that a sh go ahead it's rigid Finance can be rigid too we can have all kind it's not just rigid but rigid with reason right 2 plus three you're rigid that the answer is five not because you're being inflexible but because it is the only answer it's not just rigid it's absolute it's right or wrong it's not maybe five could be five it is five the essence of a science is if you get the inputs right you're going to get the output right mathematics is a science physics is mostly a science the laws of gravity are the laws of gravity there are no exceptions right we all gather together on the 11th floor and we managed to get one of those windows open I think they're all sealed shut but if you did and we all jumped out we don't fall in the order of our IQs We All Fall laws of GRA the laws of gravity physics is mostly science but the essence of a science is that you get the inputs right you'll get the output right can valuation ever be a science why not well at the end of the day you're dealing with people right so it's it's not just people it's a future right you know why you're not going to be right because you are not God if you're operating under that delusion you have a different problem this class can't solve it you don't know what the future will deliver you value let's say you valued Marriott in 2019 as I did November 2019 I valued Marriot what does marot do runs hotels right I did my best I collected the information on the history the occupancy rates I valued marot I came up with the value Pusher and all went to crap five months later why because a virus hit that shut down the entire Hotel business you're saying how come you didn't forecast this in November 2019 you'd have to build into some kind of paranoid conspiracy theory that I knew about covid five minutes before it happened and didn't let anybody know because I wanted to slip in evaluation of Marriot first you can do everything right in evaluation and be hopelessly wrong not because you didn't do your work but because of some that's out of your control one of the question one of the companies will value during the course of this class is Tesla and I value Tesla every year and every time I value Tesla I said look I've done the best I can but I'm going to be hopelessly wrong and I Know It Up Front it doesn't stop me from acting but I have to recognize that you can get every input right and your output can be hopelessly wrong valuation can never ever ever be a science that must make it an art right let's look at KN let's look at painting as a not not painting your house but you know the paintings I'm talking about the ones that hang up in the met I still remember my oldest son he's now 33 was 8 years old I took him to the Met for a Picasso exhibit some culture that right he lasted about 30 minutes that's how long an 8-year-old last Museum to begin with he had to substantial bribery was involved to stay the 30 minutes finally after the 30 minutes we come out and asked him Brian what you know what do you think of that he said dad I was not impressed I said that's a Picasso exhibit he said dad this guy can't get the nose in the right place have you noticed about Picasso's nose comes on the side of the head the top of the head the back of the head it's almost like the guy was drugged or drunk which in the case of Picasso was probably both but for what whatever reason we've gathered together and decided Picasso is amazing and his painting is worth 130 million tomorrow we could all get up and come to the same realization as my son this guy can't get the nose in the right place and there goes 130 million right the essence of an art is you really cannot teach it thank God valuation is not an art because then I've been teaching something that cannot be taught I'm going to give you a little bit of History here I joined NYU 1986 as an assistant professor I was given a class to teach it's called security analysis you guys heard of this class it's a class with a very long tradition it's a class that was start in the 1950s at Columbia University by a guy called Ben Graham how many you heard of Ben gram yes why is he famous WR he wrote and what else is he F in fact you know he wrote security analysis he wrote the intelligent investor but he's famous for another reason as well this is one of the great things about teaching is you're as famous as your most famous students sometimes right Warren Buffett was a student at Columbia University so this is a class that had been taught in the 1950s the 1960s still was being taught in the 70 so they give me this class I take one look at the class and say I'm not teaching this class most boring class ever cuz by 1986 it was showing its age it was three weeks on stocks with one session on valuation it's two weeks on bonds and a week on Futures a week on options a collection of topics and lots of institutional detail there was an entire session on listing requirements for the New York Stock Exchange the whole class teaching was so easy in the days before Wikipedia you could go and there say these are the 15 listing requirements of New York Stock one by one and people took everything down the guy's a genius you tried that today people check I can see that right there why is he just repeating this so I went to the head of my department this is right after I'm hired he said look I don't want to teach this class you should have fired me on the spot but he's a good guy he said what would you like to teach instead I said I'd like to teach evaluation class you know what he said don't do it there isn't enough stuff in valuation to fill a class and you know what he was absolutely right in 1986 there wasn't enough stuff to fill a class there was one book called security analysis written by Ben grab you know when that book was written anybody know the first edition of security analysis 1934 you know why that matters if you read security analysis the de deeply risk averse book risk is a bad thing the essence of Ben Graham's idea of a good company was a bond with price appreciation he wanted dividends that look like coupons and a little bit of price appreciation but before you jump down his throat for doing that remember he wrote the book in 1934 two years after the great of course you're going to be risk ofers there wasn't enough stuff in valuation but I really really really wanted to teach EV valuation class and I discovered very early in my academic life that if you want to get anything done at a university the best way to do it is to do it subversively because you try