Aswath Damodaran – Investment Philosophies NYU Classes [Part II]VW Staff
Aswath Damodaran just started uploading his NYU class lectures – we have posted the first batch below, which we hope readers will enjoy. Check back since there is a lot more coming or better yet, sign up for our free daily newsletter to ensure you never miss a post.
The ten videos can be found below. See part one here.
Also see The Little Book of Valuation: How to Value a Company, Pick a Stock and Profit, Investment Valuation: Tools and Techniques for Determining the Value of Any Asset,Damodaran on Valuation: Security Analysis for Investment and Corporate Finance and Applied Corporate Finance
Aswath Damodaran, in part two of these investment philosophies videos, discusses stock price patterns, .technical analysis of stocks, value investing and much more.
Investment Philosophies: Temporal Patterns
In addition to exhibiting correlation across time, stock prices seem to also follow patterns in calendar time. In this session, we look at two of the most commonly noted calendar time phenomena in stock prices. The first is the January effect, where stocks have done much better in January than in any other month of the year. While the January effect is commonly attributed to tax loss selling (at the end of the previous year) and institutional rebalancing, the most interesting feature of the January effect is that it is primarily attributable to the smallest firms in the market, with about half of the so-called small cap premium being earned in the first two weeks of the calendar year. The second effect is the weekend effect, where Mondays have historically been the worst day of the week to invest in stocks. This effect, though, seems to have weakened in the last two decades, with Fridays competing with Mondays for worst day-of-the-week
Investment Philosophies: Technical Analysis
In this session, we look at charts and technical indicators as predictors of stock prices. Rather than provide a laundry list of technical indicators, we classify them into five groups, based upon the “behavioral” component that each tries to exploit. In the first group we include “contrarian” indicators, which try to measure what a group of investors (small individual investors, mutual funds, financial newsletter writers) think about the market with the intent of doing the opposite. In the second, we look at indicators that try to get ahead of shifts in demand and supply that will affect prices. In the third, we exploit slow learning in markets by using momentum indicators, hoping to generate profits as the markets adjust to good or bad news slowly. In the fourth, we identify experts or investors who are more knowledgeable than we are and try to follow their actions. In the fifth, we include long term (and mystical) indicators that are built on the presumption that there are long-term waves (that are both predictable and unstoppable) that drive market movements.
Investment Philosophies: Introduction to Value Investing
In this session, we begin by defining value investing. In our view, value investors invest in companies where they believe that the value from assets in place (investments already made) exceeds the price paid. As a consequence, they are drawn to mature companies in established businesses. Value investing can come in many forms, and there are at least three broad groups of value investors: passive screeners, contrarian investors and activist investors. We close the session by looking at two legends in the value investing space: Ben Graham, whose books represent the basis for value investing and Warren Buffett, whose every word is parsed for meaning by value investors
Investment Philosophies: Value Investing – The Passive Screeners
In this session, we look at being a passive value screener, using “screens” for cheapness and quality to find the best bargains in the market. We look at earnings screens, book value screens, revenue screens and dividend yield screens, by first noting the intuition behind each screen, then the evidence on how that screen has performed over time and finally the possible weak spots with each screen. We end the session by setting up a general framework for value screening that tries to find mismatches: cheap stocks that have good fundamentals.
Investment Philosophies: Value Investing – The Contrarians
In this session, we look at buying stocks that have lost favor with the market, on the presumption that investors tend to over react to bad news. In particular, we look at two classes of contrarian investing. In the first, we examine the returns from buying the biggest losers in terms of stock prices over the previous year. While the overall evidence suggests that you can make significant returns from this strategy, we look at possible leakage from transactions costs and not having long enough time horizons. In the second, we evaluate whether you can generate positive returns from buying badly managed or poorly run companies, partly because the market has lowered expectations for these companies so much that it does not take much to beat these expectations.
Investment Philosophies: Value Investing – The Activists
In this session, we look at activist value investing, where you not only buy cheap companies, but also provide the catalysts for prices to adjust to value. In particular, we examine the strategy of investing in poorly managed companies and changing their asset mix, capital structure, dividend policy and corporate governance with the intent of increasing value (and price) over time. We classify activist investors into three groups, lone wolves (individual investors), activist mutual funds and activist hedge funds/private equity investors and examine differences in how they approach investing.
Investment Philosophies: Value Investors – where’s the beef?
Value investors often regard themselves as the grown ups in the room, the “sensible” investors in a market that is driven by fads and whims. In this session, we look at the returns earned by value investors and find little cause for celebration. Active value mutual funds underperform value index funds by more than active growth mutual funds underperform their index counterparts. While there are pockets of outperformance among individual and activist value investors, the overall conclusion that we reach is that active value investing does not deliver on its promise. We close the session by looking at possible reasons for this gap between promise and practice.
Investment Philosophies: Investing on Hope – Growth & Small Cap Investing
In this session, we set the table for growth investing as a philosophy by defining growth investing as an approach based upon the presumption that markets misprice growth assets more than assets in place. With this definition in place, we categorize growth investing into four groups: investing in small market cap companies, investing in initial public offerings, screening for growth at a reasonable price (GARP) and activist growth investing. We close the session by looking at the first of these four approaches, small cap investing, by first examining the empirical evidence on a small cap premium, then looking at the volatility of that premium over time periods and end by evaluating the reasons given for why the small cap premium may exist in the first place.
Investment Philosophies: Get in on the ground floor – The IPO story
In this session, we look at the process by which private businesses enter the public market place and whether investors can exploit frictions in that process to generate higher returns. We begin by describing the sequence of an initial public offering, from the investment banking underwriting agreement to the final offering date. We then examine the behavior of IPOs on the offering date, where, at least on average, the stock price jumps about 10-15% from the offering price. Trying to capture this “under pricing “ is difficult for investors to do for three reasons: a selection bias, where you tend to be over invested in over priced IPOs and under invested in under priced ones, a “hot and cold” markets problem, where you find almost nothing to invest in during cold IPO periods and too many choices in hot periods and a post-issue timing quandary, where you can lose most of your profits if you hold an IPO too long. We conclude on an optimistic note, by looking at ways you can modify the strategy to counter all three problems.
Investment Philosophies: Growth Investing – Growth at a reasonable price (GARP)
In this session, we look at screening stocks to find stocks where growth is being priced too low by markets. We first look at earnings growth screens, where you pick stocks that have either high past earnings growth or high earnings growth expected in the future, and note that neither screen has done well in delivering returns. We then focus on investing in high PE ratio stocks, a strategy that has done badly over long time periods, but that does offer high returns in sub-periods. Finally, we look at screens that incorporate both PE and growth, either by looking for companies that trade at PE ratios that are less than their expected growth rates, or by looking for companies that trade at low ratios of PE to growth rates (PEG ratios).