X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 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

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Damodaran's pearls of wisdom: Part I

Jul 4, 2013

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

DEEP INDUSTRIES Announces Quarterly Results (2QFY19); Net Profit Down 27.5% (Quarterly Result Update)

Nov 27, 2018 | Updated on Nov 27, 2018

For the quarter ended September 2018, DEEP INDUSTRIES has posted a net profit of Rs 130 m (down 27.5% YoY). Sales on the other hand came in at Rs 548 m (down 25.5% YoY). Read on for a complete analysis of DEEP INDUSTRIES's quarterly results.

RUPA & CO. Announces Quarterly Results (2QFY19); Net Profit Up 30.0% (Quarterly Result Update)

Nov 27, 2018 | Updated on Nov 27, 2018

For the quarter ended September 2018, RUPA & CO. has posted a net profit of Rs 281 m (up 30.0% YoY). Sales on the other hand came in at Rs 2 bn (down 0.3% YoY). Read on for a complete analysis of RUPA & CO.'s quarterly results.

DEEP INDUSTRIES 2017-18 Annual Report Analysis (Annual Result Update)

Oct 8, 2018 | Updated on Oct 8, 2018

Here's an analysis of the annual report of DEEP INDUSTRIES for 2017-18. It includes a full income statement, balance sheet and cash flow analysis of DEEP INDUSTRIES. Also includes updates on the valuation of DEEP INDUSTRIES.

TALWALKARS BETTER VAL. 2017-18 Annual Report Analysis (Annual Result Update)

Sep 26, 2018 | Updated on Sep 26, 2018

Here's an analysis of the annual report of TALWALKARS BETTER VAL. for 2017-18. It includes a full income statement, balance sheet and cash flow analysis of TALWALKARS BETTER VAL.. Also includes updates on the valuation of TALWALKARS BETTER VAL..

Hindustan Aeronautics IPO: Yet Another Play on India's Defence Sector (IPO)

Mar 14, 2018

Should you apply for the IPO of state-run military aircraft maker Hindustan Aeronautics?

More Views on News

Most Popular

Benjamin Graham Deep Value Stocks

The insights from a man who pioneered arguably the most successful form of investing there is.

4 Rebound Stocks to Profit from the Current Small Cap Crash(Profit Hunter)

Dec 3, 2018

Indian small cap space is offering a discount season. Make sure you do not get too late to scoop up the bargains.

It's Almost the Perfect Time to Buy This Safe Stock(The 5 Minute Wrapup)

Dec 6, 2018

My latest StockSelect recommendation ticks all the boxes of a great safe stock.

Players in an Oligopoly Should Have Financials Like This(Chart Of The Day)

Dec 7, 2018

This stock has corrected 30% from peak and looks attractive at these valuations.

Looking For Higher Interest Rates on Bank FDs? Read This!(Outside View)

Dec 5, 2018

Credit disbursement to the productive sectors of the economy such as infrastructure, engineering, food processing, textiles, and chemicals, among others is rising.

More

Small Investments
BIG Returns

Zero To Millions Guide 2019
Get our special report, Zero To Millions
(2019 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

MARKET STATS