you you for rest up with the CL didn't dress up for the class I hope next okay folks welcome before I get started uh I noticed quite a few familiar faces how many of you were in my corporate finance class last year last last spring it was a year ago last spring no that's it oh interesting but what happened to all those people in the corporate finance class they disappeared um how many of you are not Stern mbas are you getting my emails yes okay good because I if you're not a Stern MBA and you have a nyu.edu address Stern sometimes have have trouble with you how many of you second year mbas graduating after this semester okay how many of you take my corporate finance class this semester with so I'll see you twice every Monday and Wednesday you're going to get sick and tired of me because you're going to get emails from that class and this class you better have a way of organizing the two otherwise you're going to get really confused about what's happening when so you know so already you got the corporate finance email there's another one coming in valuation but as you go through the semester you'll lose track of which than also if you're asking me a question clarify which class it's related to because I have no idea where you you know where it's coming from so this is obviously EV valuation class and I will tell you a story to kind of give you a history for this class I came to NYU 1986 fall of 1986 I was hired as an assistant professor I was given a class to teach it was a class called security analysis guys heard of this class it was actually a class that became famous in the 1950s at Columbia University taught by a guy called Ben Graham heard of him if you haven't heard of him you probably heard of his most famous student Warren Buffett went through his class so it's a class which was legendary they hand it over to me and I take one look at the class and I said look I don't want to teach this class it's the most boring class ever because by 1986 it was showing its age it is four weeks on stocks and three weeks on bonds and a week on Futures a week on options and five weeks on institutional detail like what there was an entire session on listing requirements for the New York Stock Exchange teaching was so easy in the days before Wikipedia you could actually get in front of a class and start going through and everybody took everything down today have you tried that people be checking Wikipedia while you did that said why would we need a class so I went to the head of my department and I said I don't want to teach this class he should have fired me on the spot he's a nice guy he said what would you like to teach instead I said I'd like to teach evaluation class nobody was doing it anywhere in the country but I wanted to do it 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 there wasn't enough stuff in valuation to fill a class there were no books in valuation you say what about security analysis written by Ben Graham does anybody know which year the first edition of security analysis was published just even if you don't know guess what when do you think 1934 know the world felt like in 1934 you was still in the the throws of the Great Depression if you read the security analysis book and very few people who claim to have read the book actually have read that book it's an incredibly dense book what you would see is a book rooted in avoiding risk and the way I describ Ben Graham security analyst it's about treating a stock as a bond with price appreciation in other words the dividends acted like coupons and you got a little price appreciation but you avoided risk but don't take issue with them because he wrote the book in 1934 that's exactly what the world looked like from a risk-taking person nobody wanted to take risk the point is 1934 security analysis you know you're valuing a bond stock like a bond you want dividends you want them now you want cash flows who cares about growth right and Nvidia would never be worth any money in a b gr security not because he had no vision but it came from a very different perspective that was the only book around there was really no work done on valuation it was considered too practical right academics but I really really wanted to teach this class and I discovered very early in my academic life that if you want to get anything done at a university and take this as advice if you're trying to get anything done at the best way to do it is to do it subversively don't ask for permission because if you ask for permission you know what will happen right a committee will be formed you guys have experience with committees they meet and they meet meet and they meet they forget what they're meeting about and they baby committees that they call subcommittees and it's very incestous they report each other nobody's any has any what they're meeting about and 40 years later they'd come back to me and say you can teach the class but I'd be too old to do it so I told the head of the department I teach your security analysis class I walked in shut the door remember it was downtown now The Graduate business school was downtown then there were no cameras in the classroom a shut the door and they have no idea what happens inside the room I could be teaching cooking for 15 weeks and nobody would complain if you gave them all a and I taught my first valuation class you know how long it took them to catch on in 2008 I get a call from the Dean's office so we here teaching evaluation class I said yes I've been doing it for 22 years they said we don't see it list anywhere in the course schedule 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 for a dozen years I taught this class called equity instruments and markets I'll make a confession I am not that interested in markets I don't much care for instruments and even Equity I don't feel an attachment to you take equity instruments markets out of all your left with his and I T valuation instead said I've been hijacking this class and teaching valuation instead they said that's not right you should call it valuation I said I agree so if you look at course listings at NYU valuation shows up for the first time in the fall of 2008 this might be spurious correlation but that's when the world went into crisis so maybe we should have just left it at equity instruments and Market maybe this class is responsible for the entire world coming up part this semester I'm teaching this class and then at 3:30 I'll go teach the undergraduates exactly the same class and it'll be my 59th and 60th semester teaching this class and I'm going to say something about this class that's going to encapsulate how I think about valuation everything I know about valuation I've learned in the course of teaching this class let me explain I started my first valuation class was in 1986 one year into the class 1987 fall of 87 we were still downtown at that time The Graduate business school was right next to the American Stock Exchange I finished teaching my my my valuation class I come to my office I look out of my window and I see that everybody from the American Stock Exchange is out on the street all the Traders are out so what happened fire alarm went off it was October 19th of 1987 does anybody remember what happened in October 19th of 1987 it was a Monday that doesn't have to be said Monday is bad things happen I don't know why Monday there are so many black Mondays though what made this Black Monday so black the S&P drop guess how much 22% in one day think of what that would look like in today's world right a 22% drop in the S&P 500 would be like a 800 Point drop in the S&P 500 it would be like a 10,000 Point drop in the down we'd freak out right you'd wonder whether you'd have your jobs at the end of the semester and people were freaked out that was a Monday Wednesday I come back in front of my valuation class and get that's what the first question I'm asked us we talking about valuation how with your valuation tools can you explain the entire Market dropping by 22% in one Dayan you can explain one company dropping and bad things happen payals said expectations too high Tesla must did something crazy but the entire Market drop you wiped out trillions of dollars in market cap essentially overnight I would be lying if I said I knew the answer but I I'm incapable and my kids tell me this saying the words I don't know so I try I tried to talk about what it is with an evaluation metric that explain why markets might drop by 10 15 20% one day and I started thinking about Mar Market crisis that day and the way I think about Market crisis now was born in that moment so when you go and look at my discussions of the 2020 covid crisis the 2008 Bank you can see the seeds of that class but it started in that class not by reading a paper not by listening to a talk but by a question asked in class let's move forward into the 1990s in the 1990s you saw a phenomenon in public markets we'd never seen before companies