somewhereinthemiddle,andweusethissectiontoconsider
threecomponentsofthevaluationprocessthatdonotgetthe
attention they deserve—the bias that analysts bring to the
process,theuncertaintythattheyhavetograpplewith,and
thecomplexity thatmoderntechnology and easy accessto
information have introduced into valuation.
Value First, Valuation to Follow: Bias in Valuation
Wealmostneverstartvaluingacompanywithablankslate.
Alltoooften,ourviewsonacompanyareformedbeforewe
startinputtingthenumbersintothemodelsthatweuse,and,
not surprisingly,our conclusionstendto reflectourbiases.
Webeginbyconsideringthesourcesofbiasinvaluationand
thenmoveontoevaluatehowbiasmanifestsitselfinmost
valuations. We close with a discussion of how best to
minimize or at least deal with bias in valuations.
Sources of Bias
Thebiasinvaluationstartswiththecompanieswechooseto
value.Thesechoicesarealmostneverrandom,andhowwe
makethemcanstartlayingthefoundationforbias.Itmaybe
thatwehavereadsomethinginthepress(goodorbad)about
thecompanyorheardfromanexpertthatitwasundervalued
or overvalued. Thus, we already begin with a perception
aboutthecompanythatweareabouttovalue.Weaddtothe
biaswhenwecollecttheinformationweneedto valuethe
firm.Theannualreportandotherfinancialstatementsinclude
not only the accounting numbers but also management
discussionsof performance,oftenputting thebest possible
spinonthenumbers.Withmanylargercompanies,itiseasy
toaccesswhatotheranalystsfollowingthestockthinkabout