Damodaran on Valuation

Preface

There is nothing so dangerous as the pursuit of a rational investment policy in an irrational world.

—John Maynard Keynes

Lord Keynes was not alone in believing that the pursuit of true value based on financial fundamentals is a fruitless one in markets where prices often seem to have little to do with value. There have always been investors in financial markets who have argued that market prices are determined by the perceptions (and mispercep-tions) of buyers and sellers, and not by anything as prosaic as cash flows or earnings. I do not disagree with them that investor perceptions matter, but I do disagree with the notion that they are all that matter. It is a fundamental precept of this book that it is possible to estimate value from financial fundamentals, albeit with error, for most assets, and that the market price cannot deviate from this value in the long term.^[] From the tulip bulb craze in Holland in the early seventeenth century to the South Sea Bubble in England in the 1800s to the stock markets of the present, markets have shown the capacity to correct themselves, often at the expense of those who believed that the day of reckoning would never come.

^[] But then again, as Keynes would have said, "In the long term, we are all dead."

The first edition of this book was my first attempt at writing a book, and hopefully I have gained from my experiences since. In fact, this edition is very different from the prior edition for a simple reason. My other book on investment ...