Value Investing III: Rebirth, Reincarnation or Requiem?

[@shyamramachandran6940]

This series is a Masterclass on valuation by the Dean of Valuations!

[@focus168168]

Modern Real world valuation ! :)

[@jonathancphelps]

I studied was a double major in philosophy and poli sci in school and I've learned investing by myself. For the life of me, I can't understand why such a big gap formed between so-called "growth" and "value" investors. The way I view it, learn as much as you can from all camps and use the toolbox you create for yourself to be successful. It's very strange to me that people wouldn't do this. They way you defined yourself toward the end of the video should give lots of people light bulb moments. Thanks so much your help in educating me. I've learned a ton. You ROCK!

[@ericguo8209]

One of the best teachers on investing- Buffett 2.0!

[@ryry9780]

I'm a value investor myself, so your series on the philosophy REALLY hits close to home. I'm very familiar with Type 2 errors and the other problems that come with having rigid margins of safety. I know what you mean about the ritualistic behavior of other value investors -- I see it many times in the FB groups I'm in. I haven't seen the disdain people have for DCF models though (and I'm a proponent of their use over pricing multiples). I've never used price multiples to dictate my interest in an idea either. I've also had moments where I've been dismissive of "juvenile and impulsive traders" and I still do, even though I know they have a place in the financial ecosystem and that I shouldn't feel that way because they just focus on something else that's equally valid (ie: human sentiment). So... yes, I can empathize with your writing. As I read through your articles, I find myself agreeing with everything you wrote. Like every discipline, evolution needs to happen and so practitioners must be open to the idea of change. It's a shame I never ran into you when you were at Omaha. I would've found it interesting to converse with you. Over the years, I've had to make changes not just to the way I analyze businesses but also the criteria I use to justify buy/sell decisions, simply so I could adapt to today's market environment, and I can expect to make more of those changes in the decades to come. Blaming lackluster returns on the Fed, on the effect technology has had on the accessibility of data, and on shifts in the global economy to intangibles and technology can only go so far and eventually becomes an excuse, a crutch leaned on by a bunch of "old fogies" who can't, or won't, keep up with the times. Those people get left behind. I refuse to be one of them.

[@sobriquet5016]

I largely agree. One thing that came to mind when you mentioned "juvenile and impulsive traders". Value investing requires markets to have pockets of inefficiency, and you should welcome those 'juvenile and impulsive traders' who open the door to more inefficient markets. Think of how much you would prefer other market participants to be someone inexperienced, usually with barely surface level understanding of markets, and trades on whims, as opposed to an algorithm programmed by the brightest on Wall Street.

[@ximu7232]

This series really changed how I viewed the stock market and value investing, and the rationale makes very good sense. I learned about professor Damodaran when I took my valuation class in graduate school. The first day, my professor handed out a research paper/survey (I forgot exactly what it’s called) that was done by professor Damodaran and told the class if you finished this paper and understood everything, you don’t have to come to the class, because that’s all I will teach for the semester. Sometimes, I can’t stop imagining if one day professor Damodaran becomes one of those youtubers that shares their robinhood account on their KZbin channel, how many views will he get, and how that would impact the entire investing world.

[@sobriquet5016]

That's a nice story! But don't hold your breath while waiting for the day Damodaran shows his Robinhood account. However, if you read his blog you'll find that he has mentioned many times over the years when he has taken a position in a company. It's public information, so no need to wait for Robinhood account transactions - check the blog.

[@johncase9153]

