Old style investing doesn’t work anymore, says Damodaran
The chorus of the end of value investing the way it was known and practised is getting louder and louder with more legends from the world of investing lend their voice to it. This time it is Professor Aswath Damodaran, who perhaps knows a thing or two about valuation – he teaches a popular course on valuation at NYU and also is fondly known as the Valuation Guru. Damodaran makes the point about the irrelevance of book value as assets of successful companies in the digital age are largely intangible and don’t get adequately captured in its reported book value, thereby overstating its Price to Book multiples, making those stocks look seemingly overvalued.
“Valuation Guru Aswath Damodaran has made a wakeup call to those who believe in old-style value investing. The Professor of Finance at Stern School of Business at New York University (NYU) says value investors have got stuck in the 20th century.
In an interaction with ETNow, he said value and growth investing has become a very lazy categorisation of investing. “The former style lost out to the latter over the last decade. Stocks with low price-to-earnings (P/E) ratios and high dividend yields have been hurt the most,” he said. Often referred to as the ‘Dean of Valuation’, Damodaran said as an investor one should not convince oneself that he is right and the rest of the world is wrong. “I think book value has completely lost its meaning. Value investing is not just buying low P/E and price-to-book stocks. I describe valuation as a craft. The Covid-19 crisis has humbled me further. There is so much to learn,” he said.
He makes an even more pertinent point about Narratives and Numbers, the title of his latest book. He brings out the importance of having a narrative behind the numbers and coming from a valuation expert like him suggests that valuation is simply not a number crunching science. As he himself puts it, it is a craft. In the world of investing we often find a divide – people either believe in the narratives or some who blindly look at the numbers, when the key is perhaps to link the two. As Prof Damodaron put it beautifully elsewhere: “I think of valuation as a bridge between stories and numbers, where every story becomes a number in the valuation and every number in a valuation has a story behind it.” Why, even Robert Shiller, the economist who won the Nobel price for ‘emperical analysis of asset prices’ in 2013, published a book a late last year titled “Narrative Economics: How Stories Go Viral and Drive Major Economic Events”
“Guru Aswath Damordaran, who has just released his book Narrative and Numbers, where he argues that “we would need stories, not mechanical valuations, to truly evaluate companies this year,” said the virus has clearly affected corporate operations and some services will face permanent loss. “Hotels, aviation, global travel have lost revenues. Startups that are into crisis will be snapped up by the biggies,” he said. The ongoing crisis has also hurt companies with high fixed costs like Tata Motors, he said. On the other hand, such a crisis will also produce big players like Amazon. He said that it was the dotcom bust, which gave birth to the Amazon what it is right now, not the boom. “People forget how close Amazon was to getting bankrupt before recovering,” Damodaran, who teaches teaches corporate finance and equity valuation, recalled.”