to get official permission you know what would happen a committee would be formed you know what happens when committees get formed they meet and they meet and they meet they forget what they're meeting about I think they keep meeting and then they have baby committees that they call subcommittees and sub subcommittees all reporting to each other 40 years later they'd come back to and say you got permission to teach the class I'd be too old to teach the class so I said okay I'll teach you security analysis class and I walked into the classroom closed the door and remember these were the days before there were cameras in the classroom we had no idea what I was doing inside the room I could be teaching cooking for 15 weeks he saying won the students complain if everybody got n who's complaining and I taught a valuation class that was fall of 1986 you know how long it took them to catch on in 2008 I got a call from the Dean's office we hear you teaching evaluation class I said yes I've been doing it for 22 years said we don't see it listed anywhere on the course listings I said that's very easy to explain I've been hijacking all these other classes you've been giving me and teaching valuation instead fact they made me teach this class called equity instruments and markets for 15 years I am not in the least bit interested in instruments markets or equity which kind of leaves you at a problem because and is all I'm left with so I thought valuation instead they said that's not right we should call it valuation I said I agree so if you look at the course listings at NYU valuation shows up for the first time I think at the fall of 20 8 fact now that I think about it it might have caused a crisis in markets right maybe there should we should have left it as equity instruments and markets leave well enough alone but if valuation is an art I've been spending almost this will be my 38th Year my 60th semester teaching the mba's valuation my 12th semester teaching the undergraduates I didn't teach undergraduate an extended period like 25 years for the last 10 years of course I've been teaching this class valuation is not a science it's also not an art you can't do whatever you want you know the word that I think best describes valuation you can see it on the slide but I'm going to say it anywhere it's a craft I'll give you the discipline that I think is closest to valuation it's cooking how do you master cooking you could do what my daughter used to do she used to watch a Food Network like 12 hours a day chopped episode after chopped episode Beat Bobby fle Beat Bobby fle she couldn't cook a lick but she could tell you how to make a sule in theory she'd watched it so many times you don't learn valuation by watching TV you don't learn valuation by reading cookbooks you learn cooking I'm sorry you don't learn valuation you don't learn cooking by by watching TV you don't learn cooking by reading books you learn cooking by cooking and the first time you cook what happens disaster fire alarms go off you're going to order out that day guaranteed I remember the first time I scrambled eggs nobody told me I was supposed to spray the damn pan I scrambled the eggs it looked really good but wouldn't come off the pan pan and eggs go into the trash can I learned a very important lesson that they spray the pan first you learn cooking by cooking and each time you cook you get a little better at it you three steps forward two steps back you move in the right direction you learn valuation by doing which means I have some really bad news for you if all you do for the next 15 weeks is sit there and watch me talk you're not going to learn valuation you got to do it you got to get your hands dirty the first time you do it it'll be like cooking for the first time fire alarms will go off or the equivalent of fire alarms and valuation will go off you got to fight through those moments one of the things you will see every week starting tomorrow is I'll put up evaluation of the week tomorrow I'm going to put evaluation I did of GameStop remember that ill fad episode from a few years ago GameStop of course is how many of you have been in a GameStop okay that's fewer than 10 years ago everybody in make GameStop because this is a classic Mall store where kids used to go to try out new games and if you like them you bought the game when how many of you have never been in a mall in the last year you guys are doing a lot mall shopping I haven't been in a mall in the last year I mean it's I mean most of us don't go to we don't hang out in malls anymore right GameStop is a dying business because it's business model is broken so for about a decade leading into 2021 GameStop stock price fell Dro but down to about $18 per share and it looked like it was going to zero it was the most highly shorted stock you know a shorted stock is people sell the stock expecting the price to go down they want to make they'll make money if the price goes down most highly shorted stock and everybody expected the price to go to zero until something magical happened a group formed on Reddit called Wall Street bets and they decided that they were going to buy GameStop why I would love to say it was for because they thought GameStop was undervalued that the company was going to turn around you know why they bought GameStop because they wanted to take revenge against who those hedge funds that made their lives difficult for whatever reason and magically it worked they pushed the price up from $20 to $400 per share and we come back and talk about this process how can the value go the value did the price went from 20 to 400 and I'm going to separate the two words from this day point on in this class when we talk about value we're going to talk value when we talk price we'll talk about price the two cannot be intermingled though eventually the two will be linked up they're two separate phenomenon so tomorrow I'm going to put up my that a Blog a post I put on GameStop at the time this happened I call called it the first crowd shorting in history because short when a stock is shorted usually shorted by wealthy people trying to make money the expense of other wealthy people this is the first time a group of people put together shorted a stock and pulled it off so I I'll put up my post I'll put up my valuation I did a GameStop right I said let me think think about what the value of the compan is I can see what the price is and then I would like you with each of these valuations to give it your best shot you know what