Methodologies, Valuation, Value Investing

Bill Miller’s Valuation Methodology (Legg Mason)

The points here are summarised from an interview with Bill Miller (Legg Mason) conducted by Kirk Kazanjian in his book Wizards of Wall Street.

How do you figure out what a company is worth?

  • We use what we call a multifactor valuation methodology, i.e. we look at the value of the business every possible way we can.
  • We use P/E, P/B, P/CF, but we adjust those numbers for the underlying economic reality.
  • We do all the cross-sectional analyses of trying to figure out what the historic parameters have been (i.e. to correspond with the historic underlying economic reality).
  • We do a scenario analysis of the business, by projecting cash flows out anywhere from 5 to 10 years under a variety of scenarios. One scenario would be where the current growth rate continues. Another, where the company does a lot worse. Another is where it does better. We then try to figure out what we call the “central tendency of busines value.” Each scenario analysis gives us a different number and then we see how those numbers cluster. If they all cluster around the same thing, then we have a pretty high confidence in the particular valuation range.


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