with small revenues no clear business model and big losses going public these companies had always been around but prior to the 1990s where did they get the capital I mean comp young companies have always been around but they got their capital from venture capitalist 1990s they jumped the queue went directly to markets of course I'm talking about the boo I still remember the day again in 1997 student of the class says can we value this company called amazon.com they said stupidly I said yes I don't see why not at that time there were an online book retailer not even an online retailer online book retailer and during the course of that class I valued amazon.com and here's what I discovered almost every input I needed for that valuation there was nothing in the literature about how to estimate cash flows and discount rates and growth rates and risk for a very young company we were so used to history based for forecast you know what I talk about take 10 years of income statements project things out so everything was like pulling teeth and I kept a journal of how many roadblocks I ran into in valuing Amazon in 1997 and the journal by the time I was done valuing the company was 75 pages long because you how many roadblocks are do I never throw away anything I WR so I slapped a title on that on that that that that journal 75 pages I called it the dark side evaluation C and amazon.com be valued CU what I heard from people is don't even try you can't value companies like that I still hear that with young companies you cannot value companies like that that became one of my books it's in it's in its Third Edition called The Dark Side valuation it's now about valuing any company where you feel uncomfortable but that day was when I started thinking about how do you value young companies and if you look at my valuation ation of Airbnb from 2019 or zato in 2021 you see the seeds of my of my Amazon valuation play through because that's the Playbook I had to develop because somebody said can you value company called amazon.com incidentally Amazon is one of those companies I valued every year for the last 26 so somewhere along the course of this class we talk about how valuations evolve over time move forward about 10 years it's 2008 we're in the middle of middle of Market crisis a market crisis caused by Banks behaving badly here again question comes up what know companies behave badly all the time but usually the pain is felt primarily by that company but when Banks behave badly we all feel the pain it's called systemic risk since 2008 it's become this big area to exam so again somebody in class says why when Banks behave badly to the rest of us feel feel the pain so again we had to talk about how when companies behave badly the side effects can affect the values of all of the companies around them at least for some companies and then you get to the last decade and you get the decade of what I call the numbers company me explain yeah take some of the biggest IPOs last decade Facebook 2012 IPO what's the most impressive number about Facebook is it its revenues no there are lots of companies 10 times its revenues it's not the margins could be the data but you have no idea what the data is it's the number of people in its ecosystem you know how many people are in the Facebook ecosystem remember Facebook includes Facebook what WhatsApp Instagram collectively those ecosystems have two and a half to three billion people it's kind of a scary thought one out of every two adults on the face of the earth is on a Facebook ecosystem you think so what 2017 I remember the class again I'd valued Uber in my class as I had starting in 2013 every year somebody in class said that's a valuation of uber but can you value an Uber Rider you see what the question is right can you value what the value Rider is I said let's start simpler let's value a Netflix subscriber you'd see why in a moment a Netflix subscriber is easier to Value than an Uber writer if I asked you what the value of a subscriber is to Netflix explain to me how using the tools of valuation you'd come up with the value of a subscriber to Netflix anybody want to give that a shot Richard you're Netflix I'm a subscriber how do you make money off you have Netflix I do not okay then I'll pick somebody who doesn't do you have Netflix okay as an you be the subscriber I'm Netflix how do I make money off you in fact you don't even notice you pay this auto payment every month you get this little Netflix charge you don't even notice the amount it's a very great it's an amazing system it could be $222 month and you have no idea because it just sends you a message but every month I collect Subs so to value a Netflix subscriber let's work this up as Netflix I had to estimate how much I collect in subscription revenues what else do I have to estimate how long you will stay on as a subscriber right what's that driven by it's driven by what's called churn rates how quickly so my Netflix's churn rate is about 90 is about 4% basically 96% renewal so let's say your expected life as a Netflix subscribe is 10 years so we're almost there what do I do I take the next the expected subscription revenues over the next 10 years there's probably some expense associated with servicing individual subscribers I'm not talking about the content cost because for Netflix that content cost is a fixed cost they don't say well you know she signed up stranger things We'll add another actor on you know we've got a new subscriber the cost is the cost so I take the present value of the subscription revenues net of those servicing cost I've got the value of subscriber to Netflix and I did this in 2019 it was about $500 per subscriber but that's if you're a US subscriber if you're an Indian subscriber you still have to pay subscriptions but you know what the average monthly subscription is in India it's about one quarter the subscription in fact there's a version of Netflix in India where you can watch only on your smartphone and the reason it there a lot of Indians whose only device is their smartphone thanks to Reliance GI which would collect a premium of every company that lives off this a typical Indian subscriber and this is something that I always wonder about because Netflix in its and when when it reports has an earnings call talks about how many subscribers at I keep waiting for the day well one of the analysts asked the question right so when you tell me I add 1 million more subscribers given what we just said about a US versus Indian subscriber what's the question you should be asking the Netflix hereo where did those subscribers come from right I have never heard analysts ask that question which tells you that people don't think about what the value of subscribers just a number of subscribers so valuing a Netflix subscribers is easy now value valuing an Uber Rider is more difficult let's do a survey how many of you are Uber country be a subscriber you have Uber on your phone right now I could go around and ask you how much you use Uber but even without going the answer the question you can already see some people don't use much Uber some people like my youngest son I think uses Uber to go to the bathroom I mean he has like six Uber charges I I keep use my credit card still because I want to know where he is on a Saturday night that's more important to me than the money I'm spending six Uber charges between 9 p.m. and 11:00 p.m. say k what are you doing maybe the Uber driver comes into his apartment carries him to the bathroom not a bad service to offer young you know if you're too drunk the Uber driver will come in and carry you on with $8 charge but the problem is you can have people who use hardly any Uber and people who use Uber $300 a month so for an Uber Rider I had to look at the average right and you say how are you going to get that we see the gross Billings Uber reports that they also tell you how many writers they have so I value NOA writer I did that because somebody asked the question and in fact I'm glad I spent time doing that because the approach I used I then used to Value Spotify when it went public any subscription based company which brings me to 2020 March 6th of 2020 I was teaching this class D Paulson we all get emails at the same time from NYU you know what the email said right there's virus going around next week is spring break go home a week early we'll be back in three weeks complete line so I live in San Diego I took off I went home I didn't come back for a year a why because we basically stayed but between March and April the entire global economy shut down isn't that long ago remember that all stuck in our house and I was still teaching the class on zoom and March 23rd I decide I want to Value boing think about it you're in the middle of a shutdown there are no planes flying and your value accompanying the heart of the storm right it makes aircraft that nobody but one choice is why don't you wait for the crisis to