your response is going to be tomorrow right how many sessions will be under your belt tomorrow one you saying the classes just started I didn't even know how to value a company give it your best shot the first week you might say I'm going to change the third decimal and the risk-free rate leave everything else alone in which case your value is going to be very close to m but as you go through this class and I'll you know move from company to company so second week I might do the next week I might value the entire S&P 500 the week after I might value Tesla so each week I will pick a company that I have valued and I will put out my valuation not because I think it is the right valuation but I want you to take that valuation and just as you learn cooking by trying a different recipe try your hands on that valuation that's how you learn valuations by doing now that you talked about value and price great start you know launching pad for what why the two can be different through much of this class perhaps the first two-thirds of this class we're going to talk about what drives value what there's no magic here the value of a business is driven by three just three forces what it can generate is cash flows as a business how quickly those cash flows can grow and how risky those cash flows are cash flows growth and risk is this something we discovered last year in the last 100 no this has always been true that Venetian glass maker who sold his business in the 1400s the 1500s that business valued based on cash flows growth and risk now in the last century we've developed tools for measuring risk and a framework for bringing cash flows growth and risk into a value called a discounted cash flow valuation or that famous acronym DCF which I don't like but think of essentially bringing the three but this has always been true we know what drives the value of an asset or business that's what drives value you saying what drives price very simply demand and Supply you saying aren't they determined by Fundamentals by partly but they're also driven by mood and momentum I mean we talked about revenge right GameStop price is driven by demand and supply and emotional factors that can cause the price to be very different from the value again this is a new right in finance for the last 50 years we've had a branch of Finance called behavioral Finance what does behavioral Finance do it brings the tools of psychology to explain why the price can be different from the value beh Finance doesn't change value explains why prices can deviate from value not just in large ways but stay deviated for years even decades as I said the first two-thirds of this class we're going to talk about what drives value how to Value an asset company or business but in the last third of the class I'm going to talk about how to price a business very different tools right because they not talking about Cas flows growth and risk you're trying to figure out what other people are paying for similar things if any of you use seat geek you know what seat geek is you want to buy tickets to the Yankees for opening day and it's too late you can't buy directly you go to seat geek there you know people selling tickets saying I want to sit in the you know on the on the sidelines right behind home plate and you can see what people are charging for tickets you're not doing an intrinsic valuation that's a pricing you think those unsophisticated people when you see a stock being priced it'll be usually based upon a multiple right because you can't compare price a p ratio anytime people use a multiple price earnings ratio in E to they should never use the word value for what they've done because they're pricing something which leads us to a very unpleasant truth which is even though two-thirds of this class is being spent on valuation and many of you will end up in jobs that claim to be about valuing things most of those jobs are pricing jobs Bankers price things they don't value things I don't know why they go through this charade of saying I care about value it's all about pricing so the last third of the class we're going to talk about how to price things better and pricing things better is very little to do with Finance it's got more to do with data and statistics and I think we have more data than we used to and better statistics we can price things better let's at least take advantage of the data and the statistics we have so through this class if I seem finicky about these words it's precisely because I want to separate the two words if you're trying to explain pricing explain pricing you want to explain value explain value but don't try to explain both in the same setting because it almost never succeed I said this is a class it's a valuation class it's about valuing just about anything so we're going to spend you know you know it's not just about public companies it's about private businesses and public compan not just about young you know mature companies anybody can value a craft n or Coca-Cola and I say anybody you give me an 8-year old enough candy to bribe that 8-year-old in reasonable brightness right so you can't be a really dull 8-year-old you can probably learn enough valuation to Value Coca-Cola so the only company going to value is Coca-Cola don't waste your time chat jpt could probably do it for you you want to go where it's more more and so the companies that are difficult to Value young companies startups companies where things are changing on the ground so you have to forecast the future we're going to Value companies across the life cycle we're going to Value across Market Market I'm not going to explicitly say well I'm going to do us companies now Emerging Market companies the end because to me that suggests you already lost the game so you're going to see me slip in and out of you know from one company to another the first company I might value is Coca-Cola the second company I might value is the adani group and I'm not going to explicitly and now we're going to shift because it's the same principles that drive value in every Market you say what about Bitcoin or gold or a Picasso let's be quite clear there is some to Value something in a what did we say drives value cash flows growth and risk right so only assets that generate cash flows can be valued stocks can be valued businesses can be valued a project can be valued currencies cannot be valued not just cryptos any currency but they can be priced in fact what do we call that pricing for currencies it's called a exchange rate