Thanks for the series of lectures that you make freely available. I consider myself a value investor having bought B. Graham's book about 18 years ago. I'm also a retired civil engineer. So when I started investing in individual stocks, I used the one equation he presented for valuation V/E = (2*GR+8.5) in his book, and tried to selected stocks that were undervalued. What he said about Margin of Safety really resonated with me because if you consider how structural analysis and design is performed according to building codes, you are factoring up your loads, and factoring down your allowable stresses that result in a Margin of Safety. Think about public buildings that you walk into. Are they structurally sound? Are you concerned in any manner? No, because there is an adequate margin of safety. With time, I bought many more books on finance. This included your book entitled Damodoran on Valuation. I also bought the essays by W. Buffett. What was fascinating to me is what W. Buffett said. He confirmed that the value of an asset equals the sum of the discounted free cash flows over time. He also said that growth is a component of valuation, sometimes quite positive, sometimes not. He really didn't draw a distinction between growth and value, but considered growth as one component of value. He also said that he would not present valuations because of the uncertain nature of the input assumptions. He said that he and his sidekick C. Munger might come up with different valuations. He did say that his Berkshire annual reports would provide inputs so that investors could come to their own valuation assessments. In reading his essays compiled by Cuningham, he also stated that academics definition based upon beta is wrong. His essays don't provide any mathematical analysis though. So I set out to develop my own analysis which simply looks at the uncertainty to a basic discounted free cash flow analysis based upon future free cash flows, growth rates, discount rates and perpetuity rates. In engineering, I used what is called the First Order Second Moment Method (FOSM) for propagating uncertainty in basic parameters I have been applying my DCFROR model for about five years with success. In my most recent analysis, I examined a buy and hold strategy in terms of risk. I define risk as the probability that a stock selected for investment will lose money if it is held for a short time, or if it is held for many years. A book that I use to inform my probabilistic estimates is Reliability Based Design in Civil Engineering by George Harr. What seems very clear to me is that a stock held for a short time that is subject to variation in market prices has a high probability of losing money (P >= 1/2, 1/4, 1/10) while a stock held over a much longer period of time based strong consistent free cash flows for over 10 years has a very low probability of losing money (P

[@quant-trader-010]

This is gold!

[@teddyw8457]

I was pure technical on stocks. But guess what? Until I see value investing .. I feel I was So stupid! Nice professor! Love your content .. I learned something from you. Bwt, love your abnb valuation.

[@andyk9359]

I feel like this short value investing series was about not relying onto the ratios so much, especially the pricing multiples. As per with how he's purchasing his own stocks, I think his major point was finding the intrinsic value rather than relying onto low p/e and p/b ratios, and to expand your horizon instead of getting obsessive with certain sectors and pricing models. I appreciated this short series and hope you do more videos like this! Thank you Prof!

[@jadenkitchen8311]

Fantastic series! Thank you for putting this together!

[@savdarim98]

Thank you, Dr. Damodaran, for sharing these three episodes on Value Investing. Very insightful indeed.

[@franciscneculau3128]

Amazing content. A humble thank you professor for sharing this!

[@raulnepomuceno]

Hello, Professor Damodaran. Thank you very much for the excellent content. I am an amateur investor, still studying to consolidate my investment philosophy, and you have been very important in this regard. Coincidentally, last week I finished reading the book "The Warren Buffett way", by Robert Hagstrom. The author says that, at the beginning of his career, Buffett did follow a very restricted version of value investing, focused on low prices. However, over time, qualitative criteria were included. Hagstrom says that, in recent decades, Buffett started analyzing the price only after another type of screener: high return on equity, good profit margin, candid and rational management, projection of growth in net cash flow, favorable long-term prospects, strong brand. The author insists on saying: price is the last thing that matters in this analysis (yes, it does matter, but it comes last). First, the company needs to go through these other qualitative filters. Therefore, I think that some of the considerations that you present in these sessions still apply to Buffett and his philosophy, but, respectfully, I see some critics as a simplification mistake, when you consider Warren Buffett's philosophy similar to just buying low price/earnings ratio or low price-to-book ratio stocks. I hope you will receive my words as part of an honest attempt to learn. I would get very sad if you think I am being presumptuous. I really admire your work. If it were possible for you to add these qualitative elements to your graphics and your critical analysis, it would be excellent. Once again: thank you very much for the excellent work you have done here on youtube. I have learned a lot from you, I am very grateful for that. Cheers from Brazil.

[@christiandelapena8623]

Yes he changed his views and approach when he met Charlie, which introduced him to Phil Fisher's Common Stocks and Uncommon Profits. A far deviation from Graham's 'cigar butt' approach. BTW, I also love that Robert Hagstrom book, playing the audible in the car whenever I can, but I prefer the Snowball.

[@maks_st]

This is an absolute gold of intellectual debate! Thank you very much, professor!

