Top positive review
Get this as your second Damodaran book
Reviewed in the United States on August 11, 2020
I'm a professional investor, though I traditionally work in the credit markets. That said, I've had ample formal training in securities analysis across the spectrum and often work with and help train equity analysts. In addition to reading the works of other authors, I've read a few of Prof Damodan's books. Of course, some may find reading about investment valuation to be as dry as dust, but if you like the subject I think you'll find his writing style insightful and even entertaining in some spots. As a bonus, you can find many of his lectures on line for free and they often align closely with the writings in his books. He also provides loads of information on his website and blog.
What I like most about Damodaran's work is that it is applicable to most any investor who can build a spreadsheet. His examples are usually real-world. I've read other books where I think, "That's great, but what do I do with that?" or "That won't help me because management will not release that type of detail to me." Damodaran presents options and solutions to virtually every scenario. A lot of The Dark Side is about that: He shows an obstacle facing the analyst, examines the "Dark Side" or what is often the easy way or the most-practiced way to address the obstacle, and then he shows the "Light Side" or what is the best way (which may or may not be easier). He always explains the ramifications for each method.
Like in his other books, Damodaran reminds readers that any valuation is garbage-in, garbage-out. One must constantly consider whether the model matches the story and how to think about whether input assumptions such as growth and return-on-capital are realistic (Narratives and Numbers is another book that addresses this).
I suggest this as a second book because it builds on his book "Investment Valuation." I think that book is fairly comprehensive for readers that know their way around an Income Statement, Balance Sheet, and Cash Flow Statement. If you don't understand how those flow, you'll need to start somewhere else. And if you're not sure about this author at all you can try his "The Little Book of Valuation" if you don't want to go all in on a 900 page book. The Little Book is inexpensive and a much quicker read - albeit very limited in depth and breadth.
For "The Dark Side" you can probably browse the contents here on Amazon, but in summary he goes into much more detail on valuation of distressed firms, control premiums, differences in how to look at cyclicals, mature firms, start-ups, to name a few. Important things like how to adjust multiples for cross-holdings and creating bottom-up betas are much more fully addressed in "Investment Valuation." In purchasing Dark Side, I was concerned it might be a re-write of Investment Valuation, but it is not. A little overlap and occasional review, but I never found myself thinking I bought the same book.
To be clear, Damodaran is one of my favorite authors, but I don't agree with him on everything his does. For example, in his books he argues that analysts should push beta towards 1.0 as the firm matures (to an 0.80 to 1.20 range, I believe). This presumes firms get more "economy like" as they grow, yet utilities as a group have probably seen their beta drop during the past 10 years (say, from 0.5-0.6 to 0.3-0.4). To me Utes will stay low-beta unless they merge outside that industry.
I also don't agree with his method for creating a "synthetic credit rating" (an indirect input into cost of capital) by looking at the interest coverage ratio. As an experienced credit analyst, that is really not the way to do it. There is so much more to creating a credit rating, both from a ratio perspective as well as a business risk perspective. For some industries and higher quality companies, I never looked at an interest coverage ratio since there were far better credit indicators. Oh well, he couldn't exactly include another book.
Damodaran is definitely a CAPM guy and his books mostly rely on DCF models. He does address multiples in depth and agrees they can be an important part of analysis. And even though he also talks about its weaknesses he always comes back to CAPM and DCF. To be sure, I agree with a lot of his reasoning behind that. For one, multiples include many implied assumptions that aren't really visible to the user. With DCF and all it's variations, the analyst is aware of every single assumption (e.g., growth rates at each stage, return on capital, leverage, reinvestment rate, etc). Damodaran touches on other Cost of Capital methods like Arbitrage Pricing Theory, but it's only in passing. That said, as an analyst, how do I use APT on my own when it requires a lot of data and analysis to apply it? I imagine APT is more useful to analysts with a big research department and few quant guys helping out so I'm left with CAPM and it's known weaknesses. And most anyone has access to the data needed to use CAPM.