ValueWalk Interview With Professor Aswath Damodaran

ValueWalk’s Raul Panganiban interviewed Professor Aswath Damodaran, discussing topics ranging from his book, The Dark Side of Valuation, what should investors do about uncertainty, Bitcoin millionaires, Spotify valuation and much more. This interview was recorded in May 2018 and was recently transcribed.

Q1 hedge fund letters, conference, scoops etc

Interview With Professor Aswath Damodaran

Transcript

Hello, podcast listeners, today is a very special episode, I have Professor Aswath Damodaran.  He is a Finance Professor at New York University, Stern School of Business.  He also lectured finance at the University of California, Berkeley.  He has a BA in accounting from Madras University, an MS in management from the India Institute of Management and he earned an MBA and PhD in broker and finance from the University of California, Los Angeles.  Professor Damodaran authored many finance and valuation books such as the Dark Side of Valuation, The Little Book on Valuation and many more.  I want to welcome Professor Damodaran to the show and I want to welcome all our listeners to a very special episode.

Welcome to ValueTalks with Raul.

So I just wanted to welcome all our listeners to a very special episode, I have Professor Damodaran and welcome to the show.

Thank you.

Yeah, and can you just tell me about your background and what led you to finance and teaching?

Well, I got my MBA and PhD at UCLA, now I’ve jumped into teaching higher ed because I love teaching, so that’s a short intro.  There’s really no long intro, so I’m going cut the journey side fairly short.

Right.  And then you recently wrote … came out the third edition of The Dark Side of Valuation.  I just want to know what are the updates from the second edition?

Well, I think that the updates are, you know, I’m not going to be interested to pitch for my book, in fact I really don’t care if anybody buys the book, so I’ll say that upfront, which would be an odd thing to say when you’re talking about the book.  The book is about really dealing with uncertainty in valuation.  But that’s the best way to describe it, is to go back to the original, the first edition because it was born in the dying days of the dotcom boom.  It was my attempt to try to make sense of how to value companies in the dotcom boom, essentially young companies with no history and lots of losses essentially.  It was an attempt to kind of stretch valuation approaches to deal with those companies.  The first edition was all about dotcom companies because that’s where I felt uncertainty was greatest and people were doing strange things in response.  The second edition kind of expanded on the first edition because I found that uncertainty was not just in young companies, it could be commodity companies, banks, wherever there are people were uncertain about the future, people were doing crazy things.  So in 2009 in the aftermath of the 2008 crisis I expanded the book to good banks and commodity companies and cyclical companies and emerging market companies.  Now, the 2018 edition is a relatively minor update because I’m building on the 2009 base but I’m not bringing in what I’ve learned in the last 9 years about user based companies, subscriber based companies, the companies of today which are building on numbers, you know, numbers of [inaudible], numbers of users and downloads.  So essentially it’s an extension of the same theme because it’s really, you know, that’s what the book’s all about.

Right.  Should investors be afraid of uncertainty or embrace it?

It’s not a question of being afraid, it is what it is.  I mean that’s like saying should I be afraid of the speeding cars on the highway, you know, it is what it is.  You can be afraid of it, it doesn’t make it go away, you can avoid it.  But it is the feature, not a bug, so I mean if you want to avoid uncertainty, put your money in, you know, [inaudible] and just go to bed and make you feel peaceful.  So this is not choice, it is what it is and you’ve got to be a realist, you’ve got to live in the world you’re in, not the world you wish to, in the world we’re in there’s uncertainty.

Yeah, and that also gives opportunity because we’re all in the same boat.

I mean it is, you know, uncertainty gives you upside and downside, that’s the way to think about it, it is the nature of the process and it is, you know, it is something we have to learn to live with.

Yeah.  I just want to know, what are the core principles for determining intrinsic value?

The core drivers you mean?

Yeah, core drivers.

Yeah, the cash flows, growth and risk, and closures, some way of putting closure because you can’t keep doing this forever.  So basically it’s not … I mean it’s always been the way we think about business, it’s what are your cash flows from your existing investments, how much value will you create from future growth, how risky are these cash flows and when can I put closure on this process so I can have an estimate of value today.  So those are the four questions that are at the heart of any intrinsic value.  And now, you might use a discounted cash flow model to bring those all together, but you don’t need one.  I mean you can have intrinsic value without this kind of cash flow valuation.  It goes back to that core principle that Warren Buffett often talks about, don’t think about buying a stock or a share, you’re buying a piece of the business.  And to invest in that business you need to understand it, you need to understand what drives it.

For the new companies that are coming out like Spotify, can you talk about how you like value a company like Spotify?