exchange rates are pricing so when you look at the Bitcoin price it's an exchange rate between one currency a fiat currency the US dollar and a cryptocurrency already you've saved yourself a Hu I mean you know how many times I've been asked in the last decade is Bitcoin undervalued or overvalued my answer is it cannot be Valu can be priced and what's driving its price mood and momentum right why can the price go from 50,000 to 10,000 because the mood shifts so we're going to talk about we talk about pricing we'll talk about those including Investments that can only be priced and if there's anything that's new and different about this class as opposed to perhaps a variant of this class might have been taught 30 or 40 years ago it's we have this technology and finance for valuing options we created it not for valuation classes but because we have listed options value and fixed income and convertible bonds of options but I'm going to steal that option technology and use it to Value certain kinds of businesses I'll give you an example you you know I live live in San Diego much of the year you're saying why do you check the temperature today in San Diego it's like 70 degrees in sunny I can't believe I'm here I should be there but I'm you know San Diego is surrounded by Young pharmaceutical companies all with no revenues no earnings but drugs working their way through the pipeline think of what you get when you invest in a company like that you don't get a set of cash flows you can't price the company there's nothing to price it on you're buying an option what's the essence of an option if something happens you get cash flows what's that something for a drug it's got to get approved and ready for commercial use you're buying an option I'm going to argue with oil companies commodity companies you essentially get an option in addition to the cash flows what's your option if oil prices shoot to 200 you get an upside if oil prices drop to ready you don't take oil out of the ground we're going to talk about how options can help us make sense of certain kinds of Investments which brings me this the story to the story and numbers but as I said earlier when I asked you you know whether you're a numbers person or a story person I also said that I'm going to surprise you but what by what valuation is and I'll make a confession here I describe valuation as a craft and the essence of a craft is you never quite Master you always have to keep learning I mean you take a master Carpenter you might be a master Carpenter but there's some type of carpentry you know you might be a great chef but there's a certain kind of Cuisine you don't how to cook valuation is the same way you never quite mastered it you have to keep the door open to the fact that and I'll make this personal when I first taught this class I taught it like a number crunch of what which is when in doubt put up an equation if you're still doubtful put up a second equation if your doubt persists make them simultaneous equation solve for it you know you're you're doing absolutely nothing but you're getting a I'm in control but six years into teaching this class I realized I had a prom and I'm going to introduce a word that I'm going to come back to over and over again this class I discovered I had no faith what's Faith got to do with valuation everything I don't do valuation for a living I do valuation because I want to act on that valuation you know what I mean by act on that valuation if I find something undervalued what do I need to be able to do buy that thing right why bother and I discovered I had no faith why because I knew how to Value just about anything mechanically but there was nothing holding the numbers together I could just move the numbers to get a different value and that's when I realized I needed to be able to tell stories stories hold your numbers together they keep you from making up stuff and things blowing up a good valuation is a bridge between stories and numbers I'll give you you know let let me go back to the Tesla valuation I said I did a few months ago in my valuation I'm projecting revenues of about $750 billion for Tesla 10 years from now is it a lot of revenues how do you get a sense of whether something is a lot or not in fact let's set that that that discussion up now if I gave you a number my margin for my company is 38% how do you get perspective on whether that number is a high number a low number what do you need to look at just look at the I mean look at the entire there are 48,000 publicly traded companies how many of them have revenues of 750 billion and over right now zero the largest company in the world Amazon and Walmart are their 550 600 billion dollar so I'm making Tesla the largest company in the world it maybe not an infl but clearly that's already a number that jumps out say okay tell me why so it's an automobile companies what's the next thing you're going to check what's the largest automobile company out there right and right now the largest automobile companies of Volkswagen and Toyota which have revenues of about 300 billion I'm making it two and a half times bigger than the largest automobile company so what's the next question you got to ask me well either Tesla is going to be an extraordinary autom Bill company twice the size of or it's got to have some other revenues right now do you see why the story matters here because if I don't have a re explanation I can't give you a story and basically I've made up the entire valuation the 750 billion is a madeup number so I'll tell you what my story was that some of that difference would come from software you saying what software you know Tesla without software is is just a heap of metal even metal I don't even know what it's made of sitting in your garage without the software the car the car essentially becomes almost unusable right now the software is bundled with the car but there is a potential for that software to be separated from the car and you have to pay an annual subscription it might be premium features you want the FSD to the automated drive you got to pay $200 a year $500 a year I think there is a potential for business in my story there's also the other potential side gain that you get when you have automated driving right that's been a big part of the Tesla story is if you can truly automate the driving imagine starting a right share what's if you're uber or lip what's the biggest challenge you face you collect the fair but 80% of the fair goes to the driver of the car and the car