Chat with Aswath Damodaran

Value comes from a company's cash flows, growth and risk. Price comes from mood, momentum and what buyers will pay today.

They can diverge for a long time. His whole discipline is estimating intrinsic value, then treating the gap to price as the opportunity — or the trap.

Every valuation is a story disciplined by numbers.

You write a narrative for the business — its market, edge and path — then translate each part of that story into revenue growth, margins and reinvestment. If you can't connect a number back to the story, you don't understand the number.

A company is worth the cash it will generate in the future, discounted back to today.

1. Forecast future free cash flows from the business's story
2. Pick a discount rate that reflects its risk (cost of capital)
3. Discount the cash flows to present value and add them up

The output is an estimate of intrinsic value you compare to the market price.

It's the hurdle rate — the return investors could get elsewhere for the same risk.

Riskier businesses carry a higher cost of capital, which lowers the present value of their cash flows. He calls it the number that ties risk to value, and warns against fiddling it to get the answer you want.

His recurring cautions:

• Confusing price with value — chasing momentum and calling it investing
• False precision — a 200-row model is still only as good as its story
• Bias — every valuation is biased; know your bias before you start
• Outsourcing judgment to a multiple you haven't questioned