To all those people with whom I have debated valuation issues over time and who
have pointed out the errors (or at least the limitations) of my ways.
"There is nothing so dangerous as the pursuit of a rational investment policy in an irrational
John Maynard Keynes
Lord Keynes was not alone in believing that the pursuit of 'true value' based upon
financial fundamentals is a fruitless one in markets where prices often seem to have little to do
with value. There have always been investors in financial markets who have argued that market
prices are determined by the perceptions (and misperceptions) of buyers and sellers, and not by
anything as prosaic as cashflows or earnings. I do not disagree with them that investor
perceptions matter, but I do disagree with the notion that they are all that matter. It is a
fundamental precept of this book that it is possible to estimate value from financial
fundamentals, albeit with error, for most assets, and that the market price cannot deviate from
this value, in the long term1. From the tulip bulb craze in Holland in the middle ages to the South
Sea Bubble in England in the eighteen hundreds to the stock markets of the present, markets
have shown the capacity to correct themselves, often at the expense of those who believed that
the day of reckoning would never come.
The first edition of this book was my first attempt at writing a book and I have hopefully
gained from my experiences since. In fact, this edition is very different from the prior edition for
a simple reason. My other book on investment valuation, also published by John Wiley, was
designed to be a comprehensive valuation book, and repeating what was said in that book here,
in compressed form, strikes me as a waste of time and resources.
This book has two parts to it. The first part, which stretches through the first 9 chapters is
a compressed version of both discounted cash flow and relative valuation models and should be