they're driving right if you don't need a driver imagine running a right sharing business with no driver it's not going to be an easy business you still have to own the cars is there a potential yes so I had two other businesses which had projected you're saying but you could be wrong of course and it's not even could be wrong I will be wrong 100% of the time but to beat a story you got to come up with a different story and that's what I'm going to challenge you on I will tell you my story for Netflix and you said I don't like that story good then tell me your story I don't like that story is half the game I don't even know whether it's half the game it's tenth of the game that you I could have given you that I could have told you that myself I don't like my own story but this is the best story I can think of every number in your valuation when I point to to why are your margins 25% your an automobile company you got to back it up with the story this is the story I have for the company that explains why its margins can be higher than the typical company in the group now all of this requires that you understand what typical looks like in a sector right that's the easiest part of this equation at the start of every year I spent the first five days in the year playing Money Ball you seen the money movie Money Ball Brad Pit plays the role of Billy Bean Billy Bean of course was the GM for the Oakland A and baseball is a sport with a very long tradition of Storytelling without numbers right where you had Scouts who would come and said this guy's going to be a great pitcher why his shoulder you know he's got a crooked elbow and I remember watching a pitcher 23 years ago with a crooked elbow and he won 25 games a year and people would sign this guy for $300 million and he'd blow his elbow out the next year and Billy Bean got tired of listening to his Scout so it seemed to make up stuff and he said you know what I'm just going to look at the numbers baseball also is a sport with an incredible amount of numbers where everything you do is chronicled in a number right you walk it's recorded you strike out it's recorded he said let me look at the numbers he hired an MIT guy to run the numbers so who should I be signing and it made the Oakland A into a success not a World Series success but a playoff success which is you got to a certain point then you got hit a brick wall so first five days of the year I play Money Ball what is that mean I'm sick and tired of people making up crap the FED sets rates really this has become your excuse for why interest rates change on a year the FED changes rates me you listen to CNBC every day you listen to about 50 assertions that people make pass off as facts so my immunization against that stuff is look at the data you say 30% margins are not too high let me look at the numbers that puts you at the 80th percentile how is it not high say start of every I collect data on every publicly traded company in the world sounds like a lot of work right but it's not have access to S&P Capital IQ and so do you S&P Capital IQ has every accounting item on every publicly traded company in the world you download an Excel spreadsheet I do it to get perspective because I want to know what the typical margin is I need to know what the typical margin is for a Chemical Company if I'm Val BASF a good valuation is a bridge between stories and numbers because left to our own devices we do I I won't say strange things we do IR rational things remember I told you that we tend to hang out with people who think like us let me take you into a number crunching group and talk about the delusions that number crunchers share first because I'm a number cruncher and you could probably relate to these if you're a number cruncher and then I'll take you into a Storyteller group where I'm a little more of a foreigner but I've learned to kind of hang out with those people as well and talk about the delusions that they operate in if they don't have people from the other tribe if you hang out with number crunches here are some of your delusions you know you tend to believe in false Precision you think if you add more decimals things get more precise because nobody pushes back right if you're a Storyteller you rely a lot on anecdotal evidence you built an entire there's a business school built entire anecdotal evidence it's called The Harvard Business School right you know what the anecdotal evidence is case studies you know how many case studies have used in 40 Years of valuation zero it's silly to use a case study in valuation when you got 48 8,000 live case studies out there why you you go about concocting something that happened in 1998 and then break it apart here's my hope of what this class can deliver if you're a a Storyteller that's what comes naturally to you I hope you get comfortable enough with the numbers that you become a disciplined Storyteller the problem with storytelling is it's easy to lose all perspective tell fairy t if you can get enough comfort with numbers you will become a disciplined Storyteller if you're a number cruncher here's what I hope this class can do for you by the end of this class I hope you're willing to give your imagination a chance to let it run an imaginative number cruncher or a disciplined Storyteller I've been teaching this class I said for 40 years 60 MBA classes guess which group I have more trouble with every single day time in this class getting storytellers to develop discipline or number crunches let lose their imagination it's not even close I've always have trouble with the number crunches for those of you number crunches your climb will be more difficult than the storytellers because you'll be fighting every Instinct you've spent your entire lifetime developing right precision objective has become a bad word it's a sub everything is subjective why do we make it a bad word it's an estimate of course it's an estimate but you got to fight through that because that's the way you get balance in your valuation which brings me to this word faith I said know as I don't do valuation for a living I don't do valuation as a consultant I do valuation for myself because I want to be able to act on my valuations so what's Faith Got to Do with It to act on my valuation I need faith on in two things first enough faith in my valuation that I'm willing to treat it as value it's not easy to get right because you look at me I could be wrong in this I could be wrong and that you could second guess yourself you say look I