The New Ben Graham Speaks
NYU professor Aswath Damodaran is an intellectual force of nature who never hesitates to shoot straight. That's a quality value investors appreciate...until he challenges value investing. Damodaran challenged some value investing precepts today head on in a very thoughtful, engaging presentation. Here are the highlights of his talk I was able to capture:
Pushing Back: I am sick and tired of valuation being used as a piñata by value investors. Setting up a straw man and knocking it down is easy to do. But this piñata is ready to fight back.
On Value Investing: When everyone is a value investor no one is a value investor. If everyone says they're a value investor and everyone is doing it, then value investing is dead.
On Accounting: Fair value accounting is an oxymoron. You can have fair value or accounting but not both. I said that at an accounting conference a few months ago – they didn't like that very much.
On Facebook: Would I buy Facebook? Yes, at the right price. I would say that of any company offered. Don't invest in Facebook and come crying to me in two years that Mark Zuckerberg won't listen to you.
Leaving Off: If you're a hard-core investor, you're leaving 80% of investment opportunities on the table.
Sees 3 Faces of Value Investing: Passive screeners who follow in the Graham and Dodd tradition who screen for stocks that have characteristics that you believe identify undervalued stocks. The second group is contrarian investors. These are the ones who invest in companies others have given up on, either because they have done badly in the past or because their future prospects look bleak. Third, there's activist value investors who try to invest in badly managed, poorly run business and then try and change how the company is rn.
On Himself: I'm not a value investor. I'm an investor interested in value.
The 3 Biggest R's of Value Investing: Rigid, righteous, and ritualistic.
The 7 Misconceptions of Value Investing. One, that DCF valuation is an academic exercise. The value of an asset's is the present value of the expected cash flows of that asset. Two, beta is greek from geeks…and essential to DCF valuation. Three, the margin of safety is an alternative to beta and works better. Four, good management equals low risk. Five, wide moats equal good investments. We're good at assessing competitive advantages but not what makes them change. Six, intrinsic value is stable and unchangeable. Seven, value investors get a bigger payoff from "active" investing than growth investors.
On Value Destruction: 45% of global companies generates returns on invested capital below their cost of capital. That means almost half of public companies are destroying value.
Watch: Never ignore the markets. They're telling you something.
On Time Horizon: "As a money manager, your time horizon is only as long as your shortest-term client."
Strategic Investing: "Strategic investing is the description you use when you can't make the numbers work."
On Deep Research: "There is a belief that if you look at a company long enough and hard enough to make the risks go away."
4 Valuation Questions: The value of a business hinges on four things. What are the cash flows from existing assets? What is the value added by growth assets? When will the firm become a mature firm? How risky are the cash flows?
On Magic: "Diversification is not magic. It is the law of large numbers."
On Buffett: The Wizard of Oz isn't going to make you a better investor. The key is knowing yourself.