In today’s episode, William Green speaks with valuation guru Aswath Damodaran, who has written numerous books on how to value companies and invest successfully. The ultimate teacher, Aswath is a legendary professor of finance at NYU who has also made his classes available for free online to millions of followers around the world. In this conversation, he shares insights on how to value stocks, find the right investment strategy for you, and build a joyful life.
IN THIS EPISODE, YOU’LL LEARN:
Why it’s so valuable to build unscheduled “day-dreaming time” into your day.
Why it’s a competitive advantage to be a generalist in a world of specialists.
What 42 years as a professor have taught Aswath about how to communicate.
Why he’s intensely skeptical about the ESG movement.
Why he owns no cryptocurrencies and views Bitcoin as a currency “for the paranoid.”
Why he’s glad that he sold Amazon and Tesla, and how he hit the jackpot with Apple.
How he values businesses by focusing on three key drivers above all else.
Which investors he admires the most.
Why it’s so important to spread your bets and not concentrate too aggressively.
Why he believes that macroeconomic forecasting makes soothsayers look good.
How he maintains his serenity in difficult times, both in markets and life.
How “small, right” actions can have a massive impact on you and others.
Why he treasures the freedom to speak his mind, quit his job, and walk away.
Disclaimer: The transcript that follows has been generated using artificial intelligence. We strive to be as accurate as possible, but minor errors and slightly off timestamps may be present due to platform differences.
William Green (00:00:03):
Hi there. My guest today is Aswath Damodaran, who’s a cult figure in the world of investing. When it comes to valuing businesses, Aswath is pretty much the ultimate authority. He’s written numerous books with titles like Damodaran on Valuation and The Little Book of Valuation. As a Professor of Finance at NYU since the 1980s, he’s taught thousands of MBA students how to value companies and pick stocks. But Aswath is really a rebel at heart. So, he also took the very radical step of making all of his university courses available online for free. As a result, he’s built an enormous following around the world. His YouTube channel has something like 425,000 subscribers. His Google talk, last time I checked, had been viewed more than 1.1 million times, and his website has had nearly 10 million unique visitors. This extraordinary level of exposure has led Aswath to joke that he’s the Kim Kardashian of evaluation.
William Green (00:01:01):
It’s not hard to see why so many people are fascinated by him. As you’ll hear in this interview, he’s a fantastic speaker, wonderfully articulate, insightful, and never afraid to be provocative. In this conversation, he talks about his distinctive approach to valuing businesses. He speaks about stocks like Tesla and Amazon and Apple and Alibaba. He also explains why he regards Bitcoin as, “A currency created by the paranoid for the paranoid.” He talks candidly about why he’s intensely skeptical about the ESG movement. He explains what teaching for decades or so has taught him about how to communicate well. He also shares some profound advice on work and happiness and freedom, that had a powerful impact on me. I hope you enjoy this conversation as much as I did. Thanks so much for joining us.
You’re listening to the Richer, Wiser, Happier podcast where your host, William Green, interviews the world’s greatest investors and explores how to win in markets and life.
William Green (00:02:05):
Aswath Damodaran, it’s such a pleasure to be here with you. Thank you so much for joining us.
Aswath Damodaran (00:02:19):
I’m glad to be with you.
William Green (00:02:22):
I wanted to start by talking a little bit about your childhood, your upbringing in India. And over the last few days, I’ve read several of your books and listened to a million of your interviews and it struck me that in one of your books, Investment Fables, which has the subtitle, Exposing the Myths of “Can’t Miss” Investment Strategies, you dedicated the book to your parents, and I was really intrigued by the dedication. You wrote, “To my father who showed me the power of ideas and to my mother who taught me the value of common sense.” And so, I wondered if we could start by talking a bit about your parents and how they shaped and influenced who you are today.
Aswath Damodaran (00:02:53):
Yeah, I grew up in an India that’s very different from the India that you experience today, an India that really hadn’t changed much for hundreds of years. It was an India that was in many ways worse because there were far more people who were poor, but also an India that was connected with… It was social connections that held people together. I still remember when I was growing up, I mean, I was part of an extended family. I probably had a hundred relatives, all lived within five miles of me in the same city. And every evening, because there was no TV when I was growing up for the first 16 years of my life, TV hadn’t arrived, there was nothing on the radio, and the adults would all gather together, 30 people, and sit around and talk about whatever, and kids would come in and go.
Aswath Damodaran (00:03:33):
And I remember sitting in on their conversations. You weren’t allowed to interject when you’re eight or nine or 10, but that was my entertainment. Playing with my cousins, listening to the grownups talk about the issues of the day, debating, discussing, dissecting. So very early, I learned about the process of how you talk about issues. I mean, I tell people, “Disagree without being disagreeable.” And when you’re family debating issues, that becomes something that you have to stick to because you’re a family. So, you have to disagree without being disagreeable. So, I learned some very important lessons about how to talk about issues without being disagreeable. I hope I’ve been able to absorb those lessons because there are times I am disagreeable, but I wouldn’t change it for the world. I mean, there were so many technological wonders I did not have access to, but I had other things that substituted and made up for that.
Aswath Damodaran (00:04:23):
We are all the products of how we grow up. And in a sense, there’s nothing I would change in how I grew up. It gave me a very safe environment to grow up in. I had none of the issues that my kids have to go through with social media and peer pressure. I mean, it was a very sheltered environment, and I was lucky to be born into a family with means in India. That made a huge difference and it made me realize how much luck plays a role in where you end up and be there. But for the grace of God, I could have been born five miles away in a different family and my path upwards would not have been there for me. And at least the time that I was born, there were no chances to get out of that spot if that’s where you were born.
William Green (00:05:04):
And you moved to America, I think, in 1979. So you came from a place where, if I’m right in thinking, in Chennai, it was a city of something like 10 million people, that I remember you once saying had only five restaurants back when you were a kid there. And so, this place that was kind of frozen in time and then you go to America, and I’m wondering what that culture shock was and what in a sense-
Aswath Damodaran (00:05:25):[inaudible 00:05:25].
William Green (00:05:25):
Has drawn you to America, because it seems like in some way, you love the place.
Aswath Damodaran (00:05:31):
Chennai in 1979 and LA in 1979, if you were putting a spectrum of humanity, were on opposite ends of the spectrum. Not in good or bad ways, in terms of how they operated. I still remember the first day I landed in LA, TV was not something I’d watched very much. I mean the last two years before I left Chennai, TV had just arrived. I think that two thirds of the shows were farming shows. It was three hours every evening. And then, I Love Lucy. Now, the USCIS I had given I Love Lucy and they played it over and over again. And that was the only show that people watched. It had a 100% ratings.
Aswath Damodaran (00:06:07):
So I land in LA and the first evening, I turned on the TV and I saw [Roll A Doobie 00:06:11]. I don’t know whether you remember. [Roll A Doobie 00:06:13] is these women who go around knocking each other out. And I said, “This is something I never thought I would see on TV.” I mean, it was culture shock, but I was pretty adaptable. I was able to adapt to LA pretty quickly. And as you said, I loved the energy, the excitement that came from being in America with all pluses and minuses. Again, I wouldn’t trade that for anything in the world. It made me, again, who I am today.
William Green (00:06:38):
You ended up at UCLA, you have multiple degrees if I remember rightly, and I wanted to get a sense of how you stumbled into teaching, because it seems like everything you do really is about teaching whether it’s being a professor at NYU, making videos for YouTube, writing your blogs, writing your books. And so, I’m curious how you actually discovered this lifelong passion which… What, you’ve been teaching now for 40 odd years?
Aswath Damodaran (00:07:02):
42 years now. No, it was accidental. Like so many things in so many people’s lives, it was just being at the right place at the right time. I came to UCLA to do my MBA. At that time, I’d already got a Master’s in Business in India, but because I had only 15 years of education, in India, school runs through quicker, US universities then required 16 years. So basically, I had to come back for a second Master’s. And my intent was to do what all MBAs do, which is to go work for some place which pay me a lot of money. When I started in 1979, that one might have been a consulting firm. But by the time I got towards 1981 and getting close to graduation, I was hitting the start of the growth of Wall Street exploding out, where you saw investment banks hiring.
Aswath Damodaran (00:07:47):
And I was on the verge of accepting that position at an investment bank when I realized I had run out of money and I needed to do something just to get enough funds to make it through when my job started. So I took a job as a TA, a teaching assistant, for an accounting class, a subject, as you might know, I don’t particularly care for. But I needed the money. So I remember I said, “I’ll get this done. It’s a quarter. How much pain can it be?” So I still remember that first day I walked into the class, and I was nervous. I mean, like everybody is when you’re in front of a big group of people. At about 15 minutes in, I don’t know what it was, but I realized that this was what I wanted to do with the rest of my life.
Aswath Damodaran (00:08:26):
I’m not a religious person, but I do believe that you get these moments of clarity when, I don’t know, some supreme being is saying, “Hey, listen, this is what you were meant to do.” I was lucky to be listening. And that moment changed my life because I said… And I remember right after that class, I marched up to the floor of the finance department, talked to professors there about, “Hey, how can I get into the PhD program? I want to be a teacher.” And luckily, that path opened up and I became a PhD. And the rest of my life has been all about teaching.
William Green (00:08:57):
I remember you once describing that as a [Godshot 00:09:00], which I thought was a wonderful phrase to describe that kind of 15 minutes that change your life. I am sort of a mystic who pretends to be rational because I cover the investing world where you’re supposed to be rational. So, I kind of love the idea that somehow there is some sense in which we’re being guided in life. I have no rational or objective basis to believe this, but it gives me pleasure to think it.
Aswath Damodaran (00:09:21):
And I believe we all get moments like that through our lives, but we’re so busy with our lives, we don’t listen. I tell my kids… They have social media, they’re constantly filling their days. And I still do this. Every day, I try to give myself some time. When I’ve nothing scheduled and I’ve open slots, it’s daydreaming time. I think we think about daydreaming as a waste of time. I think daydreaming is when you open your mind up to, “Hey, what can I do that’s different? What can I learn?” And I really value those moments because I think it makes a difference in my life.
William Green (00:09:55):
I was very struck by that. I remember hearing somewhere that every morning you would read the paper, you would kind of look at the stories. You wouldn’t read the opinion pieces, because you didn’t want them to shape your view too much. And then, you would sit by the water often near your home in California and would just look out and mull over them, and that process informs a lot of what you do. And given how noisy and distracted most of our lives are, I’m curious about how having that kind of systematic process built into your day actually has become fundamental to you. Do you find it’s really a key part, to put it in pragmatic terms, of your competitive advantage?
Aswath Damodaran (00:10:29):
The way I describe it is we live in a Google search world, which is when you have a question, you go to Google search, and you almost always find at least what you think is the answer. It’s become awfully easy to find an answer to everything. And I think in the process, we’re missing an opportunity, which is when you have a question, sometimes spending a few minutes to try to reason your way to an answer. It might cost you a few minutes, but it’s like your brain is like everything else. It needs exercise. This is the process by which your reasoning gets refined. I know I’m lucky now I live two blocks from the ocean. I take my dog for a walk in the morning. I sit on the bench, I watch the ocean. It’s amazing how waves kind of add to the process of, “Hey…”
Aswath Damodaran (00:11:10):
And I’ve looked at the stories for the day. I’ll give you an example. Amazon buys Activision, big story, and I know there’ll be lots of opinion about it by the end of the day. And I think about, “Hey, how can I explain this using the frameworks I have for thinking through corporate finance and valuation and investing?” I might not get an answer, but at least, I have a way of thinking through it before I look at the opinions. And I might agree with the opinions and I might have thought of something that everybody else was thinking anyway, but I don’t think it’s a waste of time. It’s still part of the process of creating a point of view that’s yours, rather than taking on somebody else’s point of view.
