ways of valuing companies (multiples and
comparables,forexample)thatdonotrequireexplicit
assumptions about the future. A few decide that
valuation itself is pointless and resort to reading
charts and gauging market perception.Itisnaturaltofeeluncomfortablewhenvaluingequityina
company.Weareafteralltryingtomakeourbestjudgments
aboutanuncertainfuture.Thediscomfortwillincreaseaswe
move from valuing stable companies to valuing growth
companies,fromvaluingmaturecompaniestovaluingyoung
companies,andfromvaluingdevelopedmarketcompaniesto
valuing emerging market companies.
What to Do about Uncertainty
Theadvantageofbreakinguncertaintydownintoestimation
uncertainty, firm-specific uncertainty, and macroeconomic
uncertaintyisthatdoingsogivesusawindowonwhat we
canmanage,whatwecancontrol,andwhatweshouldjustlet
passthroughintothevaluation.Buildingbetter modelsand
accessing superior information will reduce estimation
uncertainty but will do little to reduce exposure to
firm-specific or macroeconomic risk. Even the
best-constructed model will be susceptible to these
uncertainties.
Ingeneral,analystsshouldtrytofocusonmakingtheirbest
estimates of firm-specific information—How long will the
firmbeabletomaintainhighgrowth?Howfastwillearnings
growduringthatperiod?Whattypeofexcessreturnswillthe
firmearn?—andsteerawayfrombringingintheirviewson
macroeconomic variables. To see why, assume that you