Investment strategist Michael Mauboussin recently spoke at the CFA Institute Equity Research and Valuation Conference, saying that investors could generate more accurate valuations and improve their investment decision-making by avoiding certain behavioral pitfalls, one of which is relying too much on multiples. Mauboussin says investors are often quick to dismiss the DCF model because of the number of assumptions required—but they embrace a multiple approach that is equally reliant on assumptions. The P/E multiple, in particular, is widely used yet poorly understood by analysts and, as a result, is often misapplied, he says. "Multiples are simply shorthand for the valuation process. You can't get valuation right without understanding the economics of the business." You can read more on his remarks here.
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