[@nileshgada]

The best part in this session is the motivation you have given to supplement /add Technical/other methods to the traditional value investing approach !! That’s a valuable lesson !! Thanks a lot 👍🏻👍🏻

[@christiandelapena8623]

Wow I have been a Ben Graham blind follower and has taken the 'investing high ground' all my investing life, but I like and agree with what the professor has said. Thank you sir.

[@AteusXReligiosos]

Mindblowing! A big thanks from Brazil 👏👏

[@MrKush-ee7go]

This session is GOLD !!!

[@handeulkoo6396]

This was such a great series. Can't believe this is free, thank you professor!

[@wohinmitdemgeld584]

Thank you. I really do love your way of thinking and presenting your insights. Every one of your videos helps me become the investor I want to be.

[@dave7mm083]

Professor, words alone are not enough to thank you for your knowledge contribution to society via this channel. Good karma to you!

[@vladko7777]

The last minute was the most important part in my opinion - because growth is just a component of value. We should clearly distinguish between value investors who prefer to invest in companies with low multiples, and those, who do not hesitate to invest in growth stock with high multiples, because they understand that growth is just a component of value. I will call first group "low multiples investors" or "stable companies investors" for example. This will help us to avoid any confusion, which exist at the moment in the investment community. But this idea should come from academics, everything in your hands Professor!

[@paulbar1768]

Amazing honesty!

[@Sanchopensa1]

It's really inspiring and I do like the humility of your speech. Thank you so much for sharing your thoughts and analysis. The slide 7 seems a little difficult for me to apprehend but I am going to dig more on it to truly get the essence of what kind of investor I am and I want to be. Thank you. You completely change my mind set!

[@ConioPendeho]

Thanks to Aswath e Puru (for concretness( & also for a broader view generallly: the acquirer's pdocast I learned in 1 year what I would have learned in at LEAST 6 years. WOw this session I,II and III are pure gold !! thank you ! (thanks to Puru for posting the link)

[@BrunoHenriqueMattos]

You are fantastic. Thank you so much for sharing such a high quality work.

[@petarz9029]

This series was fantastic!

[@Filipehall]

Excelent vídeo! I´ve been aproaching investing through both fundamental and technincal anallysis, great to see that you also have this point of view!

[@user-wc7em8kf9d]

MInd blowing! Now time for me to assimilate your insights. Thank you Professor, this is Teaching at its best.

[@juanochoa3972]

Outstanding session!. Thank you so much

[@MrAcenit]

Professor, amazing series. Thank you for taking time to do this and share with us all. May I request a similar series but on the counter part - "Growth Investing" and essentially what high level themes/suggestion you may have for the Growth Investor?

[@jedbmorris]

Absolutely love the sessions Prof D. Thanks for putting them together!!

[@vibzee4118]

I agree with your point, which had discouraged me last year. Though you buy value by paying the price, the profit you make will only depend on the price of stock. Hence no matter how good you value a company, untill and unless others value it similarly (i.e price gets adjusted to value) you have no advantage of it.

[@ChristopherZhou-d3s]

amazing content

[@shivamsharma6154]

Dear Prof. I am big admirer of yours!! but I have read all the Berkshire annual letters back from 1978 and one thing that mr. Buffet have always emphasised is that value investing is not about low p/b low p/e ..it's about excellent businesses ...so he always sticked to basics.

[@Mesozoic_mammal]

Wow! I'm glad I found this channel. That was a truly great lecture!

[@kerrinnaude2777]

"Don't rule out charting" yes!

[@wildreams]

Lol.

[@kerrinnaude2777]

@@wildreams LOL. Gotta respek da prise akshen

[@xyzzy4567]

Don’t rule it out, but don’t worship at the alter of charting either.

[@beamboy14526]

I watched all 3 videos. I think most value investor would agree that indicators such as price to book, price to earnings, etc are all useless and that successful value investors value the company by estimating all future cashflows the shareholders will receive. If companies do not dispense cash back to shareholders, it must be able to deliver increasingly larger potential cashflows back to its shareholders at a rate that is equal to or greater than the discount rate. If they are not able to do this and it continues on forever, the limit of the infinite sum of the future value of the company approximates to zero. If eventually the company does dispense cash back to the shareholders at some point in the future, then that can simply be discounted back to find the present value of the company.