have number I don't have any faith in it second I have to have faith not just in my value but that the price will correct to that value do you see why that's needed as well because you can be right on value and go bankrupt if the market never A J but what's the essence of faith if you ask me to prove that valuing companies is going to make you money I can't do it because that essence of faith is you know it's like going you know I don't know what your religion is but going into church or Temple or mosque and asking your religious person can you give me some proof that this God guy exists you know I've been I've been working really hard you know fighting temptation I'm not sure it's worth it I'd like some proof before I keep going down this road I'm almost always going to get the same answer you got to have faith but the essence of Faith also is it's going to get tested right anybody who tells you I feel absolutely sure is somebody you should not hang out in investing in valuation certain is not a word absolutely sure is not a word the essence of faith is you got to be willing to accept the fact that you will get tested and in investing it happens every single minute of every day if you actually act on your you know how what form it takes let's say you decide that now is the time to jump into Nvidia what took you so long I don't know but now you're on you decide it's undervalued you buy invia at $600 per share I think it hit 600 today next day you wake up and it drops $25 you know what that is it's God knocking do you still have faith say yes yes I have faith the day after drops another $25 knocks get louder do you still have faith you see why it's so difficult to hold on to faith that sometimes you act the market moves in the other direction you start to second guess yourself let it play out don't fight it it's human nature I remember when I was much much much younger 1970s I was taken to a talk that Mother Teresa was giving in in India and she said every day I wake up and I question the existence of God and listen if Mother Theresa can wake up every day and question the existence of God I can wake up every day and say did I get the Tesla valuation right it's okay it's okay to be questioning it's the nature of Faith but one of the things I hope I will show you I can't convey Faith to you I can teach you the valuation tools faith has to come from you trying things out and coming to your place of comfort but I will also tell you when I'm getting uncomfortable with something I did say I bought the stock and there are times when I've actually sold something and done a m c no I really don't have faith to hold on in terms of structure for the class we're going to spend the first first two sessions laying out the big picture so bring that valuation intro packet that that you can print in session 3 to 12 we're going to talk about the inputs that go into intrinsic value discount rates cash flows growth rates the mechanics of valuation and you're going to get really impatient because we're going to Value pieces of do pieces of valuations but we're not going to actually value an entire company hold on because in SE sessions 13 to 16 we're going to talk about storytelling and actually start to Value company after company you can see it play out and we're going to know spend some time on what I call the Dark Side of valuation these are the companies that people give up on because things are too difficult there's too much uncertainty session 17 to 20 we're going to talk about pricing how to do it right what are the different pricing metrics why do you pick one over the other and then we'll spend a little time on tangents one is what's called asset based valuation some of the parts value you value pieces of companies add them all up you know you take a multi- bus company like United Technologies you value each piece or Disney you value te Parks you value broadcasting but I'm also going to dig deeper what if you have a company like Netflix can you value a subscriber can you value a user to Uber and because with subscriber user customer based companies and in sessions 2225 we'll talk about applying options in the context of different aspects of valuation session 26 we will look at m&a valuation I'm glad I've never been asked to teach a class in m&a because my class will last about 30 minutes and then I'm done because there is really nothing separate about m&a valuation other than two things that come up in the context of Acquisitions one is What's called the value of control and the second is synergy and in case you think Bankers who do this all the time know what they're doing you know how the value control they at 20% I'm not kidding it's a I'm not being physician they just add 20% to the Target company now they value Synergy they don't it becomes a plug variable it's the difference between whatever you paid and whatever the price was and we ask why did you pay the premium Synergy that's not the way we're going to approach it we're going to talk about what's the value of control what's the value of synergy how do you put numbers on those I also want to talk about value enhancement because for much of this class will be passive what does that mean I'm going to give you a company like Disney to value and you're going to Value Disney with Bob Iger running the company the existing management running the company but with Disney that question has now been opened up is Bob Iger the right person to run the company Nelson pels Has directly challenged Iger saying this is not the way to run a company in value enagement the question we'll ask is if I gave you a company to run how would you increase the value of the company how would you change the value of the company value announcement is about opening the doors going inside this is actually my corporate finance class playing art in valuation because in corporate finance we look at companies from the inside out what's the right project to take how's what's the right financing mix for how much should a company pay in dividends so value enhancement will be session 27 and then we'll have a grand finale where I'm essentially going to take what you do during the course of this class and that's going to not be mysterious in a minute or two and you're going to see it play out out as this class this is too late it's preseason prep but not really not you can catch up on another we good now in terms of the skill sets I need of you these three you should already have in your classes but don't assume just because you've