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Professor Damodaran: Our Meeting with an Authority on Valuations

Apr 12, 2017

In this issue:
» Is there a bubble building in small and midcap space?
» Market roundup
» ...and more!
00:00
Rohan Pinto, Research analyst

Kunal and I have been working on a project.

To tell you the truth, it has consumed us.

The inspiration behind this little project was nothing short of mastering The Art of Stock Picking.

This took us on a journey to track the smartest minds in the world of investing.

In an earlier WrapUp, we wrote to you about how tracking smart money can give you an edge.

We then shared with you what we learned from India's Peter Lynch, Kenneth Andrade.

In this week's edition, we bring you an international guru, a professor who has been teaching valuations to students for decades.

Professor Aswath Damodaran is an authority on valuations. He teaches a popular course on corporate finance and valuation at the Stern School of Business at New York University.

We have been the beneficiaries of Professor Damodaran's pearls of wisdom in the past. However, this time around, we covered more ground.

Without any further delay. Here is our conversation with the legendary Professor.

What got you interested in stock markets?

To be honest, I am not that interested in stock markets. I don't follow stocks religiously, don't watch market TV shows, or read about stocks intensely. I am interested in markets of any sort, since I find it fascinating that thousands of buyers and sellers can create a market clearing price even on the most obscure and complex of claims.

Who has been your biggest inspiration?

My inspiration has always come from within. I think that looking to other people for inspiration is a dangerous thing to do. Even the best and most amazing people are human beings, filled with all of the false pride, blind spots, and frailties of humanity.

What according to you is the most difficult part in investing?

Learning what you don't know and what your blind spots are in investing. We all have our weaknesses, and often we are the last ones to recognize those weaknesses.

If you could change one thing about your investing approach in the past, what would that be?

Nothing. I am who I am today (as a person and as an investor) because of the mistakes (and right decisions) that I have made in the past. I don't believe in regretting or reliving the past and I also believe that going back and selectively changing only the things that you don't like about your own history is never as easy as it looks.

Could you tell us something about your mistakes in picking stocks?

If by mistakes, you mean stocks that I have bought that have gone down, what is there to tell? The nature of investing is that you are going to be wrong not just sometimes but a lot of the time and the way you insulate yourself is not by trying to avoid making mistakes but by spreading your bets.

What kind of businesses do you think will be the biggest wealth creators over the next two decades?

Who knows? This is the kind of hubristic macro question that people like to hear profound answers to, and I am afraid that I not only don't have the answer but don't even try to answer.

What do you think is the 'one thing' that every Indian investor should keep in mind?

That we live in a world where change is the only constant, that you have to keep an open mind, learn from everyone around you, and be willing to say the three most difficult (and freeing words) that anyone can say, 'I was wrong'.

If you had an extra hour each day, what would you like to do?

Sleep.

Do you prefer a concentrated portfolio or a diversified one and why?

I am surprised that people still ask this question. It takes a special combination of arrogance and ignorance to think that you are so good at picking the right stocks and that so convinced that the market will come around to your point of view that you put all their money into four or five stocks. I don't have that conviction and I have always held a broader portfolio. Contrary to popular wisdom, there are enough stocks in the world that I can both pick stocks and be diversified at the same time.

What is your preferred Valuation metric and why?

I don't use metrics (by which I think you are talking about multiples like PE, price to book, or EV/EBITDA). To be honest, if you pick stocks based on metrics, you should just throw in the towel and just buy an index fund or ETF. After all, if you can screen stocks based on metrics, what makes you think that an automated process cannot do it much more efficiently and cheaply?

Towards the end of our interview, we asked him to answer a few rapid fire questions.

Questions Professor Damodaran's Responses
Your Top Three Favourite Books Moneyball. A Conspiracy of Paper. Thinking Fast and Slow.
Your Favourite Movie/TV Series Lost, ABC. The Walking Dead. The Twilight Zone.
Graham or Fisher or Lynch Lynch.
Alphabet or Apple or Amazon Amazon.
Growth (Size of the Opportunity) or Valuation A false choice!
Movies or Annual reports Movies.
Great Management or Business Moat Neither; the right price.
Historical Performance or Future Expectations Come on! Does anyone pick historical performance?
Cash Flow Statement or P&L Cash flow statement.

We appreciate the Professor taking the time to answer our questions, and we hope you enjoyed his often-amusing insights.

As I mentioned earlier, we are on a journey.

In the process, we have met-discussed-debated with some of the smartest minds in the world of investing, both India and abroad.

Now, there are many ways of picking stocks. Different investment philosophies exist to exploit the inefficiencies in the market.

However, we believe there is a great merit in marrying different yet proven investing approaches.

I highly recommend you to watch this space closely as Kunal and I are fully geared up to bring some interesting stuff in the coming days.

And Next time, we will share more value investing insights with you from one of India's best value investors. In our view, this man is both an accomplished teacher and successful practitioner of his craft.

In the interview, he told us what patterns investors should seek, which ones to avoid, and much more.

We are excited to share all his learnings with you.

Stay tuned...

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04:40 Chart of the Day

Professor Damodaran is very much clear on his thoughts when it comes to valuation. One simply cannot afford to overpay in the stock market.

Indian stock markets are at life time highs. In fact, the mid and small cap index has returned 31% in FY17, as against nearly 16% given by the S&P BSE Sensex and around 19% by Nifty.

Interestingly, many mid and small cap stocks have outperformed the index not only in last one year but have been on the winning streak from last 5 years.

BSE Small Cap Index Flying High

With earnings not improving from quite some time now, the rise in the stock prices has led to unreasonable valuations. In fact, some of them are in a bubble phase right now. We believe, these stocks are vulnerable if there is any correction in the broader market.

My Colleague Richa, Managing Editor at Hidden Treasure is very cautious about the same. She is very skeptical about the current scenario with stock prices shooting up and earnings are near stagnant.

We too believe, in times like this, one need to be extremely disciplined about the businesses they are buying. Compromising on the quality of the business could prove fatal in these times.

04:45

After opening the day on a flat note, share markets in India witnessed volatile trading activity and are trading marginally below the dotted line. Sectoral indices are trading on a mixed note with stocks in the FMCG sector and stocks in the banking sector trading in green, while stocks in the power sector are leading the losses.

The BSE Sensex is trading down by 55 points (down 0.2%), and the NSE Nifty is trading down by 11 points (down 0.1%). Meanwhile, the BSE Mid Cap index is trading up by 0.1%, while the BSE Small Cap index is trading down by 0.1%

04:55 Today's Investing Mantra

"Be Fearful When Others Are Greedy and Greedy When Others Are Fearful." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Rohan Pinto (Research Analyst) and Kunal Thanvi (Research Analyst).

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2 Responses to "Professor Damodaran: Our Meeting with an Authority on Valuations"

Paul

Apr 12, 2017

No one doubts that prof Damodaran is an authority on valuation. But I really don't know what u expect readers to learn from the interview... however small. He has either ducked ur question or not felt worth answering it. I think this was frankly a space filler with a big name attached to it.

Like (4)

sethuramasamy

Apr 12, 2017

Went in and came out as went in .Kabir says so that fits in here.

Like (2)
  
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