The Big Myth: Investment Valuations and CAPM

Every year, I have a fight with Auditors on valuations. They’re lovely beings, always trying to do justice. But at times, they’re just too ‘by-the-book’ and this is causing private equity practitioners like myself anguish. Every now and then, people realize what they’ve learned is wrong. We’re not infallible. Have you read about the story of how a scientist defied all modern day theory and found a cure for Alzheimers?

Perhaps we’re in times, where we need to throw the book out of the window and just focus on the fundamentals, not hypothesis or theory… fundamentals. Perhaps we need to re-learn the art of valuation.

I buy something because there’s a demand and sell something because there’s still a demand. Depending on the supply, I can ask for more or less.

How many times have you decided to buy a stock or make an investment, and gone through a rigorous Discounted Cash Flow (DCF), setup up a Weighted Average Cost of Capital (WACC) and thought about what Equity Risk Premium, what Country Risk Premium, what Debt Margin you will be using? Oh and did you see the last 40 years of returns thinking you would make the same return in the next 5 years? No, neither do I.

Time to get a different perspective, download and read the The Big Myth by written by Eric Nath — Business Valuation Review. If you don’t have time, head straight to pages 91–94 for the essence.

Originally published at