taken a class that it's stuck right the first is accounting I have a very low opinion of accounting and I won't hide it but let's face it it is the language of business if you don't know the difference in operating a net income you are completely and totally screwed in valuation you need to understand enough accounting to be able to read financial statements the problem with accounting classes they get so mixed up about what they're trying to do they don't deliver that basic skill so I create my own version of accounting a pure accountable blanch at this class 12 sessions this is all the accounting so if you want to look at it's on on on my website it's 12 sessions about 3 hours is taking you through accounting as I see it the perspec of class if your accounting is a little weak get it out of the way get it get strengthen it doesn't take a lot of work second for moneyb you needs statistics the unfortunate reality is that when you take a statistics class I don't know about you but my reaction is when will this class end when will this class end thank God the class is over never again will I see it again which is unfortunate because statistics is what you need in the world you liveing now because you can no longer this is not 1981 We complain about not having enough data we're drowning in data and statistics allows you to make sense of that data and finally you know if you're still struggling with that PV button in your calculator get that struggle out of the way with you winning hopefully not the calculator winning if you can't do present value still struggling with time value of money what is a bond how does it work there's a class I put together in the basics of what I call Foundation all of these you should have got in your classes if you feel comfortable with your foundation Let It Go but if you don't no just as a not of warning I will haunt you for the next 15 weeks every day unless you block me which I strongly recommend you do not you will hear from me every single day let me take that back there's seven days in March I will leave you alone your break but other than that every single day you will hear from me so right after this class today you will get a short email about this is what we did in class I was in the class already I know you were here physically but sometimes mentally you might have left and this is when you were gone this is what we did right so Monday usually about the class Tuesday you'll get my valuation of the week so tomorrow you're going to get your first GameStop valuation which will describe what I did layout the valuation of the week I'll create a Google shared spreadsheet not for the GameStop because it's to but for every valuation you I do starting next week I'll start a Google shared spreadsheet where I will put my valuation as a first line and you can then go in and tweak the numbers do whatever you feel you think is the right thing for that company and put your value let's make it a crowd valuation let's see how how it works out Wednesday you get what I call a weekly challenge what's a weekly challenge completely optional much of this class I won't Force you there if you want to go there as I said it depends on what you want to take out of the class okay the weekly challenge is to take what we did in the Monday and Wednesday classes and extend it to a point where he said if you understand this let's see if you can try this out so it's not just a more difficult problem it's a way of thinking through if you understand this can you build on it Thursday you'll get an email about the project you're saying what project I will start on it explaining it today but this is something you've already started you're already thinking about your projects I don't I'm not thinking about the you are think about a company get it started that's going to be a project you're going to value a company over the course of the semester and every week I will I call this my guilt email because I'll give you a timeline on where you should be in the project knowing fully well that you're not there you're not even started and hope that as I get further and further the distance between where you are and where you should be widens you'll be prompted to take action rather than basically what I'm trying to stop you from doing is wait till the 14th week to pick a company and load it all up now so that's the project email on Friday I'll send you a link to a webcast where essentially we webcast about practical how do you read a 10K how do you find pure companies for your company so essentially about the mechanics of bringing data you know working with it in in Saturday You' get a newsletter not much news but basically it'll reflect where we are in the class class this size it's easy easy to get lost so this is think of this as like a GPS this is where we're going this is where we are in the lecture notes in case you completely lost track this is what's coming this is what happened and Sunday I'll send you my solution to the weekly challenge saying you know remember that Wednesday challenge if you tried it this is what it looks like and I'll send you a preview for the week to come I won't take attendance I've never taken attendance but I'd like you to be in class but I also understand with 300 people in the class that some of you will have to miss classes for good reasons or bad I won't ask you for your reasons and if you do those classes will be recorded on Zoom but don't make this an entirely Zoom class um that'll be a waste of your time and my time because basically the whole idea of taking a class like this is to be in class to ask questions to be involved now so the only thing you need to bring with you are the lecture notes for the class no books you know in fact there will there are no required books for this class I have five valuation books you don't have to buy any of them some of them are OB seenly overpriced I wouldn't buy those books myself so why would I force you to buy them so it's you know it's up to you but if you do miss a class catch up there's no excuse for saying i' I missed two weeks of class I don't know where we are in the class because the recordings will be there the lecture notes will be there everything you need for the class will be there if you feel the urge to buy a book I have five books there should be a sixth one hopefully during the course of the semester I have a new book called corporate life cycle and how it plays out and valuation but I'll let you know what it comes about if you have an Apple device an