preciselythanotherssimplybecausethereislessuncertainty
about the future. We can value a mature company with
relatively few assumptions and be reasonably comfortable
with the estimated value. Valuing a technology firm will
requirefar moreassumptions, as willvaluingan emerging
marketcompany.Ascientistlookingatthevaluationsofthese
companies (and theassociated estimationerrors) mayvery
wellconsiderthematurecompanyvaluationthebetterone,
sinceit isthemore precise,and thetechnology firms and
emergingmarketcompanyvaluationstobeinferiorbecause
there is more uncertainty associated with the estimated
values.Theironyisthatthepayofftovaluationwillactually
behighestwhenyouaremostuncertainaboutthenumbers.
Afterall,itisnothowpreciseavaluationisthatdetermines
its usefulness but howprecise the value is relative to the
estimates of other investors trying to value the same
company.Anyonecanvalueazerocoupondefault-freebond
withabsoluteprecision.Valuingayoungtechnologyfirmor
an emerging market firm requires a blend of forecasting
skills, tolerance for ambiguity, and willingness to make
mistakesthatmanyanalystsdonothave.Sincemostanalysts
tendtogiveupinthefaceofsuchuncertainty,theoneswho
persevereandmakestheirbestestimates(error-pronethough
they might be) will have a differential edge.
We do not want to leave the impression that we are
completely helplessin thefaceofuncertainty. Laterin the
book,welook atsimulations,decisiontrees,andsensitivity
analysesastoolsthathelpusdealwith uncertaintybutnot
eliminate it.
Are Bigger Models Better? Valuation Complexity