You are unlikely to find a corporate financier anywhere in the world who has no recognition of Aswath Damodaran. For more than 30 years he has been an undisputed authority on all valuation-related issues. He has published numerous books both on general valuation principles and on its more specific aspects.
One of his early books, published at the start of his career, carried a rather ambitious title of “Damodaran On Valuation” (and, yes, I may be receiving affiliate income if you decide to buy it). Today when industry professionals are referring to him as an undisputed authority in the field this seems fully justified.
Here are my 3 takeaways after watching a recent interview with him on YouTube:
Lesson #1
Despite of dealing with data and numbers, valuation is more of an art than a science. Every valuation is telling a story. To do the valuation you have first to listen to the stories created by others — by companies, by investors, by founders. The founders and venture capitalists are undisciplined storytellers. You have to ask yourself — “do I buy this story”? You can also do the 3-P test and seek answers to the very basic questions:
- Is it possible?
- Is it plausible?
- Is it probable?
Valuation is not limited to data and math questions, it is primarily about common sense. Having a good and sound story is bound to make you more disciplined with numbers in your valuation.
Lesson #2
“Growing up is optional, growing old is mandatory”. This applies both to humans and to companies. While age comes with its limitations and privileges the companies tend to fight aging instead of acting their age which is the healthiest thing to do. There is inevitably a time for companies to fold. With technological advancement the lifespan of companies has become significantly shorter — General Electric was around for more than 100 years, while for Yahoo it took just 23 years from start to finish.
When looking at the company’s story you have to understand where it is in its lifecycle, what can it realistically do and whether should it keep going at all.
Lesson #3
“Active investing has always been crappy”. Index funds offer an effortless pitch by saying that “we will match the market”. And they can deliver on this promise 100% of the time. Index funds also guarantee that you will not miss the winners.
Of course, you can, like Aswath himself, choose to be an active investor. But you should do it only when you enjoy the process and not expecting to beat the market.
With more and more investors going into index funds, at some point active investing is bound to come back — with fewer people out there looking for market mistakes the size and frequency of those mistakes are likely to increase. This will entice people back into active investing. But there’s no timetable available for this.
As a final thought, when teaching the philosophy of investing, Aswath emphasises that “investing is about preserving and growing wealth, not about getting rich”. This rule has nothing to do with either math or data. It is just a little bit of an old-fashioned common sense.
For those willing to watch the full interview and select their top lessons here is the link.
This note was first published on Medium.com on 13 September 2024.
