Crucial to see who’s driving the share prices, says McKinsey’s Koller

"I don't know, and it is hard to say,” says Tim Koller when asked about the possibility of a ninth edition of Valuation, the celebrated book he coauthored with Marc Goedhart and David Wessels.

- Satish John

Now in its eighth edition, the 952-page volume has become a staple in boardrooms and business schools alike, shaping how corporate leaders think about value creation, and has sold over 1 million copies worldwide—a rare feat for a corporate finance text.

As he approaches retirement from McKinsey & Co. in February, Koller hopes his colleagues will continue championing what he sees as the core of sound decision-making: pursuing growth only when it delivers strong and sustainable returns on capital.

In a conversation with Mint, the valuation expert reflects on heated equity markets, the rise of retail investing and the myths that still cloud our understanding of performance, while reminding companies that long-term value still depends on fundamentals, not momentum. Company leadership should pursue the “right balance” between ‘growth and return on capital’ to drive valuation, he says, adding that profits must be sustainable and capital must be allocated and reallocated to strategic growth opportunities. Edited excerpts from the interview:

This is also compounded by the fact that smart investors are selling their stakes in these startups, whereas small investors are buying in. Do you foresee a scenario where the small investors will hold the can?

The most crucial thing to look at is who's driving the share prices. If you look at the mega seven companies in the US, you'll see that the percentage of shares owned by retail investors is about double that of most companies. So, the share prices are being driven by relatively unsophisticated investors. And so that's when you have to be cautious.