William Green (00:11:47):
It seems to me, one of your defining characteristics, having just read a lot of your work and studied you over the last week but having not met you before, is this very free thinking, independent spirit that you have. And it’s really striking to me that this runs through everything that you do. If I think about your approach to teaching, it’s pretty radical. You’re famous as a professor at NYU, but at the same time, you chose many years ago to have this website where you make everything available for free, including your MBA courses at NYU, which people pay a fortune for, and even your lecture notes and your quizzes and stuff like that. And I’m wondering what led you to take this radical approach, why you did it, what’s wrong with universities, the way they’re structured, and also the kind of backlash you must have received from NYU when you decided to undercut their extremely lucrative business.
Aswath Damodaran (00:12:35):
Early on, I realized I was a dabbler. I was interested in many different things. We live in a world of specialization. In finance for instance, now you don’t become a professor of finance. You become a professor who specializes in options and futures, or in some aspect of investing, performance evaluation of mutual funds. Your entire life is built around that. I think that’s perfectly okay if that is your competitive advantage. I mean, I work in a building where there are four Nobel Prize winners in this building. Rob Engle is down the corridor from me. You know what? If I fight that fight of, “I’m going to become a specialist,” that’s not my competitive advantage. There are going to be people who are far better at specialization than I am.
Aswath Damodaran (00:13:17):
One of the things that I bring to the table is I teach corporate finance, I teach investing, I teach portfolio management, I teach investment philosophies. These are not topics people usually teach because they’re very different topics requiring very different backgrounds. I find it advantageous to be teaching all these things because when I teach valuation, I draw on the fact that I know how to look at a project in a company and do a project analysis. It helps me when I value companies. So to me, being a dabbler has become an advantage in a world full of specialists. It’s like being a generalist in a world where everybody’s a specialist. I give people the analogy of today in medicine, you go to a doctor, it’s very difficult to get a full diagnostic from that doctor because that doctor is so specialized that they have to send you to three other specialists before they can tell you what’s wrong with you.
Aswath Damodaran (00:14:03):
And in the process, there can be something seriously wrong with you, but all four specialists put together don’t see it because each of them is so focused on their part of the body. In business, finance, investing, I’m afraid the same thing is happening. We have a lot of specialists. People who have very deep interests, but they’re very narrow. And I think there is an advantage to being a more general thinker, somebody who thinks about issues on a broader term. I will never be able to compete on any topic with a specialist on the topic. I don’t know enough, but I know just enough to make myself dangerous. So I know just enough about cryptos, but I don’t want to spend my life researching cryptos. I’m intrigued by [inaudible 00:14:44] and how it’s been sold, but I have no desire to become an ESG specialist. So, I actually have no interest in becoming a specialist.
Aswath Damodaran (00:14:51):
Even in evaluation, when people say, “Are you a specialist?” No, I really am not because I’m just taking something that’s very basic and teaching it. On the teaching front, I’ve always been surprised that people don’t share more because sharing… I mean, knowledge is the one thing you can share. And you’re not giving up anything. Actually, you’re gaining. And there’s a more selfish interest. Every teacher is a repressed actor. You’re basically on a stage and if you asked an actor, “Would you rather have an audience of 20 or an audience of 2000? I mean, you’re going to be acting on the stage anyway. Why would I settle for an audience of 20?” So I remember very early in this process in the 1990s, I set up a camcorder in the back of my classroom and I recorded my classes. And I actually made four VHS tapes copies and I put them up so people could watch my… That was my first attempt at online teaching.
Aswath Damodaran (00:15:39):
And towards the late 90s, you could for the first time convert these tapes into something you could watch online. The quality was off, but I put it up there because if I’m going to teach to a class of 300, which is my traditional class, I’d much rather teach to 3000. I mean, I’m teaching the class anyway. So early on, I decided that what I was going to do was share my teaching. And of course, you could argue that NYU pays me, that this is a classroom. But you know what? I don’t have to teach a class of 300. I do it because I love teaching. I know exactly how much tuition NYU collects from those 300 people, and I know how much they pay me. I’m not demanding a share of what they collect, but I’m going to demand my share of flesh. And my share of flesh for teaching really big classes which might make NYU millions of dollars each time I share classes.
Aswath Damodaran (00:16:28):
I don’t want a share of the millions, but I want to be able to give away the class for free. That’s my quid pro quo. You want me to pull things offline? Well, I’ll go back to teaching 58 people in a classroom because that’s basically what my contract as a professor requires me to do. And I could put a class limit, but I enjoy teaching big classes. But to teach these big classes, the quid pro quo is I get to share my teaching. So, NYU now has certificates based on my classes where they take the recordings. And they have certificates that charge 2000 and I’m okay with that. And there are some people who choose to pay the 2000 for exactly the same content they will get on my website, but they don’t get a certificate. I don’t have the bandwidth to test people and offer certification. But if all you’re interested in is learning, we live in a world where that is easily accessible. It requires discipline on your part to stay with a class. But I’ll be glad to provide the resources as long as you can provide the discipline.
William Green (00:17:20):
There’s something kind of profoundly disruptive and rebellious about you that I appreciate because I’m sort of built that way too. There was never a rule I encountered that I didn’t want to break somehow. And I loved when I saw on your website, it said, “I may not have the power to change the status quo, but I can stir the pot.” And I wonder if you could explain what that phrase means to you, because it seems to me so fundamental to who you are, this willingness to stir the pot, to ruffle feathers, and to disrupt.
Aswath Damodaran (00:17:46):
I know we live in a world where inertia is the dominant force. Human beings, by their very nature, want to do things the way they’ve always done them. And this is true no matter… It’s true in your family life, it’s true in business, it’s true in education. And I think it gets us into trouble. So when you look at the actual tales of disruption, of businesses being disrupted, the one common theme you see in the businesses that get disrupted is inertia slowed them down. And you look at brick and mortar retail in the 1990s. Barnes & Noble could have created an online version of its bookstore and driven Amazon out of business in ’95 and ’96 and ’97. It chose not to. Why? Because it was much more comfortable, much easier to stay with the true and the tested.
Aswath Damodaran (00:18:29):
And I think I know I’m lucky to be able to do this. Most people don’t have this luxury. You have a job. You can’t be disruptive at your job without getting fired. Now, I have a job where I have nothing to do but think of how can I change the way we do things because I think that it’s amazing. In business schools, we lecture businesses about being on their toes and being adaptive and not falling into inertia. But guess what? Universities are the most inertia-bound institutions on the face of the earth. A few years ago, I was in Bologna in Italy, and I think the very first university might have been in Bologna. It’s 1000 years old, and the buildings were there and the lecture halls. And I walked into one of the lecture halls and I was struck by how similar that lecture hall from a thousand years ago was to the lecture hall today, where you’ve got the deity, basically the professor, the learned one, up on top of the podium, and all the students sitting on the desk taking down everything you said. This one way passing of wisdom. And I said, “You know what? We haven’t changed much in a thousand years.” Because we’ve had a monopoly as universities in the education system, we’ve had no need to change and I think we’ve fallen into some really bad habits. One of the things that’s always informed my teaching is when I was a student, I promised myself that all those things that made me angry as a student, I would not do as a teacher. Now, I’d like people to think back to when they were students in college, just think about all the things that you encountered during your education, you said, “That’s terrible.” I remembered those things. So one of the things that used to make me angry when I was a student is I would do an exam and the professor wouldn’t get it back to me for two weeks, three weeks, three and a half weeks. And by the time you got it back, the feedback was completely useless.
Aswath Damodaran (00:20:17):
I promised myself very early when I first started teaching that I would never take more than 24 hours to return a quiz or an exam. And I think I’ve stuck with that. I mean, I have classes of 350. I give a quiz. It sometimes means I don’t sleep during the night. But within 24 hours, those quizzes are returned to my students. And I’m not saying this to brag about it. I’m saying it because it bothered me, and I said, “I will never do it.” So to me, what’s driven the way I think about changes in teaching is I look at what I didn’t like about my classrooms when I was a student and saying, “I don’t want that in my classrooms as a teacher.”
William Green (00:20:50):
It strikes me that there’s a lot for our listeners to learn from you actually about the art of communication. You’re not just a great teacher in the classroom, but your talks are amazing on YouTube and the like. And I remember years ago when I had to do a Google talk, which scared the hell out of me, I listened to lots of talks before I did it. And yours was far and away the most impressive of the ones I heard. And I remember just watching it and thinking, “God, this guy is smooth.” There was a kind of calmness and an ease and a comfort that I think partly is your nature, but partly also result of all of the reps that you’ve done in the classroom over so many years.
William Green (00:21:24):
But it also struck me that part of your skill was your willingness to provoke, to be a provocateur. And there was this wonderful beginning of the talk where, if I remember right, you said, “Basically, I sit at this nexus of these three really big, really badly run businesses of teaching, and writing, publishing, and finance. And they’re all begging to be disrupted and to be taken to the cleaners.” And I wondered if you had any advice for the rest of us on how to speak, how to communicate, because it seems to me that you’re really a master of this.
Aswath Damodaran (00:21:53):
I think that my two pieces of advice is don’t try to be somebody else. You got to be comfortable with your presence. And I’ll give you an example. I’ve never worn a suit to teach because when I started teaching, that was the standard. In business schools, people wore suits or [inaudible 00:22:09] ties when they walk to a classroom, because the view was students will not respect you if you’re not dressed up as if you’re an authority. And my view was, “Look, now if I bought a suit, I’m going to pay a few hundred dollars. My students are MBAs. They’re going to Barneys to get their suits for 3000 because they need to look good for investment banks. My suit is never going to look at as good as theirs and I hate wearing suits.” So I said, “Look, I don’t feel comfortable teaching in a suit. So, I’m going to teach in a T-shirt. I’ll teach in sweatshirts. Basically, I can teach in whatever makes me comfortable.” So, I had to pick something that made sense for me.
Aswath Damodaran (00:22:44):
Early on, I realized there’s some great teachers who were authoritarian teachers. I don’t know whether you remember the movie Paper Chase, I think where it’s about the Harvard Law School. And I don’t remember who it was, a great actor, maybe Gielgud was there playing the role. And he plays the role of a Professor of Law, and he intimidates. He has this immense presence in front of the classroom. But when he turns to a student, just the intimidation factor is enough to keep the class going. I realized very early that I was not in an intimidating person, that my presence couldn’t be built on, “I’m the authority figure, you’re not. And I’m going to tell you what to do.” So, I had to find a teaching style that fit me or a communication style that fit me. And my communication style is much more informal and much more open and much more willing to kind of accept the fact that there might be other people who push back. And over time, there are things I do better now than I did four years ago.
Aswath Damodaran (00:23:37):
One of the things I tell people is, “Look, there are days when you wake up and you get in front of a group, and you open your mouth and magical words come out. It’s like you can’t do anything wrong. You say, where did that come from?” It’s easy to teach when you’re in the zone, right? When baseball players are in the zone. When you’re in the zone, teaching is easy. Teaching or communication is difficult when you’re not in the zone. When you open your mouth and your tongue is getting in the way of your own words, it’s not your day. And I tell people, “You got to figure out ways to get into the zone when you’re not in the zone.” So, there are small tricks and I would suggest these. One is be well prepared. I’m prepared for my classes to the point I never have to look at my slides to know what’s on the slides.
