moreprotectedfromovertoutsideinfluencesandbyreporting
our biases with our estimated values.
It Is Only an Estimate: Imprecision and Uncertainty in
Valuation
Startingearlyinlife,wearetaughtthatifwedothingsright,
wewillgettherightanswers.Inotherwords,theprecisionof
theanswerisusedasameasureofthequalityoftheprocess
that yielded theanswer. While this may be appropriatein
mathematicsor physics,itis a poormeasure ofquality in
valuation.Barringa very smallsubset ofassets,there will
always beuncertainty associated withvaluations, and even
thebestvaluationscomewithasubstantialmarginforerror.
Inthissection,weexaminethesourcesofuncertaintyandthe
consequences for valuation.
Sources of Uncertainty
Uncertaintyispartandparcelofthevaluationprocess,bothat
thepointintimewhenwevalueabusinessandinhowthat
valueevolvesovertime asweobtainnewinformationthat
impactsthevaluation.Thatinformationcanbespecifictothe
firmbeingvalued,canbemoregenerallyaboutthesectorin
which the firm operates, or can even be general market
information (about interest rates and the economy).
Whenvaluinganassetatanypointintime,wemakeforecasts
forthefuture.Sincenoneofuspossesscrystalballs,wehave
tomakeourbestestimatesgiventheinformationthatwehave
atthetime ofthevaluation.Ourestimatesof valuecanbe
wrongforanumberofreasons,andwecancategorizethese
reasons into three groups.