patentlyabsurd.Perceptionsmaybeallthatmatterwhenthe
assetisapaintingorasculpture,butwedonotandshouldnot
buymostassetsforaestheticoremotionalreasons; webuy
financialassetsforthecashflowsweexpecttoreceivefrom
them.Consequently,perceptionsofvaluehavetobebacked
upby reality,which implies thatthepricewepay forany
assetshouldreflectthecashflowsitisexpectedtogenerate.
Themodelsof valuationdescribedin this book attemptto
relatevaluetothelevelof,uncertaintyabout,andexpected
growth in these cash flows.
Therearemanyaspectsofvaluationwherewecanagreeto
disagree,including estimatesoftruevalueand howlong it
willtakeforpricestoadjusttothattruevalue.Butthereis
one point on which there can be no disagreement. Asset
pricescannotbejustifiedbymerelyusingtheargumentthat
therewillbeotherinvestors aroundwhowillpaya higher
priceinthefuture.Thatistheequivalentofplayingavery
expensivegameofmusicalchairs,whereeveryinvestorhas
to answer the question “Where will I be when the music
stops?”beforeplaying.Theproblemwithinvestingwiththe
expectationthatwhenthetimecomestherewillbeabigger
foolaroundtowhomtosellanassetisthatyoumightendup
being the biggest fool of all.
INSIDE THE VALUATION PROCESS
Therearetwoextremeviewsofthevaluationprocess.Atone
endarethosewhobelievethatvaluation,doneright,isahard
science,wherethereislittleroomforanalystviewsorhuman
error.Attheotherarethosewhofeelthatvaluationismoreof
anart,wheresavvyanalystscanmanipulatethenumbersto
generate whatever result they want. The truth does lies