Aswath Damodaran (00:24:18):
So I think that finding your zone when you’re not in the zone is something I do better now than when I started, because I’ve learned small tricks to bring myself back into the zone. Tricks like figuring out questions. One of the things you will notice in my slides is I’ve these questions asked or I give multiple choice answers and I put them up. So instead of throwing an open question to a group where nobody might react, I say, “Look, I’m going to throw this question up. I’m going to put five answers. None of the answers are going to be obviously wrong.” And I call for a minute of silence where people get to pick an answer. That minute actually helps me as much as it helps the students, because again, those moments allow you to gather your thoughts and say, “Okay, let me get back on track.” So, there are things I do now that keep me in the zone when I even…
Aswath Damodaran (00:25:03):[inaudible 00:25:00]. So there are things I do now that keep me in the zone even when I’m not feeling like I’m at my best. And being prepared, that I think is critical to teaching, but you’re right. One of the things I tell people is the biggest sin you can commit as a teacher is to bore people. I will provoke you. I will anger you. I’m willing to take any emotion over boredom. That doesn’t mean I’m going to prod at people just to make them mad. But it means that sometimes I would throw a question out that might be provocative because it challenges people’s beliefs.
Aswath Damodaran (00:25:32):
One of the first things I start my corporate finance class is I ask, “How many of you think markets are short-term?” Because that’s the conventional wisdom, at least is markets are short-term. We need to do other things to make them long-term. And about two-thirds of my class put up their hands and say, “Hey, I think markets are short-term.” And I say, “Can you give me a piece of evidence that backs up that view?” And it’s amazing how difficult it is to actually find actual evidence that markets are short-term.
Aswath Damodaran (00:25:57):
In fact, if you look at the actual evidence, you would conclude that markets are far too long-term. Otherwise, how can you explain the fact that you put $100 billion values on companies that haven’t figured out a business model yet? No short-term market would do that. So by opening up these questions where people have preset views and challenging those views, not because I want to change their views, that’s not my job, but to make them examine their own views. And if at the end they say, “I think markets there still short-term,” I’m perfectly okay with it. I’m not an evangelist when it comes to putting my views on others, but I want them to examine their own views.
William Green (00:26:31):
I think you’re kind of an evangelist for free thinking, for questioning orthodox opinion. Is that fair to say?
Aswath Damodaran (00:26:37):
I think that we should all be evangelists for this. I mean, who wants a world full of robots?
William Green (00:26:42):
One of the things I’ve particularly appreciated, and I’m agnostic about this. I don’t in any sense have the answer, but I really appreciate the way you’ve discussed ESG, the way you’ve been incredibly outspoken. This whole idea that companies should somehow be more environmentally and socially responsible and have better governance. And there’s obviously been a huge drive, commercially driven drive, I suspect from business leaders like Larry Fink, the CEO of BlackRock, to sell this idea to investors and to persuade everyone that it’s really beneficial for companies to do good, that it helps the bottom line and is profitable for shareholders.
William Green (00:27:14):
I think it’s fair to say that you are not convinced. And when I asked for questions on Twitter to ask you, there were several people who wrote to me about this. A listener named [Fabio Zugman 00:27:23], who I’m going to send a copy of my book, Richer Wiser Happier, to thank for his question, said to me, “You got to ask him about ESG.” And he said, “Do you think ESG will be a fad of the past? Or is it one of those things that will refuse to die as long as it serves as a marketing gimmick?” And so I wondered if you could talk us through this idea, why you’re so cynical about it, why you’re so skeptical.
Aswath Damodaran (00:27:44):
I first wrote about ESG in 2020, and I wrote about ESG because I’d never seen a concept explode that quickly out of nowhere to become the status quo. But usually concepts are the edges. No, the status quo had bought in, CEOs of companies. The corporate round table had bought this, signed the statement on stakeholders and how companies should be run for stakeholders. And the big investment funds led by BlackRock were pushing ESG to the forefront.
Aswath Damodaran (00:28:11):
But what made me suspicious was there seemed to be no trade-offs. So the sales pitch was you can have it all. You can do good and be more valuable. You can do good and earn higher returns. You can do good and you’ll have to sacrifice nothing. And through the history of humanity, being good has always been the more difficult choice. Being good has always cost you. In fact, if being good were the easier choice, we wouldn’t need religion in the first place, right? If the 10 commandments came to us as our natural choices, then why would we need religion?
Aswath Damodaran (00:28:41):
The nature of goodness is you got to have sacrifice. I’d have had a lot more respect for the ESG movement if they’d come up and said, “You know what, we need to make the world a better place. So companies have to accept that they will make less money and be less valuable in order to make the world a better place.” That investors have to accept lower returns because they want to be good.
Aswath Damodaran (00:29:01):
And if they’d made it a trade-off, I’d have said, “Okay, let’s talk. Let’s talk about what the trade-off is. Who’s making the trade-off? Who’s paying for this goodness?” And there’s still issues with ESG, but it would be an issue that you could talk about the trade-offs and say, “Does that make sense?”But the fact it was being sold as all good… It’s all cake, no calories. I said, “Somebody’s got to look under the hood.”
Aswath Damodaran (00:29:23):
So each of those in an area where I’ve seen this happen in the past, seen what happened. New concepts come up, which claim to be revolutionary, but really old wine in a new bottle claiming to be the magic way of coming up with a more valuable business. So it started with my favorite area, which is valuation. I said, “You guys keep telling me that ESG is good for value. Tell me where.”
Aswath Damodaran (00:29:46):
In my valuation class, I have a proposition called the It Proposition. If it does not affect the cash flows and it does not affect risk, let’s stop talking about it. So through time I’ve taken every buzzword in business and said, “Hey, whether it’s strategic considerations or China or cloud… Whatever that buzzword is, let’s talk about how it plays out in the cash flows and the risk because then we’re talking about something tangible.” Otherwise it just becomes this filler for whatever decision we want to make.
Aswath Damodaran (00:30:14):
So with ESG, that was my first reaction. Show me where. So I started looking at the evidence that ESG advocates were presenting. And I was horrified by the quality of research that passes for ESG research. Because, to be quite honest, it seemed to me that the research had many problems. One was, it was written by advocates, true believers. And they might have been deluding themselves saying, “I’m an objective researcher,” but when you start with a presumption or a prior that’s too wrong, it’s almost impossible to do clean research.
Aswath Damodaran (00:30:45):
The second was, they weren’t even sure what question they were answering. They were mixing up whether it was good for companies and whether it was good for investors in the same research. And the reason is very simple. One of the stories that has some backing to it is that ESG can make companies safer by protecting them from doing something stupid that can create a crisis.
Aswath Damodaran (00:31:05):
And I’m willing to listen to it. But if that story is true and ESG makes companies safer, those companies should have lower [inaudible 00:31:13], lower cost of equity, lower cost of capital. That’s good. But that means in the investors in those companies should earn lower returns as well. So what’s good for companies then can’t be good for investors as well. And much of this research was mixing up what was good for companies, what was good for… They weren’t sure what the question they were answering was.
Aswath Damodaran (00:31:31):
When I first started, very few people were pushing back. In the two years since, of course, the pushback has become much more tangible. And to be quite honest, I wrote a piece about ESG yesterday that I posted on my blog. I’m done with ESG, and I don’t want to re-fight. I’m going to move on to something else because I’m a dabbler. My interest has run out and I’ve pretty much said what’s on my mind. I’ve told people where I’m coming from and why I think what I do. I’ve no interest in forcing my thoughts on other people. And I will put out my views and if other people take strands of it and push back or make it their views, I’m completely okay with it. But I just wanted to make sure that people understood where I was coming from.
William Green (00:32:10):
I think it’s also really helpful to see things through Charlie Munger’s lens of just saying, “Look, you always want to focus on incentives first.” If there’s something you want to focus on first, it’s incentives. And you pointed out very eloquently that all these companies like McKinsey and Deloitte and KPMG and BlackRock, they have tremendous incentives to push this idea of investing in a socially responsible way. And so it does seem like if you understand incentives and you understand the way Wall Street works, you want to be wary.
Aswath Damodaran (00:32:39):
It’s the old Latin saying in law schools, right? “Cui bono?” You tell me who benefits, and I’ll work backwards from there. It’s a cynical view of the world. But unfortunately it’s a very effective way of thinking why you end up seeing things pushed to the front. Now it’s incentives, but it’s also, I think, any score-based system is going to create gaming. I mean, people often in the ESG complain about greenwashing. They say, “If only there wasn’t greenwashing, where companies try to look good, ESG would work.”
Aswath Damodaran (00:33:06):
And I tell them, “Look, greenwashing is a feature of ESG. It’s not a bug in the system because the way you’ve structured ESG, greenwashing is exactly what you’d expect.” In fact, if you told me that this was what you were going to do, I would’ve predicted greenwashing because every time we’ve created a score-based system, there’s gaming the system. And that’s exactly what’s happening now. It’ll only get worse.
William Green (00:33:26):
I’m slightly torn about this whole subject because I am sort of moralistic about these things. And I do wish companies behaved in a more responsible way. And so when I look at a company like Costco that I think does treat its customers very honorably, it gives me some confidence or it gives me some counterargument to convince myself that actually there’s a benefit to behaving decently and honorably in life. How do you think about that?
Aswath Damodaran (00:33:50):
That’s the point I also made. I mean, I think we each have a moral code, and we need to behave consistently with that moral code. By doing what? By not just investing in companies that track the moral code, but in our consumption choices, in the way we interact with our communities. Each of us needs to do the right thing.
Aswath Damodaran (00:34:09):
The problem with ESG is it’s actually saying you don’t have to do that. That’s so difficult. You drive your SUV the way you’ve always done. You buy your cappuccino at Starbucks, even though you might not like the way it’s run, but when you get back home, just buy an ESG fund and the scales have leveled up. You know what? I think that we each need to do the right thing. The problem though is, as I said, goodness has always cost, which is you got to give up something for that goodness.
Aswath Damodaran (00:34:36):
The fact is by choosing to shop only at stores that you think treat their employees well, you might have to pay a higher price. If your worry is that Amazon boxes are polluting the world, which is adding to the landfill, then you might not want to buy your stuff on Amazon. That’s going to be quite an inconvenience for a lot of people. But I think people don’t want to be inconvenienced. They want goodness to be delivered on a platter. And what ESG is promising them is, “We’ll deliver it on a platter. You don’t have to make those choices.”
Aswath Damodaran (00:35:04):
So don’t get me wrong. We all agree. We want to make the world a better place. The question is, is ESG the way to do it? I don’t believe so. I think we need to make our choices based on our own moral codes, because goodness is going to be a function of how you grew up, what you imbibe from your family. Essentially, it’s going to be a reflection of who you are as a person.
Aswath Damodaran (00:35:26):
I could go around my neighborhood and ask people to define good. I’d wager there’d be 20 different definitions of goodness. And what ESG is saying is, “We’ve come up with a consensus way.” In the universe that I live in, where nothing is agreed upon, how the heck are we going to consensus on what’s good and what’s not? I don’t even see that starting point as a point that makes sense.