pass this is often the response here because if you do this you'll just roll from crisis to crisis you'll never never get anything done and what's the point of waiting you have to invest in in boing today that's a choice you have to make so March 23rd at the peak of that Mar Market crisis the S&P lost 36% between February 14th and March 20th of 2020 six weeks on March 23rd the at Peak hysteria I actually valued Boeing in class I recorded it it's on YouTube now it's basically about valuing companies essentially when the world is melting down around you when the economy is shut down the point I'm making is whenever I think about things I do differently in valuation now they have their roots in somebody saying can we value that maybe during the course of the semester you're going to ask me a question to which I don't know the answer I'm not going to say I don't know the answer but I'm going to say I'm going to try how much value has Lion Messi added to Apple what's messy got to do with apple you know Apple has the exclusive rights to Major League Soccer in the US you didn't even know there was Major League Soccer that's a prompt for Major League Soccer because even soccer fans will watch the Premier League but not major league soccer when Lion Messi signed up for Miami the number of people and it's a subscription it's like $799 you can pay on an annual basis the number of MLS subscriptions doubled after Messi joined you think when he leaves they will leave maybe they will but that could a chunk of that could be long term can we value it yes we'll have to make some estimates here's a trickier one how much value does Taylor Swift add to the NFL and I'm not being phous because she's broaden people who watch NFL games who never watched NFL games before I me the NFL's weakest link has always been attracting young women to watch the game and now you're getting 18 20 25 year I mean a Taylor Swift is an incredibly shrewd woman I mean she remember she actually also know recorded a concert was the biggest one of the biggest hits and if she can work this out you know she should go to the NFL I'd like about 5% if Super Bowl revenues because know who knows how much higher their advertising rates are going to be because my point is everything which has cash flows as a value and there are question and almost every question you see out there so here's what I'm going to do and this is something you're going to notice with every single class through the semester I'm going to start the class with a quiz not about the previous class but about what's coming that's stupid you're quizzing us and then talking about it because what I want to bring home home is almost everything we talk about during the course of the class you could have figured out yourself and I might give you a mechanism that lets you think about in a more structured way nothing in this class should be mindblowing and perhaps the quizzes will give you an opening to see that so here today's quiz is going to be very low Tech it's about why you're taking this class and what you think this class is about some want some honest answers here why are you here maybe I should list it's an easy that's as a starting point it's not but you know maybe that's why here is it because you think taking this class will make you richer how many of you are thinking this is come on you can be honest thank you it's not going to make you richer at least and it would be false advertising to say if I gave you the Val Val ation tools you're going to get rich you know how much money is being wasted around the world now because people are offering if you take this you'll be rich and I'll explain why that connection between learning valuation and getting rich is not just not Leal it might not even be it might be wavy lines that lead to the wrong place and maybe you are something else in your previous life and now you think learning valuation will allow you to become an investment Bank a private Equity person maybe it's job driven right there are valuation jobs and and that's you know maybe it's to impress it's always impressed when you say I'll tell you how much TW Taylor Swift is adding to NFL and you give them a number 38.5 million now people have no idea what he said but they're too intimidated to ask you any more questions and maybe and this is I think perhaps the reason that makes the most sense to me it's to give you the tools to understand when you're fooling yourself let's face it the biggest enemy you have as an investor looks at you when you look in the mirror it's you maybe this class will give you a sense of hey you know when am I making assumptions doing things that are led by my it's not it's not it's not the company that's doing it because I want to to buy this company so pile that away as I said not towards the end of the class I'll ask you whether I delivered and whatever your objective here's the second question I'm often as valuation on art or science so give me a PRI and I'll give you the choices valuation is a science valuation is an art valuation is Magic it's what H and young would like you to believe that you can't do without as magical you get to 5 people in a room and they do magical things or maybe it's none of the above maybe you have your own characterization of what valuation is so again I'm not prejudging what your answer is make a choice and finally I'm going to ask you a question about yourself each of us has a stronger side the legend of the left brain and the right brain it's been disp there's no such thing but let's stay with that Legend right left brain controls rational most right brain or the reverse might be true one half of your brain is rational the other half of your brain is story telling I want you to look Inward and think about what you're more comfortable with is it working with numbers or is it telling stories I said no right answer this is about you saying how would I know you've known for a very long time you knew in sixth grade I knew when I was 12 or 13 what I was and it happened after my first English literature class I was asked read M dick and I did I was a good kid came in next the next day ready for a discussion of Wales and captains and harpoons and I noticed 20 minutes in nobody was talking about the whale so I put up my hand and I said when are we going to talk about the whale and and I remember the instructor saying there is no whale he said what did I read the wrong book I distinctly remember a big fish running all the way through the book she said it's a metaphor and my jaw dropped and the rest of the class was about hidden meanings in the book that didn't even know had a meaning in the first place I remember coming out of the class with the singular conclusion I said never again am I going to subject myself to this kind of and my high school life was laid out for me I avoided the literature classes like the like the plague it was algebra 1 Algebra 2 algebra 3 out of high school and these were the good old days you know what college looked like in the good old days there was no Core Curriculum you know the Core Curriculum is right they make you waste the first two years of your life taking things you don't want to take because they lie to you until you get a rounded education it's complete lie you know why they make you take history because with without you required to take history there would be no history Department those days you were you could take a you could basically jump in if you numbers person you got a Quant degree in what accounting engineering mathematics science and you got a Quant job and who do you hang out with other Quant people and you never noticed you all strange people because you just talk to each other like watching software engineers talk to each other they have no idea how how odd they are right staying up until 3:00 in the morning and working on software is not normal but that's all you hang out with what numbers people did at the same time there were people who came out of that mob de class saying this is amazing hidden meanings and everything they poets my youngest son writes poetry he show showed me his first po I don't think he's going to show me anymore he said dad what do you think and I said Kieran aren't the last word supposed to rhyme my vision of poetry is like nursery rhymes I got stuck and know when I was sick he said Dad you'll never be a poet and said you're right they take literature one literature two literature three and then they go on to college and they do a story degree history major from year and then graduate and then they discover that even Yale history majors don't make much money it's an unpleasant truth right because you're you know and after about three years of poverty stricken wages you say I'm tired of this and you quit and you're back here right I mean let's face it now lots of you from Liberal Arts majors are story people you tried the story job you might have enjoyed the job but some point in time you got to