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Aswath Damodaran

lines on the record: 198
first: 2023-04-06
most recent: 2023-04-06
sittings or episodes: 1
sources: podcast

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“It's academically proven. They pull out papers. They look, there's a small cap premium, it's roughly 6%. That's extraordinarily sloppy. You're dropping the value of every small cap company because you think the Hit with that same bloodshed. There was actually a very interesting paper that came out of AQR and I think Laza Peterson is one of the, and he argued that it's not small cap premium. It's a small cap junk premium. Which basically means that it's small cap companies that are of high quality that are earning much of the premium. So if you put your money across 100 small cap stocks and you're just investing in all 100 of them, you might end up with a portfolio that does nothing”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“More to push up the discount rate for small companies So, if you own a private business and you go to Duff and Phelps or you go to Ernst, I value my business, they'll come up with a 12% discount rate and say we're going to add a 6% small cap premium to it. You say, why? Because remember that 18% discount rate means a lower value for your business. You say, why are you doing that? Because it's a small cap premium.”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“They don't want to show on their books in December before December 31st, you get rid of those low profile stocks in your portfolio that are bad. So you essentially push the price down and then January comes around and you make You buy back those stocks, the price goes up. Whatever the reason, I would not invest based on the small cap phenomenon precisely because it's so weird. It doesn't happen over the course of the year. It doesn't happen in a cross-section. It's a small subset of companies. But here's where staying with our notion of how badly academic theory gets transitioned into practice. If you ever talk to people who praise small companies, the way they come up with a discount rate is they use the traditional models risk-free rate, beta, risk premium. They come up with a number, and then they will add a small cap premium.”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“January effect. So there's something weird going on here, right? I mean, it's been going on for the long time. So people don't.”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, so a risk adjusted story. It's even stranger than that. And much of it is delivered in the first month of the year. You know, 90% of the chamber.”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“I mean, this is, I mean, we might get to ESG. This is, I think, at the core of why ESG has floundered, is somewhere in the middle of the last decade, people decided it would sell better if you sold it as an alpha story. So they told people if you invest in good companies, you will make higher returns. I mean, hold that thought because we.”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“An ETF gets found in the next John Small Cap stocks. People forget all about the risk story. It becomes an alpha story. Everything in Wall Street becomes an alpha story.”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“And that's exactly right. But you'd look good when the alphas were calculated because people were using outmoded models to measure risk and you could beat those models. So, you could gain the system to great positive alphas by looking like you were beating, when in fact you were just buying small cap stocks. That was a form of. So, Farmer French were not saying you should invest in small cap stocks. They were saying, when you invest in small cap stocks, it looked like you're making money, but there are underlying risk, liquidity risk, information risk.”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“And that, I think, is the, to me, the models make it, in fact, much more quickly than they should because I want the intuition to get out there first. The logic to be debated first before you adopt the models. Greed drives everything. So if somebody sees a factor model and they say a factor making money, there's an ETF that gets founded on the factor. Nobody stops and asks the question, why is that factor giving me higher returns? What is the underlying logic? Small cap, right? For a long time, people bought small cap stocks because they say, oh, it makes a return. And I would stop and ask, why do you think small cap stocks earn a higher return? The original research, actually, the farmer French paper argued that market capitalization was standing in as a proxy for us, that small companies were riskier than larger companies. You weren't really making higher returns. You just looked like you were making higher returns and beating the models. But in fact, you were exposed to risk.”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“All the work, Bill Schultz has done. And the reason I make that claim is I see people who own three stocks who might use beta. And I said, look, are you sure you want to use beta to measure risk? Because you're violating the core assumption and they're not even sure what I'm talking about.”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“It's interesting the models catch up faster than the underlying logic. There are a lot of people who use betas now. But they don't understand the core assumption you need to get to betas being a measure of risk, which is you got to assume that investors have a diversified view of risk, that when they think about the risk in a company, they don't think of the risk of the company standing alone, but the risk it adds to a portfolio. That is the core idea behind all of modern portfolio theory.”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“And I think that's where it might end up, but it might need somebody to take a big write off before it ends up here. I mean, I've given up on trying to figure out Elon's motives in doing something, but I think in a sense there is a portion of honesty in Ismo, which is he wanted a public forum. He wants it on his terms. That's a problem. He wants it in his terms and the way, but I think that there is an argument to be made that Twitter as it was developing would never make it as a successful business, that maybe there's a pathway for it to become a part of our lives more like one of those regulated utilities, which we are so dependent on, but it's then not going to have the growth and the monetization potential that people might have seen originally.”