William Green (00:35:46):
Another area where you’ve been very outspoken and kind of enjoyably provocative, from my point of view, is in talking about cryptocurrencies. I remember you had this wonderful phrase where I think you said that it was a currency created by the paranoid for the paranoid. Can you talk a bit about your view of why things like Bitcoin took off in terms of the social and economic environment that we were operating in when it was born? Because that seems like a really interesting and useful perspective on how it came into being and how it became so popular.
Aswath Damodaran (00:36:17):
In fact, when I described, I was talking about Bitcoin in specific because it still is the centerpiece for the crypto movement. I don’t know whether people are aware of that first paper that Satoshi Nakamoto, that pseudonym for whoever it was that created Bitcoin put together. It was written in November of 2008.
Aswath Damodaran (00:36:35):
I mean, I remember November of 2008. It was two months into not just a market crisis, but a crisis that shook our faith in every single institution, in governments and central banks. And basically it said, “You know what? We can’t trust anyone.” I still remember that feeling. The paper was born in that moment. And it reflected that feeling of you cannot trust authority figures, and Bitcoin is designed explicitly on the absence of trust.
Aswath Damodaran (00:37:03):
When I think about Bitcoin and I think about blockchain, essentially, it is an extension of what we do with our rest of our lives. You pick a restaurant based on crowd reviews on Yelp. You pick a movie based on crowd reviews on Rotten Tomatoes. Bitcoin is a crowd checked and a crowd tested currency. So that rather than a central bank, you’ve got these computer miners deciding whether your transaction should go through. So it reflects that complete absence of trust.
Aswath Damodaran (00:37:29):
So I understand that belief and it feeds into… I mean, there’s a subset of our population, and I’m not saying they’re right or wrong, that doesn’t trust anybody. And I would wager that if you did a Venn diagram of people who don’t trust anybody and people who are over-invested in crypto, there’s going to be a lot of overlap because you don’t trust banks. You don’t trust governments. And I think we can’t talk down to them because it makes sense from their perspective, to say, “I’m not going to put my faith in the US dollar or the Japanese yen or the Swiss frank because governments lie to us all the time and central banks are crazy.”
Aswath Damodaran (00:38:05):
So I think both Bitcoins and NFTs, if you look at their growth, reflect the fact that there is a portion of the population… It might not be very high percentage, but in terms of numbers, it’s a big number, that increasingly has given up on traditional financial assets. They don’t think of shares as ownership in businesses, the old Warren Buffett saying. They don’t think bonds are going to be honored in any sensible way with at least things they can use to buy other things. They’ve given up on traditional financial assets.
Aswath Damodaran (00:38:34):
In the old days, guess what they would’ve bought? It would’ve been gold, right? And so that’s the other description I’ve given of Bitcoin. It’s the millennial gold, which is, “Hey, I don’t trust anybody. So I’m going to go back to holding something that doesn’t depend on any of these entities.” So I understand why people hold onto it. In fact, you could explain the demand and supply based purely on that paranoia. So if the world becomes less trusting, I would expect the prices of cryptos and NFTs to keep climbing. So from that perspective, I understand what’s going on. I just think that what’s going on with cryptos is actually getting in the way of them becoming functional.
Aswath Damodaran (00:39:12):
Let’s take Bitcoin, right? Bitcoin is a cryptocurrency. One of the things you need in a currency is stability. As a shopkeeper, you can’t price things in a currency that goes up 20% during the course of a day. Then you’d have to keep changing prices constantly. The problem though is if you ask most people what they like most about Bitcoin is the fact that their holdings went up 40% in the last week or they sold short on Bitcoin, and it went down 25%.
Aswath Damodaran (00:39:34):
The speculators are driving the crypto game. And as long as they drive it, what they want out of crypto is going to be at odds with what the rest of us want out of crypto. So I do truly believe that there is going to be a digital currency sooner or later. I think we’re closer to it than we realize. I think that digital currency will have to get some degree of buy-in from governments and tax authorities. Because you can’t have a currency that nobody can track, from a legal perspective, from a tax perspective. But I think it’s coming. So I just don’t think when I see the existing choices out there that any of the currencies we’ve created so far is equipped to be that global digital currency.
William Green (00:40:13):
Have you ever bought any cryptocurrencies as a kind of speculative game or is it violates your principles?
Aswath Damodaran (00:40:21):
Currencies can only be priced. They can’t be valued. So when you buy or sell a currency, you’re trading, I’m not a trader. I’m an investor. I’m not saying that to make myself superior. That’s not my game. I’m not a good trader. And here’s what I mean about that choice between trading and investing because it’s a nice segue into thinking about investment philosophies.
Aswath Damodaran (00:40:37):
In investing, you value something based on a business, based on cash flows and you compare it to the price. And if the price is less than the value you buy at the price and you hope and pray that the price converges on that. In trading, you don’t care about that. It’s all about buying at a low price, selling at a high price. It’s about, you’re saying, so if I asked you, “What’s the value?” You’re going to say, “I don’t care as long as I can get the direction right.” It’s about gauging mood and momentum. The very best traders are really good at gauging mood and momentum.
Aswath Damodaran (00:41:04):
That’s why when people laugh at technical analysis or charting, I say, “Don’t be so quick to laugh. Trading is about mood and momentum and maybe this support and resistance lines that you laugh about tell me more about shifts in mood and momentum than digging through the cash flows and doing a full-fledge valuation.”
Aswath Damodaran (00:41:20):
I’m a terrible trader. Sometimes it’s good to know what you don’t do well. I avoid trading, not just in stocks, but in anything that can only be traded. I don’t trade. And for that reason I’ve never bought or sold Bitcoin, but I can understand other people who do, because maybe they’re better at detecting mood shifts in that business. So I’ve never bought Bitcoin. I’ve never sold Bitcoin because from my perspective I would not make money and probably lose my shirt doing it.
William Green (00:41:46):
You’ve written before, I think it may have been in The Little Book of Valuation, which I read recently, which is terrific. You wrote that it’s really important not to budge on first principles when it comes to investing. And I think you had explained at some point that that was why you’ve owned Amazon about four different times. And then you had to keep selling it when it became too expensive for you to justify owning it, which some people would criticize because they would say, “Look, you found a great business. Just hold it, just keep it.” And I wondered if you could talk to me about some of these key tenets for you. What are the first principles that are at the heart of the Aswath Damodaran way of approaching the investment world?
Aswath Damodaran (00:42:20):
I start with the presumption that each of us needs to find an investment philosophy that best fits us. There’s no one best philosophy. That’s why when you read books on Warren Buffett and Peter Lynch and you try to do what they do, not surprisingly, almost everybody who tries doesn’t do what they do. They don’t [inaudible 00:42:38]. Because it’s not just copying the way they pick stocks. It’s a psychological profile you need to kind of pull that investment philosophy off.
Aswath Damodaran (00:42:46):
So I’ve spent 40 years of my life trying to figure out the philosophy that fits for me. You still have to keep and go back because sometimes you realize there are things you are doing that don’t fit your makeup as a person. I’m a believer in value. I have faith that every asset has value. I have faith that I can try to estimate that value. And I have faith that at some point in time, the price will adjust to value. Keywords here are faith. The essence of faith is if you ask me for proof, I have zero proof that I can offer for all three propositions, but my investment philosophy’s animated by those three faiths.
Aswath Damodaran (00:43:20):
So I believe if I can value something and I see a price and the value’s much higher than the price, that if I buy it at the low price, over time the price will just to that. But if that’s my faith, then that faith requires me to also act when the price goes above value. So if I buy something that’s cheap and the price goes up 80%, well above my value, I revalue the company. Then if my faith led me to buy because something was undervalued, the same faith should lead me to sell when it’s overvalued.
Aswath Damodaran (00:43:49):
That’s why when people say, “I’m a value investor, I buy when something is cheap, but I always buy and hold.” I say, “Well, how do you reconcile that contradiction in what you just told me? Because if you’re a value investor, you buy things that are priced less than the value. But if you buy and just hold, what happens if the price goes up tenfold, 20-fold, 50-fold?” Because that doesn’t seem to be an internally consistent philosophy.
Aswath Damodaran (00:44:13):
And my experience when you have a philosophy that has internal inconsistencies, it eats into itself. Those internal inconsistencies come back and eat away at the core of your philosophy. So I sold Amazon four times if you asked me, should I have a held on? Absolutely. The benefit of hindsight, you could always look back and say, “I should have held Amazon.” First time I bought it was 2001, maybe hold it all the way through 2022.
Aswath Damodaran (00:44:35):
And so I’ve left money on the table. But to me that’s a small price to pay to have a philosophy that stays consistent. So if you asked me to describe the philosophy, I can tell you with a straight face that, “Hey, I have a philosophy, might not agree with it. It might not be the right philosophy, but I act consistently with my philosophy.”
William Green (00:44:53):
How can a person actually go through this process of deciding what is the right approach for them? And also ask really the most fundamental question of all, which is whether they should be playing this game themselves, whether they should pick individual stocks themselves. Or whether they should just acknowledge the fact that they’re not really equipped to win that game and that they should outsource it to an index fund or a manager who’s better equipped than them. How do you go through that process if you are not a professional and you need to actually think about, well, what is my game? What edge might I have? Should I play this game?
Aswath Damodaran (00:45:26):
First is recognize it’s a work in process. That’s why I describe my philosophy as something that I’m still working on. And what I mean by that is sometimes I will invest in something and I realize it’s making me uncomfortable. I have a very simple test when I invest. It’s called the sleep test, which is if I lie awake wondering about something that’s in my portfolio, there is something wrong with what I’ve just done, because I shouldn’t be thinking about what I’m invested in for the rest of my day.
Aswath Damodaran (00:45:53):
I think people who constantly think about their portfolios, they’re getting a message from their portfolio saying, there’s something here that’s making you uncomfortable. So I’m constantly looking for things that make me uncomfortable because then I have to go fine tune what I’m doing and say, “I shouldn’t be doing that again. It made me uncomfortable the last time I did it.” So I think that it’s listening to your own self telling you things, “Hey, this isn’t right for you.”
William Green (00:46:20):
Sorry to interrupt you. But as you were saying that literally as you were talking, my right eyes started to twitch because I’m thinking, “Well, I own these three stocks and they make me kind of uncomfortable and they take up too much of my energy.” Because most of the money I have is in funds run by other people or a couple of index funds that I’ve owned forever. And the disproportionate amount of time that I spend looking at and thinking about those three stocks, even though I try never to sell anything really. I mean, I sit on stuff for a long time. It just eats away at me. And so I wonder about the sort of the brain death that it’s causing, the excess emotional energy.
Aswath Damodaran (00:46:52):
The answer is the second part of your question. You said, when should you not actively invest? When it’s causing ulcers. When it’s causing pain. And I invest not because I think I can beat the market. I’ll be quite honest. I invest because I enjoy the process of investing, and the way I see it is if I beat the market, that’s icing on the cake for me.
Aswath Damodaran (00:47:08):
So I follow a simple rule, do the least damage you can in the process of creating your portfolio. I mean, let’s say you’re picking stocks at random. You think you’re doing things with the systematic way of this great model, but in truth, it’s just random. Now, if you have no transactions cost, then doing things randomly is going to deliver about the same returns as putting your money in an index fund. But we have transactions costs. We have monitoring expenses. So if you are doing things randomly and you’re a day trader, you’re creating costs and pain for yourself that is not just unnecessary, it’s going to eat away at your portfolio.
