- Aswath Damodaran finds himself is one of the most sought-after experts in valuation.
- It’s the inherently unpredictable nature of business valuation that appeals to Damodaran.
- His YouTube videos on subjects such as “Equity Risk Premiums”, enjoy 165,000+ subscribers.
By Felicity McLean
Aswath Damodaran is not trying to win any popularity contests. The refreshingly frank, often outspoken Professor of Finance at New York University’s Stern School of Business lives by a simple rule: Never go anywhere you need to be invited back.
“I have absolutely no qualms in telling people what’s on my mind,” Damodaran says. “…People might not agree with me but I’m not going to hold back.”
The homepage of his website, Damodaran Online, for example, opens with the following shot across the bow: “…I happen to be at the intersection of three businesses – education, publishing and financial services – that are all big, inefficiently run and deserve to be disrupted. I may not have the power to change the status quo in any of these businesses, but I can stir the pot…”
And stir the pot Damodaran does.
Take his damning assessment of fair value accounting. (“It’s a Kabuki dance where people decide to attach a number to an asset and dance around it.”) Or his scathing opinion of small-cap premiums. (“A complete fiction.”)
Truly, Damodaran speaks without fear or favour.
In fact, in the 24 hours before our interview, Damodaran offered this truth bomb to managing consulting firm McKinsey & Company: “I was at McKinsey talking about disruption and I said McKinsey has made ‘disruption’ a buzzword.
“I was able to say this because I really don’t care whether McKinsey invite me back again. Although I have a feeling they will, simply because sometimes hearing the unvarnished truth about something can make you better at it.”
This is how, despite his unflinching honesty – or more likely, because of it – the professor finds himself in the unlikely position of being one of the most sought-after, and most respected, experts in the valuation field.
Yet even this “Dean of Valuation”, as Damodaran is affectionately known, has struggled as much as anyone with the enormity of the impact of the COVID-19 pandemic.
Picture: Aswath Damodaran.
In business valuation, the only certain is uncertainty
When Acuity first spoke to him in March, Damodaran had recently valued the effect of the coronavirus on the S&P 500 for the first time. He had also written “A viral market meltdown”, a three-part blog series exploring how the coronavirus had played out in markets.
Back then, Damodaran wrote: “This is the third, and I hope last, of my viral market updates.” Of course, since then the pandemic has gone on to break all kinds of catastrophic records. At the time Acuity went to print, Damodaran was up to his tenth viral market update, and counting.
All of which proves Damodaran’s second law: You have to be willing to be wrong. In fact, it’s the inherently unpredictable nature of business valuation that appeals to him so much.
“No-one knows the answer to a real-time valuation,” Damodaran tells me. “You can collect all the information in the world, use the best tools, and make your best estimates, but life delivers surprises.
“You can collect all the information in the world, use the best tools, and make your best estimates, but life delivers surprises.”
“When you value Tesla [for instance], there are no precise answers. And that’s a feature of business valuation, not a bug.”
Why Damodaran is a finance rock star
It’s not overstating it to say Damodaran is something of a rock star in the finance world. His YouTube videos, on subjects such as “Equity Risk Premiums”, “Acquisition Valuation” and “The Determinants of Betas”, enjoy a staggering 165,000+ subscribers, while his Musings on Markets blog has had more than 17 million page views since 2008. Damodaran himself has been voted ‘Professor of the Year’ five times by Stern’s graduating MBA class.
So does Damodaran put his popularity solely down to the fact he’s a straight shooter?
That’s certainly one of the reasons, he agrees.
“Because I’m a teacher, and not a consultant or an appraiser,” he says, “it gives me the freedom to say what’s on my mind. That’s the one thing I’ve always had to offer.
“You can agree with me or you can disagree with me, but you should know there’s no incentive for me to go one way or the other. There’s nothing I’m going to gain by finding Tesla to be cheap or expensive [for example]. I don’t work for short sellers; I don’t consult to portfolio managers.”
And the other reason?
“I’m also being helped by technology,” Damodaran says modestly, as if the rest of us might also enjoy more than 166,000 Twitter followers if only we had access to technology like he does.
“Five times as many people watch my YouTube videos as read my blog posts, and my videos are translated into a dozen languages. They let me reach a much broader audience than I could have 30 years ago…
“I write, I blog, I video – I hit people with multiple media. One way or another, I’m gonna get you!” he says, laughing.
So why the multi-pronged promotion? Is it because Damodaran is evangelical about business valuation?
“No, no, no. My first love is teaching,” he explains. “If I wasn’t teaching valuation, I’d be teaching high school math, and if I wasn’t teaching high school math, I’d be teaching middle school. Basically, my passion is teaching, and my interest lies in finance simply because my skill set works there.”
