I would highly recommend listening to the interview in its entirety, but if you struggle listening for extended periods of time, you can use the guide that follows to skip parts that may not be as interesting to you. If you are new to finance and valuation, tune in for the first 26 minutes before skipping around.
First thing investors have to be asking is whether or not they should be doing a valuation in the first place.
Valuation requires two things:
1) A willingness to learn the basic tools. Many investors want to do valuation but the don’t want to learn about accounting / present value / etc.
If you don’t have time to learn, put your money in an index fund. Ninety percent of the world would be far better off.
2) Doing it for the right reason. Most people do it for the wrong reason: they want to get rich.
How to approach accounting? “I would say keep it simple.” “The problem is if you take an accounting course it’s all about debit and credits, and getting you into the nitty gritty of the footnotes.”
Explains a podcast he did where he explained how little of the 10-K is actually relevant to valuation. The problem is that accountants throw everything in. They cannot distinguish between what is significant and what isn’t. “They’re encapable of telling the difference between the stuff that matters and the stuff that does not because they are accountants. They are detail oriented.”
“Data is not information. We are mistaking the two.” Typical 10-K is five times longer than it was 30 years ago. Argues for going back to 15 page 10-K.
Example of worthless section: Risk factors. All boilerplate text written by lawyers.
Do you know the difference between gross income, operating income and net income? If you don’t you’re in trouble.
Wants to know that you can read a cash flow statement.
“I’ve described goodwill as the most destructive accounting item ever created in history.”
“Goodwill is the accountant admitting he screwed up.”
Valuation of Tesla.
Valuation of Amazon. “Amazon has been one of my pet obsessions for 20 years.”
Valuing a private company. “Knowing the price is a crutch.” “Value should not be a function of knowing the price.” “We use [price] when valuing public companies as a feedback loop to make sure we are not screwing up.”
“In a regular market you have hundreds and hundreds of people trying to assess the price.” VC pricing, in contrast, can get out of control “because all you need is one crazy person to drive the pricing process out of control.”
Some comments on the reason VCs get sweeter deals than what is publicly disclosed. Options and protections that come with the investment.
Valuation of Uber. “They know how to grow … but they have a business model that is indefensible. Entry is easy.”
Valuing stocks in the market. Commentary on valuations creeping up over the last few years. If you look at any metric, P/E, P/BV all are at highs. “Investing is a relative game. If you are not going to invest in stocks, where are you going to invest instead.”
“Stocks look expensive relative to their own history, but they don’t look expensive relative to what my other options are.”
Valuation is not about any single metric. Commentary on flaws of this approach (using one metric to make a decision).
Commentary on how the amount of capital required to start a business has dropped considerably. Old economy businesses vs. new economy businesses. “It’s a mixed blessing because you can grow really fast, but you can also shrink really fast.”
Valuation techniques. Companies should be priced based on three things:
1) Cash Flows
2) Value of a Company’s Growth – “Not growth per say, but how much it is costing them to get the growth.” “55% of companies globally destroy value as they grow. … It’s one of the scariest statistics on growth.”
Valuation of Coca Cola.
“The physical investments Coca Cola makes are completely useless in my determining what the value of Coca Cola is.”
“If they can charge you a dollar for a can with water and crap and sugar and syrup thrown into it … it costs them 3 cents to make. It’s all about pricing power.” That pricing power is not reflected in the value of their plants and equipment. It’s the purest branding play you can make.
Valuation of Disney
“I describe myself as a Kim Kardashian of valuation.”
Comments on being “transparently wrong” vs. “opaquely right.” References to Philip Tetlock.
“The whole idea in investing is to separate the 5% of companies that are cheap that shouldn’t be cheap from the 95% that are cheap for a reason.”
The problems with “old-time” value investing strategy. “The fact that we keep going back to Warren Buffett as the name is more revealing than anything else. And even Warren hasn’t been Warren for quite a while.” Commentary on how Warren Buffett gets the best deals.
Investing has been focused on mean reversion. There has been a structural shift. Commentary on why 2008 was the wake up moment for Damodaran.
The investment world has become a flatter place. “In 1986 if you started out as an investor in New York you already had an advantage over an investor in Des Moines, Iowa.” As the investing world has become a flatter place, the payoff for active investing has dropped.
How finance as an industry has evolved. As disciplines age, they narrow creating specialists. We have lost the generalist.
Investors that influence Damodaran.
Advice for students trying to get into finance.