[@beamboy14526]

Basically I feel that a stock is just a bond with uneven cashflows. The job of a value investor is figure out how much it's worth, adjust for risk, and compare it to the price it's selling for and buying the cheapest one.

[@terrapininvestments5878]

@@beamboy14526 These are maybe the two greatest KZbin comments I’ve ever seen in my life.

[@pipilnkous5463]

Yes an undervalued company might go to its fair value - and even higher - but the real underlying process may be much different ; I'm quoting Soros here

[@pipilnkous5463]

and what do you think equity analysts are doing ? exactly this: DCF modelling; Why? To sell stocks through the brokerage business ; to collect fees ; as thats how they get paid ; so what you gonna do? Be fair or be like president pump in your valuations ? You adjust the growth rate a couple of ticks to the upside and voila. Now we say to you: hey I got this cheap value stock come and buy it !!!!!! Thank you C U later in 1 year when youre calling me at 2 am on why your portfolio got hit by a train

[@pipilnkous5463]

however aswath his solution of lookin at rel eps vol is worth looking into...

[@ims7865]

I agree with some points, BUT... One can't have 50 companies in his portofolio because is so hard to understand all those businesses and keep track with them... I have 7 companies and it was so hard to do all the research and now to keep updated with information about the..... I think a portofolio of 10 stocks is a maximum an individual should have. His best 10 ideas.

[@uselinux123]

availability of information about the prospect of a stock is what distinguishes today's era and the glory days of value investing, the more information is available, the more decisions can be taken by more people reflecting in the price movement of the stock, thus affecting returns and price opportunities basically translating into a narrow range in a chart

[@JNdeepak]

Masterclass as always! Thank you Sir.

[@johnbailey3351]

Great series!!! While I agree that price-to-book may be outdated, I kind of think value investing will make a comeback. Outperformance has alternated between growth and value methodologies for the last 50-60 years. Value lost big back in the 1990's, even more so that it has as of late, but it outperformed over the next decade. One problem is that the deepest value is 80-90% energy or financials. A lot of risk in those two sectors.

[@marcoiachini7854]

Prof. You mention your portfolio holds 50 stocks. How are you able to keep track and value them confidently while also having your fill-time teaching job, research, talks etc. valuation insights aside that is a master skill in itself...would appreciate any input!

[@jerrysadventure7423]

Thank you very much professor for sharing your insights, hope I can take your class one day!

[@CrazyHermitVizard]

Actually you convinced me about diversification and about changing valuation models. I earlier burned myself because of a lack of diversification

[@kailoonooi]

Excellent !

[@cos7575]

How much lower would be the P/E ratio of the S&P 500, if we would consider R&D in the earnings? Would it make a reasonable difference?

[@tiananicholetallant]

Thank you so much for posting these🙏🏼

[@jesseclark5659]

Fantastic

[@salmanahmad8659]

You are posting real Gold but view on these videos prove how many people value real stuff

[@juandavidsanchezrestrepo2850]

Great Video!

[@HepCatJack]

Was the reference to picking stocks according to astrological signs a reference to W.D Gann ? I've read some his papers on investing on the "natural frequency" of companies, which seemed to me to be more like cyclical stocks. Still he has managed to do in the thousands of percent's on some years which is impressive even if it doesn't make much sense to me. He was said to use astrology in his stock piking.

[@kevinfernando697]

Thank you professor!

[@killerinstinct1054]

I actually did read Security Analysis. So long and I don’t even think I retained any of it.

[@tom4115]

wow this is actually really great. here i am thinking all finance academics are full of absolute crap and you prove me wrong.

[@x10mark24]

I would consider myself an aspiring value investor and the way I see value investing is searching for reasonable factors that provide sources of value over and above the current price of a security. that value could range from undervalued assets to growth potential that is higher than the market is pricing to anything in between (like lynch I buy whatever I can reasonably call cheep based on a reasonably thorough understanding of the factors involved) I think a lot of the holier then thou mentality of some value investors comes from them misunderstanding grahams warnings about what not to do in the stock market. keep in mind graham had just lived through the great depression which was in large part caused by a market meltdown which was largely due to horrendously bad choices made by the investing public (from retail traders to fund managers) so he was very much trying to warn people away from such courses in the future. he may have overreacted but after having seen large amounts of people go from middle class to literally homeless (including overhearing a bank teller ask if his own mother was good for five dollars) practically overnight I can see why.

