1.Estimationuncertainty.Evenifourinformationsourcesare
impeccable,wehavetoconvertrawinformationintoinputs
and use these inputs in models. Any mistakes or
misassessmentsthatwemakeateitherstageofthisprocess
will cause estimation error.
2.Firm-specificuncertainty.Thepaththatweenvisionfora
firmcan prove to be hopelessly wrong.The firmmay do
much better or much worse than we expected, and the
resultingearningsandcashflowswillbeverydifferentfrom
our estimates.
3.Macroeconomicuncertainty.Evenifafirmevolvesexactly
thewayweexpecteditto,themacroeconomicenvironment
canchangeinunpredictableways.Interestratescangoupor
down,andtheeconomycandomuchbetter orworsethan
expected. These macroeconomic changes will affect value.
Thecontributionofeach typeofuncertaintyto theoverall
uncertainty associated with a valuation can vary across
companies. Whenvaluing a mature cyclical or commodity
company,itmaybe macroeconomicuncertaintythat isthe
biggest factor causing actual numbers to deviate from
expectations. Valuing a young technology company can
expose analysts to far more estimation and firm-specific
uncertainty.Notethattheonlysourceofuncertaintythatcan
be clearly laid at the feet of the analyst is estimation
uncertainty.
Evenifwefeelcomfortablewithourestimatesofanasset’s
valuesatanypointintime,thatvalueitselfwillchangeover
time as a consequence ofnew informationthat comesout
bothaboutthefirmandabouttheoverallmarket.Giventhe