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“Absolutely. It's where news breaks. I heard that the quarterback for Baltimore wants to leave. The first place you read it is he posts on Twitter that I'm looking for Lamar Jackson. I'm looking for another place to be. So I think it's become this breaking news place, journalists track Twitter because they get their news stories off. Very much so.”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“He can write off only the equity portion of the 44 billion. The test is a write-offs are going to be the banks writing it off. So that's, I think, the reality of this is I think that is absolutely true. I think Twitter plays a role in our lives, which for many people, I think we get our news on Twitter first, right?”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“And I think part of the reason is the nature of the platform doesn't lend itself easily to the way you make money. It's not good for a subscription model, as Elon is finding out, right? The 3% of the people who send out 90% of the tweets, you might get them, but you can't make enough money on that 3% to cover the business. It's not a great advertising model. Partly because what makes it attractive, which is limits on characters, also limits you in terms of advertising. People are hitting and running. They don't sit and read. Whereas on Facebook, I can get you while you're spending an hour talking to your friends. So it's a difficult social media platform to monetize. Jack Dorsey found it out and his subsequent people there found it out. I am not sure it can ever be monetized successfully. I would not buy it as a business.”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“I think it could be so to somebody with deep pockets because let's face it. 350 million users. And I've never seen a social media platform become so much a part of our lives with a pricing and a business model that doesn't seem to work, right? This has been the problem right from the beginning.”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“Market price. Market price. How hard is that? So, in a sense, that's what these accountants are doing. And presumably they mark down the pricing based on revenues dropping by 57%. It's as simplistic as that.”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“I don't think they have the tools. To be quite honest, I'd rather have an honest pricing than a kabuki dance valuation because It goes back to this issue of fair value accounting. Fair value accounting is not about value. It's about pricing. In fact, if you look at FaZ 157, which lays out the principles of fair value accounting, you're supposed to come up with a number that you can get”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“That helped finance. So they invest in the equity. They took a 57% write down, which is suspiciously close to the knockdown you're seeing from 44 to 20 billion. So, I always wonder about these accounting firms that reappraise price. They don't appreciate value. They reappraise price what they're based on.”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“Does he get a write down? So there is a taxes that I am puzzled, but I'm curious. I want to find out. And I'm digging as much as I can because we do know that Federica took a 56% write down on their investment in Twitter. They'll help finance.”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“And that's an interesting question. First, is this a gaming of the system? Are you setting yourself up for the great recovery story?”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“This is not even a question of it's not a choice. They're going to be forced to cut their dividends. You're just buying them just ahead of the precipice. And it's not a great way to invest as a reason. But to me, that is what I think about as a puzzle. When I look at a company doing something and I say, why is that happening? I want to generalize the discussion because it's easy to get trapped in an anecdotal story and draw conclusions that don't apply to the population. You probably saw the story about musk lowering, the Twitter value. Right, the $20 billion.”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“Lot of regional banks right now have dividend deals of 6, 7, 8%. But if you load up your portfolio with those, God only knows what a year or two from now. You're going to be looking at because these companies are going to be forced to cut their dividends.”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“Last year, there were at least a couple of hundred companies with dividend yields greater than 8%. And the way I think of them is these are companies that are teetering on the edge of the cliff. And if you're a lazy value investor buying high yields, you're going to be buying a lot of banks right now.”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“Companies were terrified. And this is the problem companies are so attuned to this notion. So you're actually stuck with the dividend. You're a hotel company, you're paying a dividend, you're continuing to pay a dividend because you don't want to send the wrong signal. My reaction is, are you in denial? Because everybody around you knows that you can't run your business. But that's the problem with dividends is the way we've created dividend policies. And let's face it, value investors have fed into this addiction by saying, I buy the stock because it never cuts dividends.”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“Because you got to wait this out. And if you looked at buybacks, that's exactly what happened. Companies announced that they were cutting back on buybacks. Buybacks had already announced were going to be suspended. Buybacks dropped by 50% in that quarter.”