Valuations are Never Perfect
They say that “practice makes perfect,” but that is never true in the complex world of valuations. This fact is acknowledged even by top experts in the field, such as Professor Aswath Damodaran of New York University, who is author of multiple books on valuation and considered perhaps the top expert in the field. There is always a bias in valuations. That is true whether you are valuing stocks, businesses, or even something as simple as a Toyota Corolla. And of course that sort of bias applies in the realm of divorce. At best, all valuations in a divorce are imperfect approximations.
Valuations in a Divorce
In a divorce, it is not uncommon for experts to be retained to assist with valuations. Such “expert” advice may range from something as simple as obtaining a comparative market analysis on the marital home from a realtor to experts in salary imputation, to much more complex business valuations. Judges, or those of us who practice as divorce lawyers know the situation all too well: each side obtains an expert, and the results are thereafter seemingly skewed by each party’s expert in favor of their own client. The party who wants to buy the vacation home from the other has an expert appraisal come back low, whereas the other party’s appraiser comes back with a high valuation.
As far back as 2009, when I was about to graduate from law school, Professor Damodoran wrote on his blog: “I firmly believe that bias is, by far, the biggest enemy of good valuations…By bias I am referring not only to the preconceptions we bring into the valuation of a company but also to the payoff to doing the valuation. He who pays the prices sets the bias in motion, and the valuation reflects it.” Professor Damodoran recommends that in “legal processes, we should have less adversarial valuation, where the expert for one side comes in with a high number and the other side with the low number and the court splits the difference.”
Joint Experts for Valuations
On the one hand, I could not agree more. Joint-experts are often more cost-effective and better able to get closer to the truth of a valuation. However, even here, there is the risk of bias and incentives that Professor Damodoran warns about. For instance, the law firm that does more business with an expert may still have an upperhand in a joint scenario, as the valuation expert has done more business with that firm and knows where his (or her) bread has been buttered in the past and is more likely to be buttered in the future. The appointment of mutual experts from a court roster may assist in this regard, but judges are often unable (or unwilling) to interject in this matter absent mutual agreement of the parties, and the firm that is more established is unlikely to want to cede their advantage.
Valuations and Complexity as Weapon
Another avenue where valuations are far from perfect comes when there is extreme complexity. I am currently reading the book “The Smartest Guys in the Room” by Bethany McLean and Peter Elkind. It is about the rise and fall of Enron, the notorious power company that folded under the weight of its own fraud and misguided internal valuations.
They spun such complex transactions that in the end, very few of their top brass could even understand what was going on. For years, the market rewarded the “sophisticated” structures at play, and provided Enron with valuations that far exceeded the actual value of the company, which ultimately went bankrupt.
Although a few short-sellers were able to follow some of the threads, very few caught on to the scandal before the whole business imploded. Valuations can be complex enough, but when the other side controls the situation they can utilize sophistication, complexity, or even fraud to obfuscate a proper valuation. And Enron was certainly far from the first or the last company to spin such webs of deceit.
Valuations Across Time
Moreover, valuations are ever-changing. Think about something like Bitcoin, whose price is changing 24/7. Some predict Bitcoin, which recently exceeded $100,000 per coin will go on to a million dollar price tag, and many others including people like Warren Buffett have argued that a Bitcoin should be valued at $0.00 as it has no intrinsic value. In fact, in 2022 Warren Buffett famously stated he would not buy “all the Bitcoin in the world” for $25.00 as it “does not produce anything.” As a value investor, Warren Buffett is essentially stating that the intrinsic value of Bitcoin is essentially $0.00 and that anything else is rampant speculation, no different than the 17th century “Tulip-Mania” craze, though at least with that you got some flowers.
As valuations take place at a certain point in time but all the data continues, they can never be perfect just based on that fact alone. Just as we’re always living in the present yet each second the present escapes into the past again, there are few (or no) circumstances where a valuation can reflect the true north of the present. Particularly in something as lengthy as a divorce, which can take years to finalize.
Conclusion
Which is all to say, in every divorce, you will need to negotiate with imperfect information. You will have made use of your experts, if so desired, and you will have hopefully done your due-diligence, but ultimately what you negotiate will be based, at least to some extent, on the incalculable. As Mathew McConaughey’s character states in the film the Wolf of Wall Street: “It’s a whazy. It’s a woozie. It’s fairy dust…” Be guided accordingly.
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