According to their website, Duff & Phelps “is the premier global valuation and corporate finance advisor with expertise in complex valuation” and other fields. According to their annual Valuation Handbook – Guide to Cost of Capital, most stock valuations react to market news with a lag.
Often, valuators use conclusions of this model to make meaningful decisions about pricing company risk.
If the model isn’t true, then we will need to rethink the way we value companies — likely in a way which increases the value of closely held businesses. They will systemically overstate the risk of publicly traded corporations and therefore understate the value of closely held firms.
If the model were true, one could utilize the predictions to almost effortlessly make untold fortunes in the stock market.
I’m publicly sharing the results of my research, so I imagine you can guess where I stand on the question.
I am not comfortable using the “sum beta” methodology to estimate the riskiness of an individual stock. Any observed difference between the normal beta and the sum beta is likely the result of statistical noise. Unfortunately, this invalidates the conclusions of the Duff & Phelps methodology. Their industry risk estimates are likely biased in an upward direction.
I didn’t want this to be the result. I wanted to find an easy way to consistently beat the stock market, but I’m going to have to keep looking.