The A+ teacher of business valuation
Damodaran himself completed his schooling in Chennai. He studied accounting at Madras University before undertaking a Master of Science in Management (akin to an MBA) at the Indian Institute of Management, Bangalore. After this, he headed to the US to complete a second MBA and a PhD, both in finance and both at UCLA. By that stage, he was making a beeline for a career in banking when an epiphany stopped him in his tracks.
“I started my MBA wanting to be a merchant banker but along the way I had a moment of grace,” he says. He explains that he heard an internal voice speaking to him when he was working as a teacher’s aide (TA) for an MBA class at UCLA in order to make some fast cash.
“I remember walking into the first class I ever TA’d, and I knew it was what I wanted to do with the rest of my life,” he says. “I realised this was what made me happy.
“Luckily, I was listening that day. I think if I wasn’t [sic] listening I’d be a Goldman Sachs banker, or working in private equity somewhere. But I just got lucky.”
That was almost 40 years ago. Today, Damodaran holds the Kerschner Family Chair in Finance Education at Stern. He’s so passionate about education that all of his teaching – his classes, seminars, executive classes, online classes, data sets, tools, spreadsheets and more – are freely available on his website. And when he’s not delivering courses in corporate finance, and equity instruments and markets, Damodaran’s day-to-day involves educating educators.
“I teach a class of teachers through a program called the International Teachers Programme,” he says. “It’s run by 10 universities and, essentially, it encourages business schools to send faculty to a central location, where people talk about teaching.”
It’s a role Damodaran could do in his sleep. He’s been awarded the UCLA Berkeley Earl F. Cheit Award for Excellence in Teaching, as well as Stern’s Excellence in Teaching Award, and he was the youngest winner of NYU’s Distinguished Teaching award. So what’s his secret to being an award-winning educator?
“In my session, I use three words: make, it, real.
“There’s no point valuing a company in 1988. Value companies today. Make it relevant,” he says. “Make students understand why this matters to them, and then they will learn how to use it.
“Most valuation classes are becoming spreadsheet classes, where you’re taught to be an Excel ninja… If all you have are numbers in a spreadsheet it’s not a valuation; it’s numbers in a spreadsheet. You need to tie those numbers together with a story.
“A valuation is a bridge between stories and numbers.”
The dark side of valuation
Damodaran was going to visit Melbourne in October to present a full-day workshop at CA ANZ’s biennial Business Valuation and Forensic Accounting (BFVA) Conference. That plan was redrawn when COVID-19 intervened, and he will now deliver a keynote address online on the first day. (He hopes to return with his workshop in 2021.)
Damodaran’s “Jedi guide to valuation” draws on his book The Dark Side of Valuation: Valuing young, distressed, and complex businesses. The book explores what happens when valuers abandon first principles and create new metrics, as well as how best to deal with difficult scenarios such as volatile equity risk premiums, and political risk in valuation.
In it, Damodaran writes: “…the dark side of valuation beckons any time analysts have trouble fitting companies into traditional models and metrics…”
Initially written in 1999 after the dot-com boom, and re-issued after the 2008 global financial crisis, it was updated for a third time in 2018.
“I’m a Star Wars fan,” Damodaran tells me by way of explanation for the title. “And I believe that you sometimes have to draw on an inner strength to fight your valuation battles… you will suffer losses along the way but a Jedi does not waver.”
So what does this teacher of teachers, this Jedi master of business valuation, hope to impart to chartered accountants during the 2020 BFVA Conference? Simple. It all comes back to his central argument that you have to be willing to be wrong.
“Accountants need to give up on their search for precise answers,” Damodaran says. “You can never master it [valuation]. You basically have to accept it is a process.
“Accountants need to give up on their search for precise answers.”
“If you keep working at it then you’ll get better at it. It’s three steps forward and two steps back. I’ve learned things I didn’t know about valuation in just the past nine days.
“Try to be willing to live with being wrong. Be willing to say you were wrong, and willing to correct yourself when wrong.
“On all three dimensions accountants have a tough time… They’re so busy entrenching and defending what they’ve already done, it makes a bad valuation even worse.”
This is not a popular opinion but advice, you suspect, that can only lead to improvements in the profession in the long run.
Damodaran’s ‘Jedi guide to valuation’
- Accounting is not finance
- Just because you have a D and a CF does not mean that you have a DCF (discounted cash flow)
- Valuation is not modelling
- It is better to be accurate than precise, and accuracy is relative
- Price is not value
- Valuation is a craft
- Investing is faith