When we talk about a benchmarks, again, this is not an either or issue. It's not that you have to use the historical or the cross section, and you can use both, you can add a theoretical. Usually the more perspective you have, the better the analysis that you can make. The more comprehensive is the analysis that you can make. Let's focus first on the historical benchmark. The historical benchmark case. We have the P ratio of Marriott today. In order to determine whether Marriott is properly valued or overvalued or undervalued, then we're going to look back at the history of Marriott. We're going to be comparing the PE that we observe today, with the PE that we've had in the past. If we go back to the table that we had before, then we know that the Marriott's PE was 39. That was based on trailing earnings, on the earnings that we have observed that is at the beginning of this year. The previous five years and previous 10 years, the average of those PEs was close to 30, 29.6, and close to 32, 32.1 for Marriott. What we can conclude in a very preliminary, and probably wrong if we don't go any further analysis is that Marriott is expensive because the PE ratio of Marriott, what you had to pay per dollar of earnings per share is higher now than it was over the past five years, and that it was over the past 10 years. That's again very preliminary, and it may end up being wrong. But at the end of the day, this is the comparison that we do with the historical benchmark. Where the company is today in terms of PE, and where it was over the previous five, 10 years or any number of years that you may want to focus on, which of course may be an issue, how many years you need to go back. Now, the idea, the motivation for this is to say look, if the conditions that we have around Marriott today, if the company hasn't changed substantially over the last five years or 10 years, then whatever was valuation over the past five or 10 years should be valuation today. That's the idea. If the general conditions didn't change too much, the valuation shouldn't change too much. Now of course, there are some issues that you have to deal with. One of those is companies always changed. That's as a matter of course, and the environment always changes. That's as a matter of course too. The question you need to ask is, has the company, has the environment change substantially? So that we can say that whatever devaluation it had in the past is not relevant for the situation that we've had today. That's where an analyst really contributes. That's why this is not the comparison between two numbers. That's where an analyst needs to come in, and say, "Well, the company has changed but not that much, or the company has changed in a very substantial way, and so the averages that we had in the past, don't have to be representative compared to the averages that we have today. You always have to be asking that question when you use that historical benchmark, whether you're comparing apples and apples or apples and oranges. Meaning that whether the company or the environment change so much that whatever devaluation we observed in the past is or is not relevant for the situation that we need to analyze today. Now of course, we can always discuss endlessly because theory doesn't really help you here. How many years you need to include in their average? We included five and 10, which are just round popular numbers, but of course, that there's nothing that says that you have to use five and 10. Sometimes the question may be going back as many years as we think that the company is comparable to what it was today. My typical example here is considered telecommunication companies in Europe around the beginning of 1990. Well, right around that time, the whole industry was deregulating. All these telecommunication companies are used to be one product monopolies. They were providing basically fixed phones, fix line telephones in each of them in one country. Now, they're becoming deregulated. They can compete in other countries, they're offering Internet access, they're offering mobile service, they're offering all things that have nothing to do with what they did before. If you were standing at the beginning of the 1990s, and you were looking 15 years back for any of those companies, telecommunication companies, then that information would have been irrelevant. Yes. That there is a history of P ratios you could have looked at, but it's not representative of what the company is today. That's one of the things that you need to keep in mind. Now, how many years you go back? Well, probably as many years as we can safely say that the economy, and the circumstances, and the company haven't changed all that much so that the average that we take is more or less representative, is appropriate as a comparison to the multiple that we have at hand. The other benchmark that we mentioned is the cross-sectional benchmark. The cross-sectional benchmark basically says, look at the PE ratio or look at the multiple of this company today, and compare it to those of the competitors, companies in the same sector, companies in the same industry. Going back to Marriott once more, those are the historical average we've seen before. Now, we have the sector in which Marriott is it's the hotels and tourism industry. If you look at that at the beginning of the year, the PE ratio was about 28, quite a bit lower. Again, that the Marriott's PE of 39. Once again, don't jump into the conclusion that then Marriott is expensive maybe but you should sell it if you have it or maybe you should short-sell it if you don't have it. That would be two preliminary. We're still in step number 1, which is finding reasonable benchmarks to use in the comparison. But we can say from that very preliminary analysis that what people are willing to pay for Marriott in terms of earnings is much more than what they're willing to pay for the average company in the industry. That would be the use of the cross-sectional benchmark. Again, the motivation is look, if we're comparing more or less similar companies, then the valuation should be more or less the same. Now of course, that doesn't mean that all the companies in an industry or all the companies in the sector are going to be comparable. They don't have to be. They're may be vastly different companies within a sector. But if you average across a large number of companies, then a lot of those differences may actually go away in the average. Now, couple of things to be careful with. One of them, and this is one of the fights that I always have with my MBA students. Whatever company you propose as a comparable to the company you're examining, and they say, "Well, but that those two companies are very different." The first thing that you have to keep in mind is comparables are not identical. You never find a company that's identical to the one that you want to value, there's always going to be different. Some is going to be bigger in terms of market capital or smaller. Some are going to be bigger in terms of sales or smaller. Some are going to be bigger in terms of profits or smaller. Some will grow more aggressively, some less. Some maybe in some markets that are not in others. You can never find a company that's identical. You can only find comparables. That's why we tend to take more than one. That's why we tend to take averages because a lot of the difference can wash away when you take those averages. One of the things that you have to keep in mind, particularly now that the world has become more global is that accounting standards are different across different countries. Even between Europe and the US, there are very substantial difference in what you mean by one dollar of earnings. If you're comparing a PE ratio from the US or the PE ratio for a European company, and a PE ratio from a Japanese company, those things may be comparing apples and oranges or apples and elephants. Because again, one dollar of earnings may mean very different things depending on the accounting system that you're dealing with. The ideal way of doing this, and this is not trivial, but it can be done is to put everything. If you want to compare companies across countries, it's to put everything on the same accounting system. It doesn't matter too much which one, but then you'll be comparing apples and apples. You'll be comparing earnings that mean the same thing, and therefore multiples or P ratios that also mean the same thing.
