up with that $, for the house?How does a realtor come up with the number for an apartment.What does he or she do?She looks at other apartments.Or he looks at other units that sold in the neighborhood,adjusts for the fact that you have an extra bedroomor a bigger lot.It’s pricing There’s no valuation going on.You think, those unsophisticated realtors.Let me show you a second.You’ve seen an equity research report?If you haven’t, save yourself the trouble, because here’swhat the analyst will do.There will be a company name.There will be a multiple, which is like a standardized price,like a price per square foot, a price earnings ratio.There will be other companies that the analyst claimsare just like your company.
In what universe, I don’t know.I’ve seen Google Equity Research reports. Brisbane Property Valuation These companies are just like Google.Oh, really?That’s amazing.How do you find those?I would argue that the realtor was on much firmer ground,looking at apartments around the neighborhood,than an Equity Research Analyst trying to find companies like Google.But that’s exactly what the Equity Research Analystis doing– pricing your company, basedon what comparable companies traded, though there’snothing comparable about them.You’re saying, those unsophisticated Equity ResearchAnalysts.You sometimes see a discounted– thislooks like one of those discounted–if you pay a banker, this is what you get– cash flows.The next time you see a valuation from a banker,zero in on the biggest number in the Discounted Cash Flowvaluation.It’s always the end number, the value at the end of your file.
Take a look at where that number comes from.And I’ll wager, in nine out of banking valuations,that number comes from applying a multiple to year five number.What do I mean by that?In this case, here’s what I did.I took the operating income in year five and multiplied by .Why ?Because that’s what other companies trade at right now.I can tell you all kinds of stories,but this is a pricing as well.I’m just hiding it in year five.I call these pricing in drag.The drag component is the cash flows.While you’re distracted by the cash flows,you slip in times.That’s what’s driving this number.Most of what passes for valuation out there is pricing.You’re saying, so what.It’s a very different game.What sets prices?
It’s demand and supply, mood and moment.What’s sets value?Cash flows, growth, and risk.Could the two give you different answers?Absolutely.If you are trader– not a traitor, but a trader–you care about prices.What’s CNBC?CNBC is an instrument for trade.You are trading the stock.All you care about is what moves prices.So the only question I’m asking is, what’s the mood.What’s the