I you know either an iPad or an iPhone if you have an Android God help you I don't really care about you now but if you have an Apple device go to the App Store and type in the word u value it's a it's an intrinsic value ation app that I that that a friend of mine an sundram and I created if you feel the urge in an airport actually value a company while you're sitting there one of those strange people know this app will help you do that so download the website for the class everything you need I know there's supposed to be a bright space I'll tell you up front I will never visit that after that first day I'll put the stuff there and the the zoom links might show up there that's you know it's a closed system I don't like closed systems so everything for this class will be in the in in the link that I sent you that contains the links to every other part of the class I'll also take the the zoom sessions that are recorded convert them to YouTube videos part of the reason for that is um YouTube adjusts to your bandwidth so if you're in an airport with a very limited bandwidth you try to get on then NYU sat and watch the video it's not going to work but you know with um with YouTube that should work and every email that I sent as I said every day I would start to collect into one document so you can there's no excuse for you say I missed that email that that excuse is out of I'm essentially my job is to take away every single excuse you can have ahead of the fact I'll still still miss that you know one excuse or another but this is basically every email is going to be there the Google Calendar for the class you can check out because there's a quiz I did move your second quiz from April 1st to March 27th originally was April 1 so if you got the very first link and you check most of you might not have checked so it's not an issue but I moved to March 27th which is the one but um the dates for the quizzes are there the final exam date is up as well which is unusual because NY usually doesn't put them until later but it's scheduled for for May 13th a few of you have reached out to me because you might want to leave before that weekend no I will be giving my MBA exam on the eth so any of you need to get it done and you have you know do it only because that's two days after the last class you don't want to do it unless it's absolutely necessary there will be an earlier version of the exam as well my Twitter feed is right there and I you know I and um it's I'm trying to get my numbers up on Twitter to 400,000 I'm a so I will encourage you to have five or six different emails and follow me on all of them if you can you know I'm it's a pure numbers game now my my revenge against my kids is going to always have more social media followers than you so basically this this is advancing that mission yeah and if you if you if you still have time on your hands I don't see how you could and there more readings on the site finally and this is the last thing for today it's um I know that that every class is about the learning but I also know that you have this very pragmatic need to get good grades because it affect and I will follow the same structure that all of the finance classes follow which is a rough breakdown of about 25 to 30% a about 50 to 55% B know but here's you know in terms of how I will make that judgment you got to leave that up to me now if if you can value just about anything then I think you deserve an name my test is how do I know you can value just about anything if you can value most things you deserve at least a b or a B+ if you can value some things which is a very low threshold then I think I should give you see if you can value nothing then I see the point of this class you know so everything we do in this class is to give me enough information so I can make those gradations so here's what you will see you will see the three quizzes and the way the quizzes work is each quiz is worth 10% the finals worth 30% there's a project that you will do as a group project and that's a first mission for you is to find a group and join in if you cannot find a group I will create an orphan list okay and it'll be pathetic you got to go add yourself to the list nobody wants me and maybe a group of Orphans can get together and and kind of GA but I will you know but I will not put you in a group because I think that again is an excuse you can then use against me you put this bad person in my group you pick somebody toxic you live with that toxic person I will not be the one responsible so that's the 40% and I will to pre prevent premature graduation require a part of the pro project be turned in halfway through not for grading but for feedback your intrinsic valuation Midway through the semester it'll be a window of about four days and so I think the the date that I had was uh March 29th and I would try to get back your intrinsic valuation sometimes saying this is great some sometimes with a few fixes to make last last thing on the quizzes and this is the last point I want to make each quiz is worth 10% but if you do miss a quiz I will take the score on that quiz and spread it out over the remaining exam so no strategic quiz missing you know what I mean by that you do really well in the first two quizzes you're going to be tempted to miss the third quiz saying that'll make my first two no that doesn't work it doesn't work that way it'll and if you take all three quizzes the bonus you will get is I will throw out your worst quiz or replace the score in your worst quiz with the average score and everything else you've done in the class so if you get a 10 10 zero and 30 which is perfect scores and two quizzes on the final I will make a third quiz also into a 10 so depending on how badly you do on your worst quiz relatively other exams I will do that one time adjustment and you can look at the rules for the quizzes it's open book open Notes it's not about testing you on what you memorized it's you can bring in calculators you can bring in the entire library for all I care but it's 30 minutes you don't have much time to check things out as it is individual work I hate to have to add that quizzes are individual work no cultural exceptions here on we work as a group culturally that's fine you know in the quiz I want you to work on your quiz and I grade every one of your quizzes so it'll be part it'll M it won't be multiple choice it'll be partial credit give me a reason to give you a score rather than to take scores away from you I will see you on Wednesday