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“Can't get 20 because everybody's business is under disruption. Everything is changing. I mean, welcome to globalization. There's a dark side to globalization. And one of the dark sides of globalization is business has become more unpredictable. Earnings have become less predictable. And if earnings become less predictable, what company in its right mind wants to increase dividends by 20% and then face the problem two years later of saying we've been disrupted, we have to go back and cut dividends. I think of buybacks as flexible dividends. That's the way I think of it. And that's a good thing. In the first quarter of 2020, when COVID shut the global economy down. Everybody felt the right thing for companies to do is hold back cash.”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“Exactly. A big brand name companies, and I made a list, and it was easy to do. Today, if you ask me to make a list of 20 companies with reliable and predictable earnings Of difficult”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“And I think here's where I think the real reason for the buybacks comes in. Dividends because they're sticky requires some degree of confidence about future earnings. Now, when I started in 1981, I actually made a list of 200 US companies with reliable and predictable earnings and was easy to do. You had these big telephone companies. Telephone companies, consumer product companies.”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“And I'm glad you brought up Norfolk Southern because my most recent post on Buyback starts with two stories. One is the Norfolk Southern story and how that initiated again this discussion of are buybacks happening at the expense of things of reinvestment, things you need to put back. And the second was, of course, the Warren Buffett story that came out the same week, where he essentially called people of post-buybacks economically illiterate. I mean, strong words for Buffett. Again, some histories, until 2009 or 10, Warren Buffett actually spoke out against buybacks. He was not a fan. He was a big dividend person. And then in 2012, I think Berkshire Hathaway initiated its buybacks with a cap, which is that they would do buybacks as long as the price was less than intrinsic value”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“It was 1934. It reflects the risk aversion of somebody coming off the Great Depression and thinks as bonds with price appreciation. That's a Graham approach investing. Buy a bond with price appreciation.”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“It was fairly reliable Exactly. You can go look at the original railroad stocks, you put a dividend in to get investors who are buying bonds. This is just like a bond with price appreciation. One reason I'm a little skeptical about people who claim that they do that investing based on Ben Graham's security analysis. It's a great book, but it reflects the time it was.”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“But also, if you think about equity as a residual claim, which is the way I think about it, you get whatever's left over, then that residual claim should change year to year, whereas dividends historically have been sticky. They're like coupons on bonds. And the only reason I can think for why dividends became the key way of returning cash is I went back to the history of markets. Bond markets preceded stock markets. So that when stock markets were first opened to attract investors to buy stocks, they had to be disguised as bonds.”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“So I stepped back and said, what's wrong with dividends? And let's face it, dividends really never made sense as a way of returning cash to equity investors. Why?”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“It shows up as compensation. It's a different kind of tax. The options that tax had came when you exercised your option, I remember Mark Zuckerberg when they went public had to pay, what, a half a billion dollars to the state of California for options being exercised, but restricted stock have a different set of characteristics, and there you don't have the incentive anymore to play with the prices because you're going to get the shares anyway, and you're going to get the dividends while you get the shares. If you paid out dividends, you still even unrestricted shares get those dividends. So, over the last 15 years, companies that used to give options have increasingly shifted away from restricted stock. And if we were options, there's a reason for buybacks, you should have seen a drop off in buybacks, and we haven't.”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“And I tested that in the 1990s. In fact, that argument didn't work out because the companies were doing buybacks in the 1990s were not the big tech companies. They were older companies that were over the hill in terms of their business models. And as you well know, in 2007, accountants fixed what I thought was a horrendous mistake on their part, which was treating options as free money. And essentially expensing it. And over the last 15 years, and maybe people are not aware of it, companies have increasingly shifted away from options to restricted stock. Last year.”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“Influence and dilution. But if you get restricted stock, the incentives change. With stock options, there's an argument to be made that you want the stock price to go up because your options are worth more. So in the 1990s, the argument was its buybacks are happening because we're increasingly rewarding management with stock options. They have an incentive to do buyback so that they can get the higher price in the options. So I said, okay, that's testable. If that is true, buyback should be greater at companies where management stock options are a higher percentage of compensation and less at companies where management options are not issued.”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“In fact, I throw this out to my class, and the first thing they come up with is more tax efficient to do buybacks than dividends. And in a sense, it is, but it's actually less tax efficient now than it was in 1981. When 1981, when I started, you