In Dr. Damodaran’s latest (7 January) post, he reflects on the data variables he collects and estimates every year (BVR makes use of some of Aswath’s conclusions in our Cost of Capital Pro).

His conclusion as he begins the cycle for 2023: What was once a trickle is “now a flood.”

He recalls the halcyon (perhaps they weren’t as great as we recall) days when, “to obtain [U.S.] company-level information, you needed to find its annual reports in physical form and for industry-level data, you were dependent on services that computed and reported industry averages, such as Value Line and S&P.”

Among other things, Aswath gently reminds all analysts and BV experts of four common errors that often creep in once data become overwhelming.

1. Get perspective: “One of the challenges that anyone doing business analysis, investing or valuation faces is getting a measure of what comprises a reasonable value for a business metric.” This makes it “easy to create ‘fairy tale’ valuations and analyses … without a sense of the cross sectional distribution of that metric at the time.”
2. Mean reversion: “The tendency for numbers to move back towards averages is a strong one. That said, to use mean reversion in analysis or investing, you need to know what these averages are, either over time or across companies, and data can help in that pursuit.”
3. Counter made-up numbers: Analysts and everyone else often make assertions without complete evidence, Damodaran states. “Rather than indulge in endless debates, where each side provides anecdotal evidence, data can prove to be the tie-breaker.”
4. Check rules of thumb: “Looking at the data can help you detect rules of thumb that work from those that do not.”