believethatinterestratestodayaretoolowandthattheywill
goupbyabout1.5percentoverthenextyear.Ifyoubuildthe
expectedriseininterestratesintoyourdiscountedcashflow
(DCF) valuations, they will all yield low values for the
companies that you are analyzing. People using these
valuationswillbefacedwithaconundrumbecausetheywill
have no way of knowing how much of each valuation is
attributabletoyourmacroeconomicviewsandhowmuchto
your views of the company.
Insummary,analystsshouldconcentrateonbuildingthebest
modelstheycanwithasmuchinformationastheycanlegally
access,tryingto make theirbest estimatesof firm-specific
components and being as neutral as they can be on
macro-economic variables. As new information comes in,
they should update their valuations to reflect the new
information.Thereisnoplaceforfalseprideinthisprocess.
Valuations can change dramatically over time, and they
should if the information warrants such a change.
Payoff to Valuation
Evenattheendofthemostcareful anddetailedvaluation,
therewillbeuncertaintyaboutthefinalnumbers,coloredas
theyarebyassumptionsthatwemakeaboutthefutureofthe
company and the economy in which it operates. It is
unrealistic to expect or demand absolute certainty in
valuation,sincetheinputsareonlyestimates.Thisalsomeans
thatanalystshavetogivethemselvesreasonablemarginsfor
error in making recommendations on the basis of valuations.
Thecorollarytothisstatementisthatavaluationcannotbe
judgedbyitsprecision.Somecompaniescanbevaluedmore