Part I: Getting started with valuation (a 10 part series)
If you’ve ever wanted a simple, no-nonsense way to start valuing stocks, this series will walk you through the basics in plain English. Think of it as friendly cliff notes to Aswath Damodaran’s classes—without the hours of lecture videos.
The Big Picture
Valuing a company means estimating cash flows years into the future—a task that’s hard to do well. The biggest obstacle isn’t math, it’s bias. That’s why Damodaran starts with mindset, not spreadsheets. Before you run a single number, you need to understand how your own preferences can quietly shape your valuation. Most investors skip this step.
Here are the core ideas that set the foundation:
1. Your biases show up in your numbers.
If you like a CEO, you’ll unconsciously plug in higher growth assumptions; if you don’t, you’ll shade everything lower. The “Tesla example” makes this obvious: your feelings about a leader can tilt your forecast for a 5- or 10-year discounted cash flow (DCF). A DCF is just a way of estimating what future cash flows are worth today—but those future numbers often come from emotion, not analysis.
2. Theory matters more than people think.
Many investors focus on formulas, but the qualitative side—how you think about a business, its market, and your own blind spots—is harder and more important. The math gets easier with practice. Getting your judgment right takes longer.
3. Tune out the noise.
Most sell-side analysts issue buy ratings far more often than sell ratings, which means the public commentary skews optimistic. There’s a reason Warren Buffett constantly reminded investors to think for themselves and to use outside ideas only to decide what to investigate, never as a reason to buy.
4. Accept that valuations are never perfect.
A “good” valuation is never exactly right. Mature companies with long histories are easier to approximate; younger companies offer bigger upside if you’re right, but much shakier anchors. Over time, you start to realize your confidence level in a valuation matters more than the number itself.
5. You don’t need a complex model.
Big spreadsheets can hide bad assumptions. Damodaran emphasizes keeping things simple. At its core, an intrinsic valuation needs only three ingredients: how long the asset will produce cash, how much cash it will produce, and the discount rate—basically the rate you use to translate future cash into today’s dollars.
That's an over-simplification, but it is precisely what the complex math achieves in the end.
A Quick Analogy
Think of valuation like weather forecasting. Forecasters use complex models and probabilities to give you a clear, robust prediction, but they rarely—if ever—get the exact outcome right. They give you enough reliable information to plan your day, and valuation works the same way: the goal isn't perfection, it’s decision-useful insight.
Key Takeaway
Valuation starts with understanding yourself. Before worrying about formulas, learn to spot your own bias, keep your approach simple, and focus on building reasonable expectations.
Put simply: your mindset is the real first step in valuing any company.
Part II will cover how risk-free rates impact valuation
