Damodaran near his home in La Jolla, CaliforniaAriana Drehsler
Aswath Damodaran
SAN DIEGO | Often called Wall Street’s Dean of Valuation, the 61-year-old Damodaran is a professor of finance at New York University’s Stern School of Business and an expert at discounted cash flow analysis—valuing companies based on their expected future cash flows. On his lively website, Damodaran Online, he tells readers exactly what he thinks about markets and stocks, and what he’s buying and selling himself.
Why are markets so volatile these days?
For 10 years after 2008, we lived in a world with low interest rates and low growth in developed markets, offset by high growth in emerging markets. Companies were able to grow their earnings. Markets have now woken up to the fact that that period is over. You’re playing a game with a market that still hasn’t decided how to adjust.
What should individual investors do?
Make your portfolio decisions based on what’s right for you, given your income, need for liquidity and how much risk you want to take. Then stop watching CNBC all day. I mean, 25 years ago, you had no idea how your portfolio was doing.
How should a novice start value investing?
Value investing done right requires incredible amounts of patience. For most people, that is very difficult. That’s why they can read about what Warren Buffett does, but never deliver the returns. Start slow. Stick with things that cannot hurt you. Don’t put your money in one big stock. Go with an index fund. Start a base for your portfolio that’s solid and then learn about stocks.
I’m having trouble keeping track of your holdings in Apple. What have you done with it lately?
I’ve bought and sold Apple five times in the past seven years, because it’s one of those stocks where the market is manic-depressive. A new iPhone upgrade does better than expected, and the market pushes the price up too much. You get one disappointment and it pushes the price down too much. Somewhere there’s an intermediate story that makes sense. I shorted it last year at $230 (U.S.) and said in my blog I would cover at $200 (U.S.). It kept going down, so it cost me a lot. I bought again recently at $175 (U.S.)—it was cheap based on my new valuation. It’s now down by $7 (U.S.).
Are you worried about making mistakes?
I tell people I’d rather be transparently wrong than opaquely right. I put everything I do on my blog, so everybody knows when I screw up. It’s part of investing.
What about Facebook?
I originally bought it for $18 (U.S.) three months after its IPO in 2012, when people were disappointed. I sold it too early—at $50 (U.S.). It kept going up and up. Then you had the Cambridge Analytica scandal last year, and I bought at $155 (U.S.). I put a limit sell order on at $210 (U.S.), and I got incredibly lucky, because it went past that. Now it’s down to about $150 (U.S.). I’m tempted to buy again.
Why the limit sell?
When I buy something, I put a limit sell based on my valuation. If the price reaches that number, I want it to be automatically sold. Otherwise, I tend to do stupid things.
Like ride your winners?
Exactly.
What’s your best investment ever?
I was an Apple user starting in 1989, and I bought the stock as a charitable contribution, convinced it was going to die. I bought it at $6 in 1997, and 13 years later, it was at $600. Often, luck is the dominant paradigm that explains why you make money and why you lose it.
Do you have a favourite investing book?
Hmm. I tell people they read too much and think too little. I’d go back almost 200 years to Charles MacKay’s Extraordinary Popular Delusions and the Madness of Crowds. It tells you how little the world has changed. You have CNBC taking the place of the pub to spread rumours.
How do you identify individual stocks? Do you screen them?
No. I usually look for a news story that says a stock has dropped a lot. Nine times out of 10, I conclude that’s justified. I looked at Amazon and Apple when they hit $1 trillion (U.S.) in market cap. Is that good? Is it bad? Let me try valuing the companies now.
How many stocks are in your portfolio?
I’m in 50, but they’ve been accumulated over 30 years. Some of my best have been spread over 10 years. I prune any stock that exceeds 4% of my portfolio. It’s cost me—I pruned Apple as it kept rising. But you know what? I sleep well at night.
John Daly