make a living I'm going to ask a question and as I said go with your gut how many of you are more naturally numbers people okay how many of you are naturally story people okay the numbers people outnumber the story people but not that much it's about 2/3 and 1/3 who do you think is going to have an easier time with this class you think the num usually you think numbers people because what do you when you think valuation what do you think you think Excel spreadsheet and numbers hold on for just a while because I'm going to talk about what you need in valuation and you're going to be surprised at what you find especially if you're a story person hold on don't give up hope yeah they might have an advantage on the third decimal point but you have an advantage on something substantially more important in valuation so let's put this away and open up yourself because is it the logistics right you know there are three buildings in the school this is how NYU works the business school is actually wedged between an old building that was called Tish Hall and another old building called shimin and any given moment I couldn't tell you which building ourself you notice with the elevators you take the elevators you take the wrong one you end up on the wrong floor you spend a half a day trying to find the right floor good luck I think it's by design my office is in kmac 969 which is I think this building but if you walk across that Corridor it becomes the other building so know so take the elevators in this building whatever those elevators are my email address is probably the quickest way you'll get a response no because I do check my emails frequently my homepage will talk about because a lot of the stuff for this class is there and it'll give you access to the resources my office hours are just before this class I will create a zoom link for the office hour in case you cannot physically be I'd rather that you came into my office I'm a little tired of Zoom office hours but if you can make it only on Zoom I'll have zoom running on the side the teaching assistants are can and Allan both of whom took this class last year so they're completely aware of everything in this class that good resources they will be they they they probably haven't emailed you yet but sometime this week they will email you with office hours and the timing for a review session every week where you basically take what we do in class and apply from problems from past quizes so let's start with that first question I'm going to spend the bulk of the rest of this class on laying out the themes of the class and I'm going to argue that the next 45 minutes are perhaps the most critical component of this class because after that we'll talk about details and specifics but this lays the philosophical foundations for how I think about valuation let's go back to the first questions valuation is science or an not let's take the first one science is mathematics a science see only pure science fact mathematicians are convinced that the rest of us are imposters think about what what it is about mathematics that makes it a sense can you has it a guess what is it that makes mathematics a science the fact that it has a def definitive or I can give you finance models that have definitive answers but the problem is they're definitively wrong right because in finance you can come up with defin it's not just that it's definitive but it is absolute it's either right or wrong you get the inputs right you get the output right physics is mostly a science if we all manage to get to the 11th floor get one of those windows I think they're kind of sealed shut but open and jumped out we don't fall in the order of our IQs or where we are in the organizational structure the laws of gravity are the laws of gravity you can't argue with it physics is mostly a science but the essence of a science you get the inputs right you get the output right can valuation ever be a science zero chance of being science in fact one of the things that I'll talk about this more that I'm going to send you every week is the valuation of the we what is it I'm going to value a company what company a company I want to Value this is all about me right so tomorrow I'm going to send you my valuation of Tesla why because Tesla fascinates and I did my best I took the information on Tesla I made my best judgment I came up with the value of this I did this originally in November and I came up with the value 180 now with some adjustments it's you know because the risk free rate has gone down the risk premium has shrunk it's around 192 but if you ask me are you certain my response is are you out of your mind how can you be certain about the value of a company like Tesla because so many things are going to change I can get every single input right and my output is going to be wrong 100% of the time and I'm okay with that why because I know valuation is not a science is valuation an art painting an art not painting your you know painting I'm talking about like come on Alisa that somebody thre soup I remember taking my youngest my oldest son when he was 8 years old to the Met for a Picasso exhibit and 8-year-olds and museums don't mix well so with substantial bribery I think I to get him two baseball cards and a couple of hot dogs he lasted 30 minutes in a Picasso exibit I come out and I say Ryan what did you think of that exhibit he said dad I was not impressed said that's Picasso exent he said dad that guy can't get the nose in the right place have you noticed there by Picasso the nose comes out of the side of the head the top of the head the back of the head or no nose at all it's almost like he was drugged or drunk which in Picasso's case might be both but we've all gathered together said Picasso are special it's worth 130 milon the essence of an art is you really cannot teach it I know you've seen paint by the numbers you know you can make something that looks like a pi kaso by painting by the numbers but I guarantee you your painting is not going to be worth $130 million or even a130 it look like a Picasso but it's not a Picasso the essence of an art is you cannot teach it I hope valuation is not an art or I wasted 40 years of my life trying to teach something that cannot be taught so he's saying if it's not a science and it's not an art what is it it's a craft I'll give you the discipline that I think is closest to valuation it's cooking how do you get better at cooking you could watch the Food Network right you could watch chopped episode after chopped episode and Beat Bobby Flair after Beat Bobby F and the end of two weeks if I ask you to cook something good luck with it you don't learn cooking by watching TV you don't learn cooking by reading cookbooks you learn cooking by cooking you got to go to that room in your apartment called the kitchen I know you've been avoiding it for a while because you had take out for so long and the first time you cook what happens disaster I still remember the first time I scrambled eggs nobody told me I was supposed to spray the damn pan I scrambled the egg they look great but they won't come off the pan pan and eggs go in the trash I learned a very important lesson about scrambling eggs spray the damn pan or I tried to make something where they said whip the egg in till it has a top I whipped and I whipped and I whipped and it just stayed in EG and my wife came home she said let me show you how to do it whips it it actually stands up it's it's kind of eerie the white alone I'll have to do a lot more practicing you learn cooking by cooking and the more you cook the better you get you learn valuation by doing which means this is really bad news but take it for what it's worth these 26 sessions with me are kind of useless all the books you will read won't help you that much you will learn valuation by valuing coupls you know why I do this valuation of the week because I want you to not just try your handed valuation but I want you to try your handed valuing very different companies so this week it'll be Tesla next week I'm going put out BK in stock about as different from Tesla as you can get the week after I might go to Turkey and give you an construction company in Turkey I will value the company I will do the dirty work and your initial response is but I don't feel comfortable doing this yet I'm just starting the class change what you feel comfortable changing and I'll make a prediction when I do this valuation of the week I create a Google shed spreadsheet where you can try your hand and I create the infrastructure the spreadsheet you can change the inputs and come up with the value and in the Google shared spreadsheet you can see the values that everybody trying this company so it's the 130 people in this class plus the 350 people in my undergraduate class plus I keep the spreadsheet open in case people from outside want to join in as well so you get 500 600 people it's like a crowd valuation of the company now