The Teacher

Aswath Damodaran is often called “the dean of valuation,” but his reach extends beyond that narrow definition to books about corporate finance, investment philosophies (and fables), and risk management.

In addition, Damodaran openly shares his opinions, research, datasets, and even class materials and sessions.  His website offers a rich vein of learning opportunities, including his blog, Musings on Markets.  If that’s not enough, check out his YouTube channel of almost nine hundred videos.

In December 2021, Frank Fabozzi interviewed Damodaran for Portfolio Manager Research; the quotes below come from that conversation.

Teaching

As is evident from his body of work, Damodaran loves to teach.  In fact, he says, “Teaching is my passion — I happen to teach finance,” and he believes that there is “no more prestigious job in the world, a job that makes more of a difference, than being a teacher.”  If he wasn’t teaching at a university (NYU), he would be happy doing so in a high school somewhere.

“Teaching is stagecraft,” he says, emphasizing the need to be able to tell stories well.  He thinks that also comes into play in doing valuation work; finding a fit between the numbers and the story is an important part of the process.  (This topic is covered in his book Narrative and Numbers: The Value of Stories in Business; a summary of it can be found here.)

Embrace uncertainty

“There is no right answer” when it comes to valuation — or the path of markets going forward.  In coming up with a valuation, “you’re wrong 100% of the time . . . but I’m OK with that.”  In his teaching, Damodaran eschews the use of case studies.  With tens of thousands of public companies around the world, he thinks that learning results from examining them “in real time, with real numbers,” so that you have to “live with the uncertainty.”

One major trap is that of aiming for too much precision; “sometimes you need to give up on precision to be accurate.”  You’re dealing with the future, so there’s no formula.  Trying to hone every number can actually get you further from the truth, all the while increasing confidence in that false precision.  You need to learn to be pragmatic rather than dogmatic in your approach.

That also involves the willingness to be wrong, and to say “the three most important words in investing:  I was wrong.”  Don’t be the type of analyst or portfolio manager who can’t admit that, who is always looking for something or someone to blame.

Go where it’s darkest

If you want to learn, “go where it’s darkest, go where there’s chaos and uncertainty,” because “markets make far more mistakes in the midst of chaos than in the midst of stability.”  He publishes IPO valuations and assessments of volatile companies like Tesla, where the range of opinions is extremely wide; in that case, from those who think “that Elon Musk is a scam artist” to those who think he heads “the greatest company ever.”  By assessing value somewhere in the middle, Damodaran “gets blowback from both sides.”  If it’s not just name-calling, he values the feedback, because that’s how his valuations get better.

Don’t accept the party line

To tell the story of a company, you need to understand what it does.  That doesn’t come from looking at historical financials and projecting them out — from or doing Google searches.  “You have to talk to people.”  Damodaran learned the most about Uber from Uber drivers.

In fact, he thinks “you’re not going to learn anything by talking to management,” and he has never once reached out to any firms when doing his work.  They are going to give you the party line and, depending on your role, you may be “constrained about what you say and how nice you have to be.”  Access is overrated.

Be different

Damodaran is independent in his thinking and speaks clearly about his views.  Here are some of them that stand apart from the conventional wisdom of the day.

Disclosures.  “We’re drowning in disclosures.”  A 10-K today is five times the length of those thirty years ago — and less informative.  (See Damodaran’s video showing the twelve pages of the 200-page P&G filing that he used to do his valuation.)  The entire risk section is “absolute nonsense,” just a long list of things thrown together.  He points a finger at the accountants and lawyers who argue for increased disclosures (and directly benefit when those disclosures are required or become common practice).

Buffett.  While Damodaran expresses admiration for Warren Buffett, he has a problem with the people that follow Buffett and “take everything he says as gospel.”  It resembles a never-questioning cult.

Sustainability.  One of the tenets of Damodaran’s work is an attention to the life cycle of a company and the expectation that it will “act its age.”  He compares a relatively young company to a teenager — it may be full of stories and expected promise, but amidst the progress there will be questionable behavior as it grows into maturity.  He resists the notion of “sustainability” as inevitably good, because “many companies should be liquidated.”  An aging company pining for its youth is likely to make boneheaded decisions.  “Accept your age and act appropriately.”

ESG.  No holds barred here:  “The entire thing is a scam,” with lots of people making money off of the concept and no real benefit being seen.  He mentioned several of the issues identified in the earlier “seven myths” posting, and challenged the notion that companies that received high ESG ratings are “less risky.”  Nor will they provide better returns, since you are constraining your opportunities.  He thinks that values-based investment decisions ought to be made by individuals, not CEOs (just as they have been in years past).  And we should quit ducking the hard political and personal decisions when it comes to environmental policies; getting to where we need to be is going to cause some pain, and outsourcing that through the “E” of ESG is wrong-headed.  We need “laws and regulations aimed at the public good.”

No one way

While different groups of investors believe that they have the one true religion, no approach has a monopoly on successful investing.  A variety of ways can work (although they often “work” at different times).

The important thing is to match up who you are with a philosophy that makes sense for you.  Damodaran describes himself as a value investor, but defines it differently than many who claim that moniker, being willing to invest in disparate companies at every stage of the life cycle, looking for those that have a worth that exceeds their price.  If the traditional value investor is “valuing the investments that are already made” and the traditional growth investor is valuing those “yet to be made,” they both care about value, just in different ways.  He is willing to look across that semantic breakdown — and other ones — to find value wherever it is.

Advice

As an accompaniment to the interview, here is some advice that Damodaran offers to his students (it also serves as the start of the “Other Voices” section of Letters to a Young Analyst):

Don’t mistake luck for skill:  Most investment success stories are due to luck, not skill.  My most successful investment ever was in Apple in 1997 and it was driven more by pity (for Apple) than by some sense of intrinsic value.

Experience means little:  All too often, older analysts try to intimidate younger analysts by pointing to their long experience in markets.  Unfortunately, there are so many paths that stock markets can follow, most of which we will never get to see over our lifetimes, that experience means close to nothing in markets and can often lead analysts down the wrong path.

Respect the market:  The valuation of companies and active portfolio management are driven by the belief that markets make mistakes.  While you may subscribe to that view, you should also respect markets.  Thus, if you find that a stock is under- or overvalued, start off with the presumption that you are wrong and the market is right and search for the reasons why.

Pay heed to first principles:  You will be told, especially during periods of crisis and euphoria, that first principles don’t matter anymore and that there have been paradigm shifts.  My advice is for you to pay particular attention to first principles, especially in those periods.

To thine own self be true:  Markets are about money and money can twist human beings into pretzels.  If there is enough money at stake, you will find ways to do things that you should not be doing and to justify those actions intellectually.  Listen to your conscience and learn to walk away.

Finally, Damodaran says at the end of the interview, “Don’t expect [a CFA or MBA] to magically change your skill set.  It’s the start of a process.”  Keep learning and questioning and challenging.  “If you get comfortable, you’re in danger.”