X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Damodaran's pearls of wisdom: Part I - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Jul 4, 2013

    Damodaran's pearls of wisdom: Part I

    In a recent investor event held in India, Professor Aswath Damodaran of The Stern Business School has shared some words, which we believe are invaluable to the investor community. His views on the two most commonly used terms are something that has caught our attention. In the investment world the terms 'investment philosophy' and 'investment strategy' are usually used interchangeably on most occasions. But, Prof. Damodaran, a legend in his own right, believes that the terms have different connotations and therefore have different implications for investors. During the event, he has spoken about the difference between these two concepts and has also talked at length about the two distinct investment philosophies.

    We would be presenting a synopsis of Professor Damodaran's views through a two part series. In this article we aim to explain the concept of 'investment philosophy' with a particular emphasis on 'intrinsic value investment philosophy'. The second part would explain Damodaran's views on 'technical analysis and arbitrage'.

    So, what is an investment philosophy?

    According to Damodaran, an 'investment philosophy' is a core set of beliefs about the markets. It is a behavioural set of assumptions about how markets work, how they fail to work, and how to take advantage of common mistakes made by investors in the markets. Because of the behavioural aspect involved, Damodaran argues that there is no one investment philosophy that should fit all. Thus one needs to understand one's temperament first before deciding on an appropriate investment philosophy that would suit him. A common investment philosophy for all is also impractical because risk aversion, time horizon and tax considerations vary among investors.

    Investment strategy on the other hand, is the philosophy in practice.

    The importance of an investment philosophy lies in the fact that without a particular investment philosophy, a portfolio will have the tendency to swing from one strategy to another. It would be based on what has worked best recently and this would lead to a huge turnover ratio, large transaction costs and poor returns.

    Therefore, it is of utmost importance for investors to decide on an investment philosophy and then keeping that in mind work out a strategy. For example if your investment philosophy is value investing, then the strategy could be to pick the lowest PE multiple stocks. Or, to pick stocks based on a contrarian view. So on and so forth.

    Intrinsic Value Investment philosophy

    Damodaran believes the intrinsic value investment philosophy can be practiced by both growth investors as well as by value investors.

    He classifies value investors as those who have an inherent suspicion about growth and have a knack of buying a company for less than the value of assets in place. Growth investors, on the other hand, are those who are on the lookout for companies, where the market's estimate of the company's growth is less than what the growth investors' perceive.

    The basic tenet of 'intrinsic value investment' rests on the fact that there is a difference between the market price and the intrinsic value of a security. While all of us know that at a point in time, market price is a constant, the intrinsic value is an estimate based on several factors. These factors include cash flows generated from existing investments, growth expected to be generated from those cash flows and the inherent risks involved in the growth of those cash flows.

    Value Investors believe that the gap between current price and intrinsic value will be closed when the current price will move towards the intrinsic value because of the fundamental strength of the company. However, the price of any tradable thing on this planet is determined by the omnipresent economic forces: demand and supply. Demand and supply are in turn driven by momentum, available liquidity and behavioural factors.

    Intrinsic value investors as such are not inclined to study these aspects. These concepts are of more interest to different breeds of investors, commonly known as technical analysts and arbitrageurs. We will discuss Damodaran's views on them in the second series of this article.

    Damodaran's Pearls of Wisdom - Next article | All Articles

     

     

    Equitymaster requests your view! Post a comment on "Damodaran's pearls of wisdom: Part I". Click here!

      
     

    More Views on News

    Tejas Networks Ltd. (IPO)

    Jun 14, 2017

    Should you subscribe to the IPO of Tejas Networks Ltd?

    Discover the Secrets of Hidden Smallcaps From These AGMs (The 5 Minute Wrapup)

    May 26, 2017

    Don't be surprised to come across some Super Investors there!

    A Trader's Nightmare. A Business Owner's Delight. (The 5 Minute Wrapup)

    May 19, 2017

    Not all small-cap investors see themselves as traders. Some see themselves as business owners.

    Securities & Intelligence Services Ltd. (IPO)

    Jul 31, 2017

    Should you subscribe to the IPO of Securities & Intelligence Services Ltd?

    Why Super Investors are Underperforming in This Market (The 5 Minute Wrapup)

    Jul 8, 2017

    If Super Investors can wait for the right pitch, so can you.

    More Views on News

    Most Popular

    This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)(The 5 Minute Wrapup)

    Aug 17, 2017

    A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

    Dear PM Modi, India is Already Land of Self-Employed, and It Ain't Working(Vivek Kaul's Diary)

    Aug 21, 2017

    Most Indians who cannot find jobs, look at becoming self-employed.

    It's the Best Time to Buy IT Stocks(Daily Profit Hunter)

    Aug 16, 2017

    The IT Sector could be in an uptrend till February 2019. Are you prepared to ride the trend?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    Think Twice Before You Keep Money In A Savings Bank Account(Outside View)

    Aug 22, 2017

    Post demonetisation, a cut in bank savings deposits rates was in the offing.

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    MARKET STATS