Aswath Damodaran (00:47:42):
So I really enjoy the process of investing and I try to keep the two most dangerous emotions in investing out of the game. One is regret, right? Where you look back and say, “I wish I had done that. I wish I hadn’t done that.” Partly because regret does nothing for you other than eat away at your insides saying… Because there’s no way you can go back in time and reverse something. And the other is it can actually have a very insidious effect in how you behave going forward.
Aswath Damodaran (00:48:07):
I’ll give you an example. I was lucky enough to buy Tesla in June of 2019, right after the Musk… Remember the $410 funding secure tweet and the stock price had crashed, and I bought Tesla and over the next six months it went up 400% and I sold Tesla in January, 2020. And I’ve never lived that down with Tesla enthusiasts because they point to me how much money I left on the table because I sold Tesla too soon. Because the stock since has gone up another tenfold.
Aswath Damodaran (00:48:34):
And I look back and say, “Look, I’m perfectly comfortable with the fact that I sold Tesla.” I’m okay with leaving money on the table because the price of not doing that would’ve been… I sold because it had become overvalued. Maybe my valuation was wrong. But with my philosophy, if something becomes significantly overvalued, it needs to leave my portfolio. So to me that was the price I needed to pay to have a philosophy that I’m comfortable with. So sometimes you got to do things that cost you money to stay with the philosophy that actually stays internally consistent.
Aswath Damodaran (00:49:04):
The other is anger/frustration. I see a lot of investors who spend so much of their time being angry at the rest of the world. They get angry at other people making money. This is an incredible waste of your time and your emotions. One reason I am a little leery about going to Omaha, and I’ve gone there four or five times, not to the meetings themselves, but to talk to value investors is especially in the last few years the amount of anger you see there towards the rest of the world. Those shallow investors who buy these low, money losing companies, they make money. Lot of finger wagging going on. Hell and damnation coming to those investors.
Aswath Damodaran (00:49:41):
And it’s an emotion that’s going to damage your own investing. So sometimes I get angry and then I try to talk myself off the ledge saying, “That’s not my role as an investor to be angry at other people because they’re doing things that I wouldn’t be doing. It’s their money and their choices.” So I’ve never felt the need to lecture people who buy Bitcoin at 45,000, saying, “You shouldn’t do that.”
Aswath Damodaran (00:50:03):
There are people who buy Bitcoin at 45,000 saying, “You shouldn’t do that.” I wouldn’t do it. It’s not for me, but it works for you. You’re a great trader. You got mood and momentum nailed down. Who am I to step in and say you shouldn’t be doing it? So I think that sensing your own emotions as you invest is actually a good feedback mechanism for, “Am I doing the right thing as an investor?”
William Green (00:50:21):
You are known as the dean of valuation, and I wondered if you could take us through how you would value a business like Tesla, not in ridiculous levels of detail, but think of a company like Tesla or Amazon that you’ve analyzed many times. Can you just give us a sense of your linear process and what the most important things are to focus on? Because one of the things you’ve written about, you once said very eloquently, the problem that you face in investing now is not that you don’t have enough data, but that you have too much.
William Green (00:50:49):
I’m curious when you tackle a big, complicated business, or a fast-growing business, or any business, how you simplify, how you focus on what really matters, how you clear away the noise, what are the two or three metrics or measures that really give us the most benefit? I think this could be really helpful for our listeners because many of us are suffering from what you call data overload. This sense that there’s just too much information. We don’t know what to do with it.
Aswath Damodaran (00:51:14):
I’ll give you a compressed version of my valuation plans in kind of very simplistic terms. Every valuation tells a story about a company. In the case of Tesla, for instance, is it a story you’re telling of a car company? Is it a story of a green energy company? Is it a story of a battery company? Is it a story of a technology company? That story is actually the starting point for this process because the story is going to frame every choice you make, and here’s what I mean by every choice you make. Now, ultimately, the value of a business, if you think about it, comes from five drivers. Three, capture the business model.
Aswath Damodaran (00:51:48):
First is revenue growth, which captures low-growth business or a high-growth business. The second is operating margins. Are you in a profitable business or… So what kind of business are you running? As an example, just so you know, if you’re a manufacturing company, even a very good manufacturing company, your best case scenarios, you might make 15 to 20% margins. Why? Because you’ve got to make the car to sell it. You’ve got to make the machine to sell it. In contrast, if you’re a software company, your margins can be 40, 45, 50% because the extra piece of software costs you nothing to make.
Aswath Damodaran (00:52:18):
So that operating margin captures the profitability of your business model, and third, growth needs reinvestment in machines, equipment, if you’re a manufacturing company, in R&D, if you’re a technology company, in customer acquisition. So revenue growth margins and this reinvestment measure capture the quality of your business model. So when I build spreadsheets, I don’t have 500 line items. I basically have those three line items, and what it does is it focuses your attention. Remember, now, you start by saying we’re faced with too much data, and the part of the reason where we get lost is we start looking at data without any sense of where does that data go.
Aswath Damodaran (00:52:55):
So you get one piece of data. It leads you down one rabbit. You take another piece of data. You go down in there. So it’s almost like you’re collecting information and putting it into folders without any organizing system. So by the time you’re done, you have 15,000 items you’ve collected, and nothing to organize them. The way I think about data is I have three folders on my desktop, a growth folder, a profitability folder, and a reinvestment folder. So as I read about Tesla, for instance, every story that I read that tells me about its growth potential, and that could be a story about how many cars Tesla sold in Norway, how successful it’s becoming, those, going to the growth folder.
Aswath Damodaran (00:53:29):
Any stories I’m hearing about it’s improving profitability, the gross margin numbers that might come out or something they’re talking about how they’re cutting the costs to making a cargo, so each piece of information, as I look at it, goes into a folder. It organizes the data, which means that the data is going to end up as a number in my evaluation because if you cannot take all of this disparate data and create a focus number, it becomes, on the one hand, on the other hand, and ultimately, you really can’t come to any conclusion.
Aswath Damodaran (00:53:58):
So I start with a story. I collect the data, and along the way, I finesse my story. When I’m done, I actually have a sense of, “This is the kind of company Tesla is.” In the case of Tesla, my most recent valuation, which is about a year ago, I saw a pathway for them to becoming, not just an electric car company, but perhaps, the largest automobile company in the wood in terms of car sold. It’s a very upbeat story from a Tesla investor standpoint, because the world that I’m describing, almost every car sold, ultimately becomes an electric car, and Tesla is a big market share. Lots of ways to push back on that story.
Aswath Damodaran (00:54:32):
First, the costs of making an electric car might continue to build up and you might not want to spend that much money on a car. So you might not up with that. The second is you might have lower cost producers like NIO that might end up dominating the Asian market. But my endgame here is to tell a story, convert them to numbers, come up with a value. With this incredibly upbeat story I told for Tesla, the value that I came up with was, I think, $600 per share. The stock was trading at 1,400. I had taken every can see upbeat part of my story and built it in, and my reaction was, “Hey, if you want to buy Tesla, go ahead.” Right?
Aswath Damodaran (00:55:07):
But from my perspective, with my story and my numbers, I can’t justify buying Tesla at 1,400. So the key is not to get lost in too many details, and we had talk about metrics. Look for business metrics. Investing has pricing metrics, P/E ratio. They’re all great for saying, “What is the market paying?” But the key to value is understanding what is the business worth. That’s why you want to look at revenue growth and margins and reinvestment because those are business metrics. So keep the pricing metrics, but you got to bring business metrics into your investment choice.
William Green (00:55:37):
How do you factor in things like soft factors like corporate culture or the quality of the management or the fact that, in this case, Tesla is led by a cult leader who’s a visionary genius and rebel and maniac. How do you factor in those questions, which are so distorting of this sort of rational analysis in a sense?
Aswath Damodaran (00:55:56):
I think that’s the craft part evaluation where, essentially, you learn over time, which variable each quality shows up at. I’ll give you a few examples. Quality of management, what does that mean? So if you’re a good quality manager in a declining business, no matter how good you are as a manager, you’re not going to be able to deliver 30% margins and 25% the returns on whatever you’re invested. You’re going to be constrained by the business you’re in. So, to me, one of the things that I always look at when I valuate companies, I look at a company. I look at industry averages.
Aswath Damodaran (00:56:27):
So if your margins are 17% and the industry averages are 10%, this is sure laws of economics mean that if there’s nothing stopping the process, your margins are going to come under assault and 17% is going to become 10%. So I stop and ask, “What does this company have that allows it to earn 17% margins in a business that has 10% margins?”It could be brand name, supposedly, a soft factor, but what does brand name allow you to do? It allows you to charge a higher price for the same product. It could be that your managers are really opportunistic. They find good markets to go into. It allows them to find markets with higher margins.
Aswath Damodaran (00:57:03):
Ultimately, everything we talk about in business is going to show up in either one of those three numbers or in the risk. It’s actually an incredibly useful exercise. I actually create a table for my class where I take 50 soft factors and actually say, “Let’s think about where in your valuation it’s going to show up. You have loyal employees. Where would you expect that show up? Well, I’d expect your turnover ratios to be much lower.” So one of the things you can do to push back sometimes against soft factors that are not there because companies like to invent soft factors that are not there. We have a brand name. Really? So why are margins lower than your competitors?
Aswath Damodaran (00:57:37):
So by looking at something that you can put that soft factor into you, hold people accountable when they throw a soft factor in the mix because I call them weapons of mass distraction. The reason I call them weapons of mass distraction is, often, they show up after you’ve done the valuation. So you value a company. You come up with the value lower than the price. Somebody who really likes the company wants to buy it say, “But what about the fact that they have great management?” You know what they want you to do, right? They want you to give them the license to go out and buy this company in spite of the fact that the value’s less than the price because it has great management.
Aswath Damodaran (00:58:09):
When I hear that question, I say, “Okay, I’m willing to listen. What does this great management do? Why do you think they’re great? I’m willing. I’d keep the feedback loop open. Maybe there’s something I’m missing about the quality of management at this company that I should be bringing in.” So I’m looking for something specific that comes out of this soft factor that I can bring into my valuation.
William Green (00:58:29):
This idea that you mentioned of keeping the feedback loop open seems, to me, ungodly important, and I’ve noticed that you make all of your analysis, all of your valuations of companies publicly, and you welcome people coming in and attacking them, debating them, and I wonder if you could explain that because it’s such a profoundly important philosophy of life. It seems to be not just philosophy of investing.
Aswath Damodaran (00:58:53):
Yeah. One of the books I have, Narrative and Numbers About Stories. I started that because I noticed that we live in a world where we tend to hang out with people who think just like we do. So if you go to work in investment bank, you are surrounded by people who got roughly the same kinds of degrees you did around the same time in your life as you are, who think the same way about the same things, who get trained by the same people, and guess what? You all agree with each other. No surprises there. You go to Silicon Valley, you got these VCs and founders who tell each other the same stories, and they think the world revolves around their stories.
Aswath Damodaran (00:59:28):
After a while, there’s no disagreement there because you’re all thinking the same way. Now, I tell people, “Hang out with people who don’t think like you.” One of the problems is when you do valuation, you tend to hang out with other valuation people and you show them a cost of capital and a cash flow, and that does it because this is the way they’ve been taught to do valuation. When I valued Airbnb when it went public, the person I showed it to was somebody who lives a few blocks away from me in San Diego who doesn’t know the first day about finance, but she owns three Airbnbs.
