- Probabilisticstatements. Some analystscouch their
valuations in probabilistic terms to reflect the
uncertainty that they feel. Thus, an analyst who
estimatesavalueof$30forastockthatistradingat
$25 will state that there is a 60 or 70 percent
probabilitythatthestockisundervaluedratherthan
makethecategoricalstatementthatitisundervalued.
Here again, the probabilities that accompany the
statementsprovide insightintothe uncertainty that
the analyst perceives in the valuation.
Ingeneral,healthyresponsestouncertaintyareopenaboutits
existenceandprovideinformationonitsmagnitudetothose
usingthevaluation.Theseuserscanthendecidehowmuch
caution they should exhibit while acting on the valuation.
Unfortunately,notallanalystsdealwithuncertaintyinways
that lead to better decisions. The unhealthy responses to
uncertainty include:
- Passing the buck. Some analysts try to pass on
responsibility for the estimates by using other
people’s numbers in the valuations. For instance,
analystswilloftenusethegrowthrateestimatedby
otheranalystsvaluingacompanyastheirestimateof
growth.Ifthevaluationturnsouttoberight,theycan
claimcreditforit,andifitturnsoutwrong,theycan
blame other analysts for leading them down the
garden path. - Givinguponfundamentals.Asignificantnumberof
analystsgiveup,especiallyonfull-fledgedvaluation
models,unabletoconfrontuncertaintyanddealwith
it.All too often,theyfallbackon moresimplistic