What’s it worth?

True, there are those who don’t really try to answer that question. For example, some momentum strategies have a valuation overlay, though most do not. And there are times when the relative performance derby causes fundamentally-oriented investors to toss their valuation discipline out the window. “As long as the music is playing,” as one infamous CEO put it.

Despite the difficulty (and what at times seems like futility) of the task, grappling with notions of what to pay or be paid for an investment is what makes the business go round. Thick books are written about valuation, but a few basics to keep in mind: Start with a deep knowledge of the business. Consider a wide range of possible business outcomes and avoid single-point forecasts of any variables — look for the key sensitivities in the numbers. And, by all means, have some sort of absolute valuation standards in the mix. If you don’t, you can justify anything. Then, let the debate begin.

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