early on as I said you feel said I don't enough changes the third decimal on the risk free rate come up with the value very close to mine and say I got value exactly like yours you know when I know this class is working it's somewhere on the fifth or the sixth week I'm going to value a company and you're going to come back to me and say I got a very different value expecting me to push back and I'm going to say congratulations the class is working so you don't have to do so let me be clear there's no credit for this you don't have in fact this class is a little bit like drinking out of a house right there's T coming at you you have to pick and choose what you have the time to do I think that you will learn more by doing the valuations of the week than you will by reading another 50 pages in my valuation book but you pick and choose where you want to spend your time because I understand you only a certain amount of time for this class but that's the essence of a CRA is you learn by doing and the more diverse your companies the more you will second big theme for this class there are two words in investing markets appraisal that I people use interchangeably and I blame both Academia and practitioners for this and the words are price and value you know why Academia does it right because Finance as we know it was born out of efficient markets in the 1960s in an efficient market price and value are interchangeable I'm going to draw a distinction here I'm going to be a bit of a bit finicky about this all through the class you can say I valued something I'm say I'm going to stop you say did you value it or did you price it so let me draw the contrast we know what drives the value of a company we've known for a long time it's cash flows growth and risk you can dance around this as much as you want we didn't invent this a 100 years ago the Venetian glass maker in the 1400s who sold his business based on cash flows growth and risk values driven by cash flows growth and risk in the last century we've built an INF infrastructure that we've attached an acronym to DCF but a discounted cash flow valuation is not a a theory it's just a way of bringing cash flows growth and risk into into one valuation so that's why cash flows growth and risk and we try to using what drives price demand and Supply you saying but AR demand and Supply Supply driven by cash flows growth and risk they might be but they're also driven by mood and momentum and revenge saying Revenge my undergraduate class I put a valuation of GameStop that I did in 2021 remember that sorry episode does anybody I actually had to send them a little YouTube video what a GameStop Mall store look like because many of them are too young to actually have gone into a you've been in a GameStop store right at some point in your life especially when you were a teenager store have all these games you'd go in and play and you'd buy one of those games it's some it's a brick and mor mall game store where you actually bought games as videos or as you know on on desks you think that business has a future when was the last time any of you were in the mall I'm trying to think somebody might have dragged me to one at one point in time mean people don't go to bricken Mort stores and they definitely don't buy their games in physical form anymore they download it GameStop basic business model started melting down five six seven years ago and it's been in trouble for long time its revenues have been shrinking it's it's lost money for the last four years or last five years so along the way it became one of the most highly shorted stocks on the New York Stock Exchange somebody tell me what what shorting is and what why exactly became the shorted stock what are those shorting investors who shorted hoping will happen yes they're hoping that the stock the stock would go to zero basically they were betting that there would be the business model would meltdown so the start of 2021 it looked like it was on a pathway to zero stock was down to $14 or $15 maybe even lower when something almost magical happened a group of people gathered together on Reddit first now we live in the 21st century then gathered together on CNBC they got ga in Reddit and they decided that they were going to buy GameStop I I wrote a post then calling it The now you know what a short squeeze is in the old days when people shorted stocks Andrew Carnegie for instance one of his um opponents tried to short one of his companies and he decided that he was going to destroy this guy you don't become a billionaire by being compassionate and you know how he did it right he went and bought every share that was out in the market and when you sell short what you've done is you borrowed somebody else's shares agreeing to buy it and return it see he buys every share in the market so all these people who shorted their shares go to cover their short which means to buy the shares and there's no shares out there and Andrew says I have all the shares I'll sell them to you but at at a different price that's a short squeeze he bankrupted the guy but the old short squeez is one rich guy squeezing another rich guy usually just a guy it wasn't there weren't rich women you know playing this game but today it could be any one one rich person and another rich person this case it wasn't a rich person it was a crowd of people but with enough people in that crowd you could buy the shares and and that's exactly what they did you know what the price of GameStop Rose to over the next few weeks $400 per sh so I went to the red itself because I wanted to see what the motivation was maybe they had a story of the return of gametop they had a business model with so I read post after post and there's a single theme that comes through you know why they were doing it what is the motivation they wanted to get revenge on the hedge funds why I mean remember many many of these people that this is part of What's called the mean stock thing where in their 20s they big student loans they convinced that the hedge funds convince them to get that degree in whatever college and know whatever reason they're and so it's Revenge saying it's not rational it is the most rational thing you can think of right when you have a neighbor you don't like are you thinking rational thoughts or irrational thoughts I mean as human beings irrational thoughts out overwhelm rational thoughts that demand Supply in finance we've known about this for 50 years we call it behavioral Finance in fact there are at least four Nobel Prize winners who to come out of that behavioral Finance basically says that there are human emotions that can cause the price to be different from value so let me be very clear behavioral Finance doesn't change the value once in it's not about value it's about the pricing mechanism and why price can be different from that see so what if I ask you to price a company you see what you need to factor in you need to factor in the mood the moment all those forces going in you're saying how am I going to do that I know we dismiss technical analysis and charts but have you ever seen Charters and what they do they draw the chart of the price and they tell you a story there's a head and a shoulder and a resistance line and the support line I know your your head's starting to spin but essentially underlying all of charting is the hope that the chart will give you an earlier signal of mood shifts and momentum shifts if you're as to price something you're probably your your better tool is probably a technical analysis or a charting than a discounted cash flow valuation but if you really want to price a company then you know what you do you look for other companies just like yours and you look at what other people are paying for those companies and you decide how much you saying that is so unsophisticated do any of you own your own apartments or houses technically you own it you have a loan I'm sure right on the side but technically Own It me ask you a question Manish when you went to look at your house a realtor probably show you the house did you do a discounted cash flow valuation of the house no okay how did you decide what to pay just B wife that's a different thing right but the realtor gave you a number right how did the realtor come up with that number at the surrounding houses basically looked at this next the six blocks around he looked at houses light PS and then you adjust it for difference you have an extra bedroom your backyard is a little bigger all of real estate is pricing not just a house real estate is built on pricing you see so what that pricing can deviate entirely from value nothing you can do about it at least for the moment but if you're asked to price something you're looking for other things like it and what people are paying for in the context of stocks this gets tricky right why because the share price is a little arbitrary arbitrary in what sense if I do a 241 stock split what happens to my