Aswath Damodaran (00:59:58):
She’s a host, and I talked her. I showed the valuation, not with specifics, but I wanted to get a sense of, “Is this right? Am I getting the economics of this right? I’m assuming that Airbnb passes on cost to you and doesn’t bear the cost. Is that what’s happening? The thing she pointed out that I was missing on how Airbnb collects fees and why it does some things well and some things badly, and why she was thinking about listing on Vrbo for her next rental, and I listen because what she was saying was not specific to my valuation. I was learning things about the business. I would never have learned.
Aswath Damodaran (01:00:33):
I tell people I’ve learned more about Uber from Uber drivers than I would ever have learned by talking to all of the top management in Uber put together because I’m learning about how Uber treats its drivers. What do they do? How did you end up driving for Uber? What did they do well? What did they do badly? How does search pricing work? Did they let you keep 20% of the search price? Because that’s what we need in valuation is that… I mean nobody’s an expert in everything. So there’s going to be some aspect of every business you’re valuing where somebody out there knows more about that aspect than you do.
Aswath Damodaran (01:01:06):
So stay humble. Listen to people. I mean, walking into a retail store and talking to the sales people might be one of the great ways you can get an understanding of how the gap is doing as a retail business, what is happening in the insides of the business, because that should become part of your investing story.
William Green (01:01:23):
I was very struck by a wonderful line of yours that I think may have come from that Numbers and Stories book, which is a terrific book actually, where you wrote, “Humility as the single most important quality, you need to be a successful investor.” You also said hubris lies at the root of so much investing pain. Can you talk a bit more about how to guard against our own hubris and overconfidence? Because this is something that, particularly, for highly intelligent people who are used to being right and getting good marks at school and then they become investors, it’s an incredibly seductive mistake to make to assume that you’re going to be right in this game where you’re competing with other people who are equally brilliant and equally well qualified.
William Green (01:01:59):
So can you talk about that challenge of just dealing with overconfidence and hubris?
Aswath Damodaran (01:02:06):
The Buddhist are very fond of the word serene and the essence of serenity is when good things happen to you, don’t get over exuberant about what happened, and when bad things happened to you, don’t get down in the dumps, and investing is a lot of ups and downs. There are days you wake up and say, “That was an amazing day. My portfolio was up 8%.” Next day, you wake up and the end of the world is come, and recognizing that so much of what happens in markets has nothing to do with your great analysis or skill. It’s got to do with luck.
Aswath Damodaran (01:02:36):
This is a game where luck is the dominant paradigm, and it’s not like I tell people the difference between basketball and investing is you and I can go out there and try to shoot three pointers. Once in a while with luck, you might get one out of every 50, and I don’t even think I could get that, and as Steph Curry goes and do it, he does it 30 out of 50. Clearly, luck is not what’s explaining it. It’s skill. In investing though, you could get 30 hits in a row, and I can’t reject the hypothesis that he just got lucky 30 times in a row. It’s so difficult to separate.
Aswath Damodaran (01:03:08):
One of my favorite books, and I don’t know whether you’ve had Michael Mauboussin on your row, but you should definitely have him. He’s-
William Green (01:03:14):
Aswath Damodaran (01:03:14):
Separating out luck from skill in investing is how difficult it is to do, and that’s where humility comes from. It’s recognizing when you’re successful, how much of your success comes from luck. I still get asked by people, “What do you make around the market?” Usually, I don’t go around talking about my past performance because if I’m not asking for your money, really, it’s none of your business, whether I beat the market or not. But if I added up the returns, maybe they’re just curious. I might have made 3% or 4% more than the market going back over the last 30 years.
Aswath Damodaran (01:03:42):
Then they ask me, “Well, that must be payoff for you.” I say, “I have no idea what it is. I just might have gotten incredibly lucky at the right times.” I tell them about some of my successful investments. When I bought Apple in 1999, I bought it because I sorry for the company. Actually, I bought it as my charitable contribution. I’ve been an Apple user since 1981. Remember, ’99, Apple was facing a near-death experience. Their computers were not selling. It was just as Steve jobs was coming back, and they didn’t seem to be any way that you could recover from this crash.
Aswath Damodaran (01:04:12):
I bought Apple because I was I said, “You know what? They’ve been good to me, and I’m going to spend $5,000 buying Apple shares that I can write off.” Best investment I ever made, turned out to be a investment I made because I was feeling sorry for a company. The hubris, in my part, to go around starting with my return saying, “Look how great my investment in Apple was. “Without telling you that investment had nothing to do with doing full-fledge intrinsic valuation, and some are jumping in at exactly the right time. So it’s hard work though.
Aswath Damodaran (01:04:39):
I mean, it’s easy to let things go to your head, and the market, it’s just waiting for that to happen. It’s almost like markets are waiting and hiding for you to get all caught up in how good you are. So when I see these shooting stars the people who are lauded as the great investors because they’ve done well for two or three years, I say, “You know what? Just give it some time, because most of the time when you succeed, it goes to your head. I’m old enough to remember that in the early ’80s, there was a man called Joe Granville. I don’t know whether you remember.
William Green (01:05:10):
Aswath Damodaran (01:05:10):
Who was a gold bug who became this legendary investor in the 1970s because he told people to buy gold and it turned out to be the best advice you could get for the 70s. Then you get to the 80s. Worst advice you can get is to buy gold. But he stuck with that buying gold through the ’80s, and he wiped out a lot of people, but he got to a point in the early 80s where he was so convinced that he was an expert, he was a guru that what he said moved markets. So through time, these people that we celebrate as… We live in a world of celebrity investors as great investors, and I would say, “Hold off. There are some investors who are truly great investors, but they tend to be a handful, and they tend not to talk about how great they are.”
William Green (01:05:52):
Are there any that you would particularly name who’ve really influenced you over the years where you look at someone and you think, “Yeah, this guy, who may not be on our radar or who may be on our radar, this is someone who actually is legitimately and consistently kind of extraordinary?”
Aswath Damodaran (01:06:06):
No. The name I’m going to quote are the names that have that everybody’s familiar with. I mean, I’ve said some mean things about Warren Buffett, but they’re really not about Warren Buffett. People who use his name constantly as a way of stopping discussion or debate by saying, “Hey, Warren Buffett said this.” One of the things that I’ve learned from looking at Warren Buffett is the importance of a core philosophy. I mean, you can agree or disagree with Buffett, but it’s very clear where he is coming from when he invests in a company. He stayed with that same philosophy going back 60 years. You might not agree with parts of it.
Aswath Damodaran (01:06:38):
So when he says, “I don’t buy technology because I don’t understand technology.” I wouldn’t make that part of my philosophy, but I respect the fact that he stayed true to that philosophy, and just to show you that it’s not just value investors, I mean, I love the fact that Jim Simons, when he came and said, “You know what? There’s a lot of stuff happening in markets, but people are doing things the way they always have, but we have data now. We have computers. We can really work with the numbers.” I like the Revolutionary Road by saying, “We can look at the numbers.”
Aswath Damodaran (01:07:06):
I mean, he was the first real quant, somebody who brought the thinking into the game. So I look for investors who basically find something that is their niche and then stay consistent with it, and when I wrote my Investment Philosophies book, part of the reason I wrote it is I’ve noticed people like that in almost every single philosophy, great growth investors, greats VCs, great activist investors. I like what Bill Ackman does in the activist investing space even though I might not agree with every single one of his investment choices.
Aswath Damodaran (01:07:34):
So I have a very wide array of people that I look at that I say, “I like the way they think about markets. It might not be my way, but I like the fact that they’re transparent about the process by which they get to where they are.”
William Green (01:07:48):
You’ve seen an enormous number of very predictable mistakes that investors make over the last 40 or so years that you’ve been teaching and studying this stuff, and I always love Munger’s idea of really focusing on avoiding what he calls standard stupidities, which seems to me… Actually, one of the greatest, most practical lessons from Munger and Buffett is that it’s really hard to be like them, but it’s actually much easier to say, “Oh, I can see all of these dumb things that they’ve identified that I ought not to do.”
William Green (01:08:13):
Can you talk about some of the ways in which you just see people repeatedly screwing up whether it’s believing in unbelievable stories about great companies or market timing? What are some of the really obvious inanities and stupidities that people repeat that would really help us to avoid?
Aswath Damodaran (01:08:31):
I think that the first one is a little controversial. I believe that concentration in your portfolio. We have three or four stocks is a recipe and you have nothing else. You don’t have mutual funds to balance out three or four stocks is a sign of hubris because not only telling me that those stocks are undervalued, but you’re also telling me that you’ve somehow figured that the price is going to adjust the value on all four of them, because for you to make money, that’s got to happen.
Aswath Damodaran (01:08:54):
I think that’s an extraordinary dangerous strategy in the world that we live in now. 40 years ago, you might have been able to get away with it because with these nice mature companies, you bought five of them. You bought a utility. You bought a nice brand name company, a McDonald’s and you let them ripe. You can’t do that in the world we’re in because businesses get disrupted. There’s globalization. You have crises that can wipe out companies. I think the first thing you need to do is spread your bets, and have a follow-up with that. You spread your bets. Here’s what you’re going to find, your winners are going to become bigger and bigger as a person of your portfolio.
Aswath Damodaran (01:09:24):
It’s really tough to let go of your winners because they’ve done so well for you. So you need some discipline to let things go when they get to a point where they’re swaying your entire portfolio. Where one stock can cause a 10% move in your portfolio, you’ve reached a point of no return, and stuff to do, right? So if you start something with a 5%… I know my starting point for a position, my portfolio is it’s never more than 5% of my overall portfolio, but I also have a trigger. If it gets to be 15% of my portfolio and it’s still undervalued, I have to start lopping off whatever’s above 15% to keep it from going to 25 or 30%. I’m not saying it’s easy to do.
Aswath Damodaran (01:10:01):
In fact, I have to automate it. Often, I put in a limit cell so that I don’t have to actually make that decision, because if I have to make the decision, I find ways to delude myself into waiting, into delaying it because I’ve tripled my money. Who wants to let go when you’ve tripled your money? So one of the things I would do is think about what your weaknesses are. Is one of your weaknesses that you listen to CNBC and you buy things on the spur of the moment? Which gives my advice is don’t listen to CNBC. Is your problem that you value companies but you’re unable to pull the trigger of buying the company? Then find ways to put in a limit. Buy it a price much lower, and then walk away.
Aswath Damodaran (01:10:42):
Automate as much of what you find or your weaknesses so it kind of gets done for you without you having to do something explicit. We’re all subject to the standard things that make behavioral finance debt. We hold on too long. We sell too soon. We put our bets on. We listen to people that we think no more than we do. We are part of a herd. We everybody gets caught up in all of those behavioral factors. You’re not special. I’m not special, and we have to find ways to kind of compensate for those things, and the version of the Hippocratic, that applies in investing. Do as little harm as you can because Charlie’s right.
Aswath Damodaran (01:11:18):
The people who get into trouble are not the people who go out and aggressively do something stupid. It’s because you just fail to do something you should have done. It’s the small acts of negligence that get you into trouble.
William Green (01:11:32):
There’s a great irony in my case, which is I’m a huge admirer of Charlie, and I spoke to him a while back, and also, to Lou Simpson, and I was like, “Wait, so I can see. These brilliant guys who I really revere have been loading up on Alibaba. So I can see what the greatest value investors who I sort of… I have a temperamental, an intellectual affection for, I can see what they’re doing.” So I, of course, buy Alibaba, which I think, so far, I’m happy that it’s recovered enough, that I’m only down about 40%.
