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As an investor, analyst, or business owner, it is very important to understand how to value companies across different sectors. I have created this detailed guide to help you with exactly that – explore various relative valuation methods, and their applicability to different industries.

I have also added a few practical examples from the Indian market to explain the concepts better. Here, please note that the financial numbers or stock market data I have used are just for calculation purposes and are approximations around the current values (as on 28th August 2024). Also, none of the stocks listed below are recommendations.

Anyway, let’s start right away.

In the world of investing, risk is an ever-present companion. We spend countless hours analyzing data, studying market trends, and crafting meticulous strategies to mitigate known risks. Yet, as the legendary investor and co-founder of Oaktree Capital, Howard Marks, once famously stated –

Risk is what’s left over after you think you’ve thought of everything.

This sentiment is a stark reminder that in the unpredictable world of investing, there are always unknown and unexpected risks lurking in the shadows.

Today, I share with two compelling stories told by Marks and another noted investor Joel Greenblatt, to shed light on the importance of acknowledging the existence of these hidden dangers and surprises, especially when you are sure that no such surprises exist.

Growing up in the 90s, and before digital cameras became common, one of my most precious possessions was a Kodak roll camera.

It was a simple box camera that came loaded with a 36-exposure roll of film (if I remember that correctly). When the roll was finished, the camera or the roll was handed to a photo studio for processing.

My friend’s father had a photo studio that was one of the best in town and where I got my photos developed. The studio contained a dark room (called ‘darkroom’) that no one was allowed to enter, which was typical of any photo studio those days.

When it comes to thinking and decision making, Derek Sivers is one contemporary philosopher I look up to.

In 1998, Sivers was making a comfortable living as a full-time musician. He wanted to sell his music CDs online, but there was no way for a small time musician to sell online, so Sivers took matters into his hands and built a website to sell his CDs. Very soon his friends started requesting him to list their CDs on the website. That’s how CD Baby was born. Ten years later when he sold the company, it was doing $100 million in revenues. Sivers gave away the proceeds from the sale ($22 million) to a charitable trust.

Man, they say is a social animal. Leave him alone on an Island, and he will not last long even if he has the amenities needed for survival. I am not sure if any social scientist has ever done such an experiment, but it is highly unlikely that many people can survive in an isolated environment. Maybe that is the reason Hollywood makes so many movies on this theme.

In fact, one of my favourites is one such movie titled ‘Cast Away.’ This film depicts a FedEx employee stranded on an uninhabited island after his plane crashes in the South Pacific and his attempts to survive on the island using remnants of his plane’s cargo.

The puzzles underlying the fine-grained matrix of human behaviour is unfathomable. As you dig deeper, new surprises are waiting for you. I have been a student of behavioural economics for almost a decade but every time I think of myself as an old hand on the subject, I am reminded of my folly.

Cognitive errors are not like other errors which are usually a result of misplaced knowledge. Knowledge doesn’t cure a psychological bias. A cognitive bias is a systematic error in how we think, as opposed to a random error or one that’s merely caused by our ignorance.

Two police officers were stuck in traffic. They were on a routine patrol, and not much was going on that morning. The older cop was driving. As they waited at the traffic signal for the lights to turn green, the younger officer glanced at the fancy new BMW in front of them. The BMW driver took a long drag on his cigarette and flicked the ashes onto the upholstery.

“What a careless guy!” mumbled the older cop. “Who ashes his new car?”

How much weightage would you give to the advice dispensed by an entrepreneur who is known to have successfully built a multi-million dollar business?

If you understand the role of skill and luck in the field of human endeavours, you’d question me back, “First tell me, if that entrepreneur was successful because of his skills or was it just luck?”

Fair enough. So here’s another piece of information for you. That entrepreneur has built multiple successful businesses so the odds are high that his success is the result of his knowledge, skill, and experience than pure luck. So tell me, would you take his advice seriously?

Recent advances in neuroscience and physiology have shown that when we take risk, including financial risk, we do a lot more than just think about it.

We prepare for it physically. Our bodies, expecting action, switch on an emergency network of physiological circuitry, and the resulting surge in electrical and chemical activity feeds back on the brain, affecting the way it thinks. In this way, the body and the brain string together as a single entity, united in the face of challenge.

In 1999 when Warren Buffett bought a 75% stake in MidAmerican Energy Holdings Company, David Sokol was its CEO. He retained his position till 2008. Apart from managing MidAmerican, Sokol played a crucial role in turning around Berkshire’s other investments like NetJets and Johns Manville. Over the years he established a reputation inside Berkshire Hathaway as Mr. Fixit.