[@non5309]

Спасибо за видео в трех частях.

[@HepCatJack]

Hello, I've read "The Little Book of Valuation: How to Value a Company, Pick a Stock and Profit" some time ago and I'm afraid I got lost with the complex mathematical formulas. I've done Calculus ,Linear Algebra and Statistical analysis in the past but that was over 30 years ago. Have you written similar books but where the formulas are explained along with the variables used in the calculation or perhaps shown as pseudo-code ?

[@MrSifaperdire]

thanks for destroying even the very few certainties i have!

[@true_human_007]

PLS CREATE A VEDIO ADVISING THE STEPS BY PRIORITY WHICH AN INVESTOR SHOULD CONSIDER WHILE BUYING, SELLING STOCKS.

[@zaphrode4110]

can you make a video on your personal method of calculating intrinsic value?

[@kytv9000]

I think he teaches that in his course. Search his valuation course.

[@paredesleonel2]

if we ignore price in our valuation analysis and only rely upon earnings growth; this means that we have taken out of play the value of money, and therefore, every company we analize is always undervalued.

[@FacileetDelicieux]

Value King

[@rhythmandacoustics]

Funny that value investors are categorized as righteous when the whole world is drunk on high expectations and greed. Kinda of hubris for Mr. Damodaran to say that Value investor do not know what is the difference between value and price. I do not know why Mr. Damodaran thinks that Value investors buy only mature companies and that value investors do not take risks. If I am to criticize value investing , I would say that this philosophy demands too much of a time being patient, and I think it is the opposite, and that Value investing does not make safe judgements enough and is often very prone to value traps, which is prone to high risks. I think Damodaran is trying to say the blindspots from classical value investing. I also agree that diversification in general is good. I think this whole series is Damodaran ranting about not liking the value investing philosophy because of his cultural perceptions on certainty and risks. I think the more cocky people are growth investors showing up that they can have 100x, 200x, 300x etc returns from growth investing. I think personally that most value investors are the least hubris people out there. I mean they do not care about price movements and have the fundamental thinking of that you are buying a piece of a company and not some paper that has a fluctuating price. I think that Damodaran is understating that most traders are actually momentum investors and that there is only a very few value investors out there. In fact growth investors also by far really out number the value investors. Value investors like momentum investors, that is where they find the price mismatches. 16:35 shows the main reason he hates value investors, because he is a Tesla Shareholder and Musk dislikes Buffet by a huge margin. Basically Damodaran is a huge fan of Tesla. So do I but I disagree on the valuation of this stock.

[@vishnuscodemaths]

Sir , if accounting is very reliable what source should we opt to gain the correct financial numbers of the company

[@africanative986]

6:50 is gold.

[@maddysydney]

Dear Prof, I completely agree with your 3 part series of videos on value investing. What I don’t seem to understand is why are you using this covid driven market hubris to challenge or re-define what value investing is or isn’t? How can a few months of price falls or rises define the value investing philosophy? I try to value (call it hope) that growth stocks will catch up to their market PEs in the future because market is smart enough to price in the future today. Just because it has been largely priced in doesn’t mean there isn’t some more value left on the table (cigar butt). They can be priced in by 5000 shareholders but the story is still fresh and has a long time to unfold. I am not saying bigger fool theory but there is sometimes more future growth than has been priced in. Also, like you have said, as data is now available readily compared to 50 years ago most of us don’t have a chance to buy before the story unfolds, so you are only left with an analytical edge.

[@kytv9000]

I think he didn't base it only on the covid driven market, but last decade at least.

[@arpitpathak4942]

here's my view as very small retail investor, i follow your class of value investing but have very little cash and thus hold only 2-3 companies. i am not diversified simply because I assume investing is a risky game and with very little cash you have to take more risk and as capital increase so will my risk aversion. so diversification for me is also function of capital and psychology. sir please tell your views on it.