Aswath Damodaran (01:11:58):
Well, we have lots of company then because I own Alibaba too. But I recognize it’s a bet in China, the government, not the country, and that can be an issue especially as you see Russia play out. I’m thinking more about the government part of Alibaba now than I did two months ago. It’s still in my portfolio, but I’m thinking about how can I do this better when I value companies because, historically, investing in authoritarian countries was actually viewed as safer than investing in democratic countries because you got stability, right?
Aswath Damodaran (01:12:27):
An authoritarian government can create at a regulation and say, “That’s going to be the regulation for the next 40 years.” No democracy can do that. We’ve not done a very good job in valuation of factoring in that discontinuous risk that comes from being in a country where you can have regimes do things and you have no pushback, no legal pushback, no political pushback, and I think that’s an issue. That’s one of my resolutions for the rest of this year. It’s to come up with better ways of dealing with political in-country risk that goes beyond just adjusting to this country for things governments can or cannot do to your company.
William Green (01:13:00):
How are you starting to think about things like Russia’s invasion of Ukraine or surging inflation or the threat of rising interest rates or the economic impact of COVID, these big geopolitical or macroeconomic or political things that, in the past, we might have been tempted to ignore because you would say, “Well, they’re just unknowable, and so I should just focus on valuing the business.?” How are you starting to factor in these really powerful forces that we’d like to ignore, but in some ways, it seems like you can’t really ignore them anymore?
Aswath Damodaran (01:13:30):
They should never be ignored. The advice I give people that value companies is to keep their macro views out. It’s not because they don’t have macro views. But if you bring your macro views into every company valuation, you’re going to be spending 80% of your time thinking about what will happen to interest rates and inflation and not enough in your company, but macro views matter for your asset allocation decision. I think about my portfolio in multiple steps. The first step is I’ve got to decide how much of my money to put into stocks and bonds and physical assets and even cryptos, and that choice is driven by my macro views.
Aswath Damodaran (01:14:00):
So when I think about inflation interest rates, it’s going to make a big difference in my portfolio in terms of where my money goes in the first place. So when I think inflation is coming back to 8%, I should be getting out of financial assets as much as I can. It doesn’t mean I will have nothing in stock, but instead of having 80% of my money in stocks, I’m going to be at 20% in stocks. My asset allocation decisions are driven by my macro reviews, but once I’ve made those asset allocation decisions with my macro views, I set them to the side and I say, “I want to value a company.” When I value companies, I am going to stay as focused as I can on the micro, which means I’d have only 20% in equities, and now, I have to pick the best equities I can with that 20%. I’ll have far less money invested in stocks, but valuation is about company selection. Macros are about asset allocation, and to me, when you mix the two, you end up with this jumble where you’re not sure what you’re doing at any point in time.
William Green (01:14:54):
I feel like the macro stuff is so complex and there are so many forces involved that it’s really almost unknowable like, I mean, Putin didn’t know what he unleashed. So-
William Green (01:15:03):
… unknowable. I mean, Putin didn’t know what he unleashed. So Putin had inside knowledge of what he was planning, and he still had no idea what he would unleash. So it strikes me that one of the great lessons of what we’ve seen, both with COVID and with the Ukraine situation, is again the need for humility in the face of an unbelievably uncertain future.
Aswath Damodaran (01:15:20):
I tell people, macro forecasting exists to make soothsayers look good, because the historical record of macro forecasters is worse than abysmal. It’s actually worse than random. In fact, there are books on forecasting now that talk about how badly expert forecasters do relative to people who might not have as much experience, but basically wander all over the place. So I think that macro forecasting makes us all feel better, that’s really it. It accomplishes very little in terms of actual substance, but it gives us a sense of being in control.
Aswath Damodaran (01:15:53):
That’s why very little of my investing has been driven by a macro view that’s different from the market. I’ve never bought an oil company because I think oil prices are too low. Let me take that back. The only time I bought oil was I actually bought oil companies in March of 2020, because I said, I know there’s COVID, and this is when oil price hit at 30, in fact, I think Brent Crude, the US crude went below zero for a brief period that month, and it’s one of the few times in my lifetime that I’ve actually invested on a macro variable. Most of the time when I’m investing, I’m investing based on a micro view of a company that I think is going to succeed.
Aswath Damodaran (01:16:29):
So macro variables are difficult, I don’t know about macro trends, I mean, Cathie Wood has made a profession for herself by finding macro trends that we’ll drive electric cars, we’ll sign our documents online, we’ll listen to music in streaming, every single investment is really a better… What if you’re good at predicting macro trends, which is different from macro views and interest rates and inflation, maybe there’s a way to construct an investment philosophy around macro trends. I’m too old to estimate macro trends. Maybe I should hang out with more young people, but I think that that’s something that might work for somebody else, but it doesn’t work for me
William Green (01:17:06):
In personal terms, how do you deal with the fact that the future is unknowable, that you are constantly being reminded of the uncertainty of the political situation, of the pandemic situation, of geopolitics, all of these things. I remember you using the phrase once about the path to serenity. What is the path to serenity look like for you?
Aswath Damodaran (01:17:26):
Part of it is accepting the fact that the lot that’s happening is not your fault. There are people, I think, in investing, who are so caught up, and this is, I think the other side of hubris is when you’re convinced that every success is yours, and every failure is yours as well. I’m lucky that I don’t think much of my success is because of me, and the flip side of that is when something happens, I say, “You know what? I did the best I could.” I didn’t see COVID coming in March of 2020. I wasn’t protected for those six weeks when stocks melted down by 35%. I didn’t see the 2008 crisis coming. So the reality is that bad things will happen to you and it’s not your fault. Letting that feeling of responsibility for every single mistake in investing go is I think part of being okay with being right and wrong over the long term.
Aswath Damodaran (01:18:13):
So I don’t beat myself up too badly when something like that happens, I try to learn from it and say, what can I do in the future? So, from this point on, maybe we should all be building in a chance of something like a pandemic that’s global that can bring the global economy to halt in really every company. I’m still working through the details, but we can learn lessons from the past without getting mired and sunk in whatever mud there is in trying to explain who’s responsible for this mistake.
William Green (01:18:43):
I think we also need to hedge against our own stupidity and ignorance and overconfidence, knowing that the future has turned out to be unknowable so many times before we should just say, “All right, well, I know that I’m going to be wrong about the future once again, because I have been so many times before.” So let me at least construct a life and a portfolio that are somewhat antifragile in the face of my own haplessness and ignorance.
Aswath Damodaran (01:19:07):
Yeah. I think that’s part of the spreading your bets suggestion I made earlier, which is I don’t want to bet on a geography. I don’t want to bet on sector. I don’t want to bet on a particular manager, not because I don’t have views on them, but because I know that things can happen that can make my bet score wrong. Now I tell people do a pie chart of your portfolio and compare to the pie chart of market values of every asset class around the world in geographies. The further away from that global pie chart I get, the more I have to be careful about the bets I’m making.
Aswath Damodaran (01:19:38):
So 45% of my money is in tech stocks. I’m making a better in tech, whether I say so or not, I’m making a better on tech collectively as a sector. When 80% of the money is in US stocks and globally only 37% of market cap is in the US whether I like it or not, I have a domestic bias in my portfolio. Those biases… I’m not saying you need to act and remove them right away. It should be red flagged saying you’re overexposed to a sector or a geography. Why? What do you plan to do to bring that down? Maybe the next occupy should not be a tech stock. You’re already at 47%. So it’s something that’s constantly knowing at the edges of what I do because it’s easy, very easy to get over invested or over vested in some particular sector or geography, just because of accident.
William Green (01:20:26):
I remember Jeff Gundlach who’s often called the Bond King. I’m sure you know when I interviewed him a few years ago in LA said to me, he’s always saying, “Okay, so I know that I’m going to be wrong a third of the time”, which is interesting, because he’s not the most humble guy. He is a very brilliant guy and he knows he is pretty brilliant and that he’s been successful. But he said, “What I’m always asking myself is what’s the consequence if I’m wrong.” That strikes me as a really profoundly helpful question asked. So given that I’m going to be wrong about lots of things, if I’m wrong, is it going to destroy my portfolio or my health or my marriage? God forbid any of these things. So focusing on consequences seems to me really wise.
Aswath Damodaran (01:21:02):
I think that’s wise advice. I think that if you can find a way to invest with also ways to limit your downside, your worst case scenario might be too much of an reach, but in your bad scenarios, now you want to make sure that no matter what happens in your portfolio, it’s not going to change the way you eat or where you live because if that’s the consequence you’re already overinvested in risky assets. Now that’s what I meant about the sleep test. Part of the sleep test is, I can say, honestly, I’ve never lost a night’s sleep in 40 years of investing, and I don’t plan to. The worst days of 2008, I still went to sleep like a baby, I slept like a baby, I woke up like a baby, probably crying in the morning, but now that’s different.
William Green (01:21:44):
I’ve heard you in the past talking about karma and talking about lessons from Mother Teresa’s life and stuff. But you also mentioned at the start of this conversation that you’re not a particularly religious guy. I’m wondering if there are core spiritual or philosophical books or practices that have helped you over the years to maintain some degree of serenity or a broader perspective through the slings and errors of fate to help you deal with all of the stuff that just happens through life.
Aswath Damodaran (01:22:10):
No, I realized early on that if I went out and tried to make a big change to the world, all I’d end up was frustrated and angry. This is perhaps something that came more naturally to me because I think the best way you can make the world a better place and be comfortable is to make incremental change. Every class I teach, every person’s email, I mean, there’s no activity that I do that provides me more return in investment than the time I spent answering emails because I get on average 300 emails a day. Most of them are not from people in my class. They’re from somebody in some part of the world who’s toiling on some valuation exercise who says, “Can you help me?” It takes me probably 20 seconds because all they’re often asking for is direction of to where to go look or how to approach things.
Aswath Damodaran (01:22:53):
That 20 seconds I spend answering that email can save that person three hours, in some cases, changed the course of the lives. I remember about 10 years ago, I was in Canada, giving a talk to a CFA group, and somebody in the group came up to me and said, “15 years ago I was a student in Iran and Iran was closed off. We were shut off in the rest of the world. I had a question in finance because I was interested. I asked you the question and you answered and that email answer, put me on a pathway to actually come to Canada, get my PhD and become who I am today. Thank you for answering that.” What do you think is something small can have a huge effect on somebody’s trajectory. It’s why I’m a teacher. I think we’re measured by not how much money we make or how successful we are, but how much we alter other people’s lives in good ways.
Aswath Damodaran (01:23:45):
We can always alter other people’s lives in bad ways. I don’t think that’s the measure we want, but I think everything I do so what can I do that can make a difference today because it’s amazing how incremental stuff adds over time. My website now has about 9,000 pages. It started as a website with five pages and two data sets. Every year I’ve added a few things here and a few things there and somebody says, how did you build a website? I don’t even know it just happened incrementally. I could say that it was almost everything I do in my life.
Aswath Damodaran (01:24:12):
Every book I’ve written is incrementally start as a blog post or a throw away line in a class. The next thing I know it’s become a 300 page book. The docs side evaluation, narrative and numbers was born out of an Uber post that I wrote in 2014, where I got into this debate with bill girl, a debate where I learned a great deal about user companies. I’m glad I had that debate, but that post, that took me two hours one Friday afternoon where I thought I’m valuing Uber, and then I’m probably never going to talk about it again has become almost this obsession with Uber that became a book that’s become part of my teaching, became the Google talk that you heard. So it’s actually, it’s amazing how things that you think are small things can over time balloon out to become much bigger parts, might have a much bigger impact.
