The Valuation Handbook: Valuation Techniques from Today's Top Practitioners

CHAPTER 3

Applying a Systems Mindset to Stock Valuation

 

Bartley J. Madden

Independent Researcher

 

 

Research on the life-cycle valuation model began in 1969 at Callard, Madden & Associates in order to improve stock selection and investment returns. Beginning in the mid-1980s, the model was extensively refined and commercialized by HOLT Value Associates. Today, many institutional money managers use the life-cycle valuation model, as well as relevant data from the global database of 20,000 companies in 60 countries provided by Credit Suisse HOLT.

This is a review of the five important choices that guided this 40-year research journey. A systems mindset that stressed intensive measurement and experimentation with variables was especially instrumental to the evolution of the life-cycle model. Systems thinking led to distinct departures from mainstream finance practices. For example, the life-cycle model uses a discount rate that is dependent on the procedure used to forecast a firm’s long-term, net cash receipt (NCR) stream.

Based on this research experience, I offer suggestions about the potential evolution of a new research program to address additional important, practical needs.

CHOICE 1: A SYSTEMS MINDSET

Knowledge improvement generally is a product of inquiry, undertaken to better understand or solve a perceived problem (Umpleby and Dent 1999). When we are involved in inquiry, we are as much a part of the inquiry as the external environment because we have preconceptions ...