[@kytv9000]

Everything being equal, the more money you have, the higher the chance you win in bettings. There's a theory about that. So having limited amount of resource is a disadvantage for sure.

[@arunavasarkar3600]

Thank you a lot.

[@Americabeatz]

Why would abstract modern accounting deflate book values? If your hypothesis is true, it would be more logic that it would inflate book values right? Maybe to show a higher ROE?

[@cos7575]

Because R&D costs should capitalize in the book value: people.stern.nyu.edu/adamodar/pdfiles/papers/R&D.pdf

[@nullnull3333]

Thank you for your continued insight

[@imba69420]

Saying that "value investing" somehow disqualifies tech stocks is simply misrepresenting what value investing really is. Was bying Apple in 2008 at P/E of 4 a bad idea? Was it a bad idea to buy it in 2013 at P/E of 10? Was it a bad idea at 40 P/E 2 months ago? NO, NO and definitely YES! And P/E is just one metric. EDIT: I should've watched the whole video first. In the last minute you explain you're the same "value investor" as I am. I think you're making a good point about value vs price.

[@vishka07]

The easiest to get the information the harder to have advantage. Professor what do you think about Andrew Lo theory? Thanks for sharing your knowledge.

[@cos7575]

Here is a good analysis of the Andrew Lo theory: jlcollinsnh.com/2012/04/15/stocks-part-1-theres-a-major-market-crash-coming-and-dr-lo-cant-save-you/

[@b.r.8528]

Towards the end, you say that you will buy any stock where the price is lesser than its value. You add that there's nothing in the nature of companies that should rule out certain companies. However, would you agree that one should look for businesses with strong moats? I'm certain that I'm preaching to the choir, but moated businesses have the wherewithal to keep competition at bay and continuously increase their earnings (and free-cash) over long periods, which markets tend to reward by jacking up their share-prices to astronomical levels (most of the time). So, wouldn't an investor be better off buying 5 or 6 moated business (assuming he/she finds them) rather than an array of 40 to 50 businesses, just for the sake of diversifying?

[@cos7575]

Theoretical it's better to buy 5-6 moated businesses. But there is an real world outside, where nobody can perdict if these 5-6 companies can keep their moat. Think about why you are so sure, that this 5-6 companies can keep their moat? You can't be, because there can happen so many things which are outside the control of this companies. With just 5-6 companies you can end up with much less than the market returns. You can also end up with much more, but you had taken a much bigger risk for that. Buffett and Munger had made fortunes with a concentrated strategy. Also many rich people are rich, because there were concentrated in a few or just in one business. But how many people failed with a concentrated strategy? This people will not cover the magazines and nobody is writing books about this people.

[@submariner55]

Hello! Does anybody knows how to put my hands on those 50 stocks?)

[@antrikshshiva1001]

Well I hope you bought a lot of Tesla and held on to it I heard it's booming now

[@mattfavaloro350]

Done

[@TheArtofValue]

I know for a fact that, except for the margin of safety, the versions of value investing you talk about here are not really what’s being taught at Columbia these days. Instead of looking for low book value, in large part it now comes down assessing what intangible assets are really worth, and then looking at what future growth is worth on top of that, only if there is a competitive advantage, but yes then not overpaying for growth. You are definitely talking about older styles of value investing not practiced by many younger value investors with tech companies in their circle of competence.

[@AswathDamodaranonValuation]

If by value of growth, you are comparing ROIC to cost of capital, I am afraid that you are moored to book value. Just curious. How many young, money-losing companies did you find under valued at Columbia?

[@kirkclements4893]

Classic straw man argument - define value investing in a stupid way then rip it apart - Buffett calls value investing the purchase of a security at less than it is worth - less than its intrinsic value with a margin of safety - CAPM; MPT, Beta - all crap

[@pontusschroder8361]

Curious, how do you explain that Value funds (mutual funds), dont beat their benchmark (Value index)?

[@monsterboomer8051]

@@pontusschroder8361 Easy, fund mangers are concerned about their own profits first. Second, average mutual fund investor gets scared during crash and sells and don't buy at bottom. Mutual funds are really stupid group to measure.

[@joeychai1037]

Such a harsh lecture on revealing the truth to the 🐑 🐑 🐑