William Green (01:24:55):
Yeah. It’s a profound idea that stopped me on my tracks when you said that about the impact of small things, because you get so many emails and so many messages and there’s a great lesson from, I think it was the Baal Shem Tov who was this great cabalist in the 19th century who gave rise to the Hasidic movement in Ukraine. They believed in reincarnation. He said, “You could be reincarnated for 80 something years just to do one material favor to one person.” I remember someone saying, “Yeah and you can miss it. It could be the thing that you were born to do. You weren’t listening at that moment and you didn’t notice that someone was crying out for you to help.”
Aswath Damodaran (01:25:30):
I agree. I think we live in a world where everybody’s looking 20 years ahead. This goes back to the ESC talk. We all want to make the better place, but that starts right now with what we do. The actions I take when I leave this stock and go out and buy my coffee and I’ve got to go catch a train are going to be actions that could potentially have an effect on making the world a better place or worse place. People underestimate how much of an impact this collective effect of people doing small things, but the small right things can have on us as a society.
William Green (01:26:04):
When you think about the advice that you’ve shared with your kids and the thousands of students that you’ve taught over the years, are there consistent, important lessons that you’ve really tried to convey when people ask you about what career they should pursue, what constitutes a successful and happy and fulfilling life? What do you try to share with them that you could share with our audience here?
Aswath Damodaran (01:26:26):
I’d love to tell you that I tell them to go do whatever they love to do and everything will take care of itself because it’s nice sounding advice, but it’s not practical. Let’s face it. Most of us have to do things we don’t enjoy doing, at least for a portion of our lives, before we get to coast, and enjoy the things. So I tell them look, it’s the old Thomas Edison’s 90% perspiration, 10% inspiration. If you’re going to a job, expecting all inspiration all the time, you’re going to be seriously disappointed. You’ve got to put in the perspiration to get the inspiration. But I also tell them to preserve the option to abandon it, which is you need to be able to walk away from a job to be really good at. It sounds like a very strange thing to do, but I used to say, but basically I believe that if you actually have the freedom to get up and say I’m quitting and there is nothing that the person on the other side of the table can use to yank you back.
Aswath Damodaran (01:27:18):
You’re actually going to be a much better employee because you will speak your mind. You will talk about things that don’t make sense because you’re not afraid. I do there are a lot of people I teach end up in investment banking. Investment banking is notorious for bringing you in and putting golden handcuffs on you, which is they pay you this immense amount, and the next thing you know, you’ve got a $5,000 apartment. You’re living like a king. You never eat at home. They’ve got you because now if you don’t like what’s going on, if you don’t like the way things are being done, what are you going to do? How are you going to speak up when you have too much to loose?
Aswath Damodaran (01:27:49):
So I know it’s tough for, especially for a 22, 23 year old to do, but I tell them live like a student for a couple more years for the first two years that you’re working because you’re not locked into making $15,000 a month or 20,000 a month to break even you have a much lower set of expenses. To me, preserving the option to abandon has been the hallmark of what’s driven my life I have in all my life, I’ve always wanted the freedom to do what I want and not be worried about pushback. I’ve never done consulting in my life ever. I’ve never done expert witness work because you’re accountable to lawyers, and consulting companies pay you immense amounts for saying stupid things. But you basically, the, you pay the piper or she pays the piper ends up calling the two. I’ve never appraised a company for money. Again, I’m not saying this to set myself apart. I’ve done it because what I think people come to read when I write is that they might disagree with me, but they know I have no hidden agendas. I don’t work for a hedge fund.
Aswath Damodaran (01:28:46):
I don’t consult with any of these companies, which gives me the freedom to say exactly what I think about whoever I’m thinking about it at that moment without worry about the consequences. Even with my relationship with NYU, which is my only contractual relationship, I worked as hard as I can over my lifetime to make it dispensable. I’m willing to get up, walk out of this office and say, “I’m done.” I wouldn’t have been able to do it in the first 10 years. I was here at the first 15 years, but I’ve worked over my life to have the freedom to be able to walk way from whatever I’m doing.
Aswath Damodaran (01:29:17):
I tell my kids work to get to that point because it makes you immensely powerful because it allows you to be actually a much better employee wherever you’re working, because you’re going to be open and clear about what you think should be happening. People might not like it, but guess what? We’re surrounded by people in this world who tell us what we want to hear, because they’re afraid that if they tell us the truth that we’ll push them away or fire them or get rid of them, and that’s not healthy.
William Green (01:29:44):
When I look at your life, it seems to me that one of the great lessons is that you’ve been very true to yourself, your own talents and priorities and idiosyncrasies, that for you, things like extreme independence, not being beholden to anybody, being willing to stir the pot, being willing to provoke this slightly rebellious street that I admire in you. That was something that you fought to preserve because it was such a priority for you, more of a priority than money I would say, or luxury or…
Aswath Damodaran (01:30:13):
Yeah. I think that’s absolutely true. I’ve tried to be true because let’s face, nobody stays true. Even Mother Teresa when I heard the talk she gave, said she tries, but that’s all you can do. I think you’re right. It doesn’t happen, accidentally. Independence doesn’t come as a gift in your lap. It’s got to be something where you’ve got to be willing to give up something. I was immensely lucky. I didn’t have to give up much. I have everything I need. I might not have everything I want. Nobody does. I have everything I need. There’s nothing that, having an extra million, or an extra 2 million is going to change in the way that I live.
Aswath Damodaran (01:30:47):
But I understand I was lucky to be able to be in that position of pick the profession where I could pick this path. But that’s what I wish on my kids is that degree of independence, but their paths, it might be more difficult to get there. So I’m not going to judge them if they don’t have that independence. I hope they find a way there, but they have to make it part of their priorities if they wanted to show up at some point in their lives.
William Green (01:31:13):
You’ve often talked about life cycles, whether it’s a country having a life cycle, a mature country like the US or these Western European countries or an economy with an aging population or companies going through a life cycle. Obviously there’s a life cycle for each of us, individually. When you think about the stage of life that you’re in now and you look to the future, you’re in your early sixties, are you Aswanth? How do you think about the future, about what you’d like to do, what you hope to achieve? You seem like someone who’s had a tremendous mission and a passion for teaching, but also who’s quite happy to be pursuing your own interest and curiosities, I’m wondering how you think about the next 20, 30, 40, 50 years.
Aswath Damodaran (01:31:54):
I have no big plans. No, I don’t have five books I need to write. There’s nothing on my bucket list that I need to do. But you know what, it’s incremental. I will continue to write posts for all. These three posts on ESG might become a book on ESG. I’m not sure that I’m not saying that that’s what it’ll be. It’s things build up. Last week I took my Google blog. I’m very old-fashioned. My website looks like it was constructed in 1990s. I tell people, that’s because I need to be able to fix it. Now I’ve been a Google blogger since 2009. Google blogger is very powerful. I’m grateful to Google for giving me a platform where I can write and people can read me. I think there were 21 million people have read. I have gone through the blog.
Aswath Damodaran (01:32:34):
So it’s clearly reached a lot of people, but I’m a little nervous about the fact that I’m completely at the mercy of Google because blogger is not even on the list of top 50 things on Google’s product menu. They don’t make any money on it. It’s little thing they do on the side.
Aswath Damodaran (01:32:49):
So tomorrow they said, we’ve decided to remove Google blogger entirely from our portfolio, there goes 9,000 plus pages and 636 posts of writing. So last week I got a call from Substack. You probably read people right on Substack. They said, would you be… And I said, “Fine, as long as I get a free version. And I said, “The only one concern I have is transporting everything I have from… They said, “That’s easy.” It was actually very simple. Two minutes. I was able to take 13 years and 9,000 plus pages from Google blogger and duplicate it on Substack. I’m going to keep both platforms open. But my point is I never started this blog expecting it to last more than a few weeks and expecting to write more than like 15 or 20 pages. 9,000 plus pages later, I look back and say, how did that happen? It’s just a collection of Thursday afternoons where I wrote a post or a weekend where I spent writing a post adding up over time.
Aswath Damodaran (01:33:46):
So I’ll keep doing things on an incremental basis. If it amounts to something that is substantive enough, then I’m going to say, “Look, might as well make it a book, might as well make it into a standalone clash” because to me that’s something that’ll happen when it’s time to happen. I’m not going to push. I’ve never actually signed a publishing contract to write a book before I’ve actually written the book. I’ve actually written the book, gone to a publisher. I’ve got a book you’re interested because to me, the notion of saying, I will write a book and then throwing out this proposal and then starting to write a book, it feels like drudgery to me because now I’ve got to write all these chapters that I’ve promised the publisher, and I promised to due date, and I hate to be behold into somebody on a timeline. So to me, this is, that’s my life has always been about taking these incremental things. If it’s ready, then push it to the next level. If it’s not, I’m okay with it not going there either.
William Green (01:34:40):
So in a way for you, the ultimate luxury has been control over your own time, your ability to speak your mind, to be beholden to nobody, to express yourself, to disrupt the investing business, the academic world, it’s freedom, that’s the goal.
Aswath Damodaran (01:34:58):
The fun I’ve had on the ride is exactly why I value that freedom. I wake up on Monday mornings when I have to teach and I just can’t wait to go. There aren’t too many people in the world who could say that I about now, I haven’t worked a day in my life. I know people say that I have not worked a day in my life because everything I’ve done, I’ve done because I wanted to do it. It’s a powerful luxury to have, but now I’m grateful every day of my life for having been able to get that path.
William Green (01:35:29):
That’s a lovely note to end. So I’m really absolutely delighted that we got a chance to talk. We had a wonderful teacher and a wonderful speaker and I’d never met you before. It’s just been a sheer pleasure for me. So thank you.
Aswath Damodaran (01:35:41):
Thank you. It was a pleasure.
William Green (01:35:43):
That’s it folks. Thank you so much for joining us today. If you want to learn more from Aswath, I’d encourage you to visit his website, which has an incredible array of resources, including his blog and links to the classes he teaches at NYU. Amazingly, he’s made all of his university courses available online for free. It won’t surprise you to discover that he’s a fabulous teacher, he’s won tons of accolades including NYU’s distinguished teaching award. In the show notes for this episode, I’ve included a bunch of links to his website, his YouTube channel, and his many books about investing. For regular investors like me, I think one of the most useful books he’s written is The Little Book of Valuation, which explains his approach to valuing businesses in a very accessible way that even a mathematically challenged investor like me can understand. Meanwhile, thanks a lot to everyone who wrote to me on Twitter to suggest questions for me to ask Aswanth.
William Green (01:36:36):
I end up asking him a question that came from Fabio Zugman, a listener who lives in Brazil. As a way of saying thanks, I’m sending Fabio a signed copy of my book, Richer, Wiser, Happier which is based on hundreds of hours of interviews that I’ve done over the last quarter of a century or so with many of the world’s greatest investors. Please feel free to follow me on Twitter @williamgreen72. Do let me know how you’re enjoying the podcast. I’m always really happy to hear from you. Thanks so much for listening. I’ll be back with you again very soon. Take care.
Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday, we teach you about Bitcoin and every Saturday we study billionaires and the financial markets. To access our show notes, transcripts or courses go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.
HELP US OUT!
Help us reach new listeners by leaving us a rating and review on Apple Podcasts! It takes less than 30 seconds, and really helps our show grow, which allows us to bring on even better guests for you all! Thank you – we really appreciate it!