constant flow of information into financial markets, a
valuationdoneonafirmagesquicklyandhastobeupdated
to reflectcurrent information.Thus, technology companies
thatwerevaluedhighlyinlate1999,ontheassumptionthat
the high growth from the 1990s would continue into the
future,wouldhavebeenvaluedmuchlessinearly2001,as
theprospectsoffuturegrowthdimmed.Withthebenefit of
hindsight,thevaluationsofthesecompanies(andtheanalyst
recommendations)madein 1999 canbecriticized,butthey
may well have been reasonable given the information
available at that time.
Responses of Uncertainty
Analystswhovaluecompaniesconfrontuncertaintyatevery
turninavaluationandtheyrespondtoitinbothhealthyand
unhealthy ways. Among the healthy responses are:
- Better valuation models. Building better valuation
models that use more of the information that is
availableatthetimeofthevaluationisonewayof
attackingtheuncertaintyproblem.Itshouldbenoted,
though, that eventhebest-constructed modelsmay
reduceestimationuncertaintybuttheycannotreduce
or eliminate the very real uncertainties associated
with the future. - Valuationranges.Afewanalystsrecognizethatthe
valuethattheyobtainforabusinessisan estimate
andtrytoquantifyarangeontheestimate.Someuse
simulations and others derive best-case and
worst-case estimatesof value.Theoutputthatthey
providethereforeyieldsboththeirestimatesofvalue
and their uncertainty about that value.