share price roughly right after I do the split it goes in half it's not it's getting more there's more units you can't compare share prices across companies because otherwise burshire hatway is always going to look expensive and penny stocks are going to look cheap right so you know what you do you divide the price by something by earnings by Book value and what do you get you get a multiple whenever people use multiples and comparables they should not use the word value for what they've done even though they do it all the time they priced the company nothing wrong with that and I think we can do pricing better but I I'll draw that contrast and as we go through the class talk about when we're doing each one and why the numbers can be different third what are we going to try to value in this class pretty much everything now obviously we'll spend a lot of time with publicly traded companies not because it's my preferred domain but because the data is there right but we're going to talk about value private businesses we're going to Value individual assets we're going to talk about some of the parts valuation we're going to talk about the value of you know Taylor Swift to the NFL or the valueable you basically we're valuing everything and we're going to look at it through multiple LS as an investor as a manager as a as a somebody taking over the company he here's my hope of what you will get out of the Class by the end of this class I hope you can value just about anything you have the tools I mean all you need to do is bring an imagination and bring be creative should be able to Value just about it so now let me go back to the story number connection here's the way I describe a good valuation a good valuation is a bridge between stories and what the heck does that even mean when I show you my valuation of Tesla you can get caught up in the little details about cost of capital but tomorrow when you see my valuation of the week you know what you're going to see as my Revenue in your 10 $700 billion and your ey should pop out right away why how many companies in the world have revenues of 700 billion right now yeah the answer is zero Amazon Walmart are getting close and maybe they'll so I'm giving the company immense revenues and he here's the second problem what's the what are the largest automobile companies in terms of revenues in the world right now it's Volkswagen and Toyota roughly 300 billion in revenues I'm making Tesla two and a half times bigger so here's the question you need to ask what is the story you're telling about Tesla because I can't I used to 50% growth rate that tells you absolutely nothing because that story's got to be a special one right in my story I see Tesla become the largest automobile company in the world that'll give them 500 billion in Revenue she's saying where's the extra 200 billion coming from I see Tesla opening up other business part of it is the energy business that they're already in getting bigger but also a software business and potentially a right sharing business he saying what software business anybody here own a Tesla you want a Tesla do you have software on your car that you got update what happens if you you don't have the software what happens your car then you all the systems are not functioning so basically a car becomes a hun hunk of metal sitting in the garage waiting for a software update is it conceivable right now the software comes bundled with the car could you see a word where at least some aspect of the sof like especially with FSD there's a talk of making it additional software that you pay for you might not pay for it but some Tesla owners might say I want that that's a software business it's not going to give them huge revenues but it's a very high margin business it's margins of five six seven times higher margin on automobile business in my story Tesla becomes the largest automobile company in the world with an energy and a software business and potentially even an opening to being a right sharing business why it comes right out of the F because what's the biggest cost at current right sharing compan like Uber or lift places what happen when you pay the fair and Uber where does 80% of the fair go drivers it goes to the drivers right imagine a world where you own the cars and there are no drivers don't imagine it too much because it's there's all kinds of side cost that had to be created because if a lot of cars are like that then You' be selling fewer cars and you're parking lots are going to go to dust because I mean there's a whole host of side costs but in my story that's what's driving my revenues my margins when I talk about valuation being a bridge between stories and numbers every number in your valuation has have a story behind it and every story you tell me about the company has to have a number that calls it right so if you tell me your company is great management I'm not just going to let you walk away I'm going to say great in what sense what do they they do that makes them great I think Nidia is great management you know what I based it on what's invid is current value coming from the AI business right why are they so dominant in the AI business because they started three years ahead of everybody else before the AI business the crypto business and inedia was there a couple of years before everybody else before the crypto business there was a gaming business Nvidia was there you do it once you could you could argue it's luck right you do it three times as something systematically in the company that allows them to get ahead of their competition it became part of my Invidia story when I valued ined bridge between stories and numbers and here's why I think the story people have an advantage it by the you know by the end of this class if you're a numbers person for a story person here's my hope for a story person I hope you get comfortable enough with numbers that you become a disciplined Storyteller because if you're a Storyteller and you have no restraints think of the typical strategies these are storytellers with no restraints no God reals you tell fairy tales right I hope you become a disciplined Storyteller and if you're a number cruncher by the end of this class I hope you trust your imagination enough to let it fly because you spent an entire lifetime bludgeoning that poor thing into the ground right because the word subjective is weakness you can't tell a story give me an equation you're fighting a lifetime of being told that storytelling is it's subject and you're right every single semester you're right when as when you said storytellers have an advantage here's one every single semester I run this experiment through trying to make storytellers develop discipline and number crunches let lose their imagination every single semester I have more trouble with number crunches than storytellers you give me 100 history Maes I can teach them enough valuation value companies tomorrow you give me 100 Engineers I'm completely and totally screwed so those of your number CR say I want you to be aware of this because you're looking for closure you want correctness when you get an answer what do you want is this correct it's built into you and you got to let that go because you're always going to be wrong and it's okay and that takes a while to stick but you got to work through that discomfort of knowing that you don't know what the right answer is that you don't know what you've done things wrong and nobody does I'd love to tell you that I always told stories in my valuation when I first started teaching valuation though I taught it like a number crunch a day what does that mean when in doubt I put up an equation if I was still doubtful I put up a second equation still doubtful I made them simultaneous equations because it gave me a sense of being in control and about six years into teaching this class I knew I had a problem and here was what the problem was I could value just about any asset you gave me but I had no faith strange word to use in a valuation class right here's what I mean by no faith I mean if you value something I mean I don't value for a living I don't work for an appraisal company I don't do value Consulting I value for one reason and one reason I value Tesla because I want to be able to act on the valuation what does that require if I find Tesla to be undervalued I have have to be willing to buy and I was unwilling to do it because I knew how easily I could move Valu just numbers 30% growth rate doesn't work try 40% and I knew that what was missing was a story that held my numbers together so 1992 93 I started trying to tell stories back my valuation and the first time I did was like the first time I scrambled X it's painful but here's the good news today I'm still in number cruncher but I feel pretty comfortable telling stories I can spin with the best of them right you can put me in a room full of VCS I can tell stories with them but I also have the benefit of knowing what the numbers tell me so my point is don't expect this to come easily you'll have to work at it but working on your weak side is what this class should be about it's not reinforcing your strong because here's where the faith comes in to act on evaluation you have to have faith in your own valuation of the company so I told you I got to Value 192 for Tesla I have to have faith in that Val why is that difficult because I know it could be wrong and what's the other thing I have to have faith in that stock I think is right now at 182 I've got to have faith the 182 will become 192 the price will adjust back you know why we use the word faith how many of you are religious 10 I'm not but I go with my wife to church every Sunday I'm not Catholic but for 40 years I know when to kneel when to get up know have the whole thing nailed down right and when they do the water I make sure my head is in the way so I get the water on my head so I I've got this thing I think right but if you're religious and you go to your religious Authority and you say you know father Rabbi whatever you know it say no I'm I'm working really hard to be good and lot of sacrifice can you give me some proof that God exists because it seems like a lot of work what will you get as an answer at least if you're relig just authorities is an honest straightforward person I can't prove it you have to have faith the essence of faith is you cannot prove it in the context of valuation if you come to me and say can you prove to me that your valuation is right I can't I can't even prove it to myself I just have Fai you say can you prove to me that if I get a value that's right in the price is different the price will adjust a value my answer is exactly the same I hope it will I can't prove it now the essence of Faith also is that it will be tested you know how it'll be testing I'm planning I'm in fact I had limit buy and Tesla that kicked in yesterday I'm now a proud Tesla shareholder at 182 tomorrow let's say the stock goes to 170 good right you know what that is the market knocking on your door saying do you still have faith yes yes drops to 160 Market's knocking even larger do you still have faith every time the market moves against you it's a test of your faith and I've I've never been shy about admitting that my faith gets tested and I actually have a lot of skepticism for people who claim their faith is absolute like who like all those people show up on Omaha Nebraska every year for What I Call Value investing Woodstock right buer hat meetings they're true believers they think they are the chosen ones they've read security analysis they've read every Warren Buffett letter sent out their faith is absolute which makes no sense to me when you say your faith is absolute that's not Faith that's Dogma the accepting that you can be wrong and you might have to change your mind is not a sign of weakness it's a sign of strength I remember in the 1970s my mother took me to see Mother Teresa that time and I was living in Indian room and I still remember during the talk Mother Teresa said every morning I wake up and I question the existence of God I said Mother Theresa can get up every morning and question the existence of God I can get up every morning say did I get my Tesla valuation right right I mean this notion that this is somehow absolute is I think the opposite of what you should be doing is keep an open mind accept the fact that you can be wrong have some Faith because you no faith you're just going to give up but I can't endow that to you it's something that has to come from with it so in terms of the class itself this session in the next we'll lay out the big picture so next class I'm going to look at different ways of approaching valuation then we're going to spend about nine sessions essentially visiting the inputs into incling value discard rates cash flows for some of you this will be boring because I've seen that before I know what a bait is I know what a risk free rate is there's even if you do there's no harm reinforcing it and some of you are going to be surprised at what you think you know might not be the right way to do it during this period you're going to get very impatient because I'm not going to I'll be taking Ving pieces of companies airbnb's growth rate now and briers cost a capital there won't be a single company I'm valuing all the way through but if you have patience session 12 through 15 I'm going to essentially just value company after company and I'm going to do it on the dark side difficult to Value companies then section 16 to 19 I'm going to talk about doing pricing better because I think people not only price they do it in a very sloppy way they act like it's 1965 you have no access to data you couldn't compute any statistics we live in a world we have data and statistics we should be able to do pricing better session 20 I'm going to talk about valueing private company privately owned companies you have a small business that hot dogs stand outside you said can you give me a value and then in session 21 through 23 I'm going to talk about bringing in insights from option pricing in the context of valuing companies young farmer companies natural resource companies distress equity and distress companies session 24 I'm going to spend on acquisition valuation youing only one session I was once asked to teach an m&a class by St and I said look I can teach the class but I run out of material after about 45 minutes I've never understood what the big deal about acquisition valuations value a Target company of course two magical words Flo around control and Synergy so much of what I'll do the acquisition valuation is how do you value control how do you value Synergy what does that even mean session 25 I'm going to talk about changing the value for the first 24 sessions we're going to be a little passive we're going to be looking at companies and saying I'm going to value that company session 25 I'm going to bring you on the inside say you're running the company now how would you increase the value change the value for company so those of you end up working in businesses building your own business this will take the tools of valuation which you think about is valueing companies and use them say how do I run the company to increase its value and session 26 is the grand finale which is basically taking what you've done in the class and trying to look at how does it play out now the preseason it's too late for maybe do you can still do it this weekend but if your accounting is a little shaky your statistics is you got amnesia and your foundations class even though you did it just last year and not that they're like Turkish construction foundations after an earthquake very quickly discovered there's no Foundation there you know there I have these manyi versions of these classes that I've created it's not because I don't trust the people teaching this actually it's because I don't trust the people teaching this class so to be quite honest this is these are very idiosyncratic views of this is what I need my valuation class each class is is about 12 sessions three hours so a good way to kind of you know catch up if you feel we as in my corporate finance class and for those of you in my corporate finance class the harassment will continue the beatings will continue until morale improves as they say the mailings and the SES will continue every day for the next 15 weeks boring the spring break you will hear from me today's class I'll tell you about the class tomorrow will be the valuation of the week so you'll get the Tesla valuation Wednesday you'll hear about the class and I'll send what's called a weekly chall which is something that takes the topics for that week and says can you build on it can you try it on this on Thursday I will nag you about your project you're saying what project more about that in a few minutes okay essentially saying this is where you should be this is where you are what's keeping right on Friday I'll send out what's called a web basically a webcast and something in valuation getting your hands dirting so when we talk about estimating betas I'll talk about how I got the beta from capital I so it's really about getting your hands dirty about from getting dat on Saturday you'll get newsletter not much news but basically saying this this is where we are in the class this is where we're going and on Sunday I will lay out what's coming in the next week and send you a solution to the weekly challenge me be very clear the weekly challenges again are up to you you can try them you cannot try them youing should I if I do them will my grade improve I have no idea that's not what they're there for but they're really about building what you learn in this class and push pushing them to the next step in terms of class material the one thing that um you know that you need for this class are the lecture notes the lecture notes all three packets are now up they about 750 slides which means it's probably best that you don't print them and kill all those rainforests in Brazil in the process so we can keep them digital and you can get a really big iPad will really help but know keep it digitally every every slide you see in this class will be in those packets no and I would really really really like you to be in class but I am a realist there will be times to miss a class the classes I'm I've set up on Zoom every class so if you have to miss a class it'll be live on Zoom it'll be recorded on Zoom it will also be available as a YouTube video so basically there's no reason for missing the class right so catch up if you don't I have five books on valuation you don't need any of them right if you want to buy it I little descriptive of what may set some apart so you know some are obscenely overpriced some are cheaper you know some you can get in Indian editions for even cheaper I shouldn't be saying this but you know my Publishers won't like it but I don't care where you get it or if you get it so get it if you need it but you will not need it for this class but incidentally if you have an Apple device an iPhone or an iPad friend of mine anund mou and I developed an app that does intrinsic valuation it's the ultimate gek cap which has been in an airport stuck on a lake flight rather than doing what normal people do which I think is get drunk you sit there valuing a company on your try out so you know if nothing else people will step away from you give you a lot of distance in a strange person valuing a company in the middle of nowhere if you have an Android forget about it I know there's a bright Space page for this class I've visited it last week I put the basic stuff on I'm not visiting it again for the next 15 weeks almost everything in this class is going to be transacted through my web the web page for the class which you've got in the email so check it out the YouTube video will have all of the lectures as just a set of you know and every email I send this class I will collect in a Chronicle so you can see the email history for the entire class Google Calendar tells you when the quizzes are so check it out to make sure that you can that you that you will be able to be here and I'll talk about what will happen if you have to miss a qu which some of you will know my blog I already sent you my first four blog posts on data updates for this year about once every two or three weeks I will write on something I have no idea what the next thing is going to be but I'm a dablo I move on from topic to topic so last year when I was teaching this class in February while I was teaching the class this report came out at a group called The Hindenburg group had targeted an Indian company called adani I know nothing about adani I know even less about the Hindenburg group but the story struck me has an interesting valuation story so I valued it I posted on it so my guess is there'll be interesting things that happen over the next four months um and they will be Gris for the maill so I have a Twitter feed but my tweets are very very rare and basically they're about directing you somewhere else because know the reason Twitter exists for the same reason we all stop on a highway to see an act accident right it's because bad things happen on Twitter when people engage so I will engage with no one on Twitter so basically I tweet and I'm gone and other readings if you have time so ultimately though if you're thinking about grading on the class my objective is to make sure you can value things you can value just about everything you deserve a name you value if you can value most things bb+ if you can value some things which is going of be minimal if you can value nothing at the end of this class then I've really done a bad job and you got nothing out of the class so the entire class is structured around making that device so here's what's going to drive your grade first there will be a project where you pick a company and valued over the course of the entire semester you have to do it as part of a group simply because partly for logistical reasons and partly because I want you to know that there will be group members who will have trouble that you have to pull up some you learn valuation but and explain to other people what something is and it's good to have to do that especially the it might be different different parts of the project that valuation project is due at the end of the semester but especially in the spring we have this strange phenomenon called premature graduation and especially you're second year you know what that is around March mentally you've left the school already right and it's very difficult to extract anything from you at that point so to kind of counter that here's what I'm going to ask you to do one of the things in your valuation is an intrinsic valuation of your company TCF valuation halfway through the semester I'm going to ask you to submit that not for a grade but for feedback it's completely optional like much of the class so around March 20 around March 29th so Friday if you send me that valuation I'll take a look evaluation I won't give you a grade but I'll say you know your growth rate you might want to rethink this number your discount rate you might have missed this part of it so essentially about getting feedback but the entire project is due on the last day of class by 5:00 pm now in terms of quizzes there will be three quizzes that first date is obviously wrong that should be February 28th not April 28th February 28th April 1st and April 22nd each is worth 10% open book open notes and a final exam which will be on May 8th and I think the time schedule for it is 1:30 to 3:30 that'll be 30% open book open Notes every quiz and exam I've given an evaluation class is online on that page for the class so you can't complain you didn't get enough practice you'll have to pick and choose how many you can work through my suggestion we have limited time start with the latest quizzes and work backwards but that's going to be it now I know some of you will have to miss a quiz if you do here's what's going to happen that 10% will be moved to what's left in the class in in in exams in the class so you missed the let's say you take the first quiz that's a 10% you miss the second quiz I'll take the 10% and move it into your third quiz and your final you missed the third quiz will all go to the final why because that's to prevent what I call Strategic quiz missing right which if we do really well on the first two quizzes you're going to be tempted to miss the third quiz this way it's always going to get pushed out towards left what's a good reason to miss a quiz I'll be quite honest I'm not going to ask for doctor's notes I'm going to trust you when you say I couldn't make it okay but remember if you do miss a quiz there is a cost and the cost is if you take all three quizzes I will take the worst quiz you you had and move the score on that quiz to the average score on everything else so you get 0 10 10 30 which means you got perfect scores and three and nothing I'll move the Z to attend so it's available only if you take all quizzes so there is an incentive to take all the quizzes even if you don't feel ready there's nothing you will gain by missing a quiz right so if you if you're here might as well take the quiz in terms of Rules of Engagement pick your own groups I will not assign you a group you're saying what if I cannot find a group towards the end of this week I will create what's called an orphan list and I will invite orphans to join I will list you there and I will put a pathetic story of these poor people need to be adopted so try I mean if you get into a group you don't but if you don't get into a group let me know I'll put you on the orphan list and you will get adopted right and needless to say the quizzes and exams are individual work bit ra on it and I don't give grades for participation but I'd love more participation from a purely selfish perspective which is the more you talk the less I have to talk right and that makes my life easier so and because this is a first time I've taught in this room in 22 years I've been teaching pson I begged them to give me this room and they gave me the class numbers because this is a good room to talk unlike Paulson we can't even see people so I know you've got your name plates try to bring your name plates I won't if I call on you it's not because I want to embarrass you I want to draw you into the discussion if if you don't feel comfortable in that discussion just pass it's not the end of the word right I ask you what do you think of Tesla and you say don't want to answer that question because I have deep thoughts about Elon Musk I'll let it go and I'll move on to the next person so if you can bring your name plates and you have them bring it in otherwise just get a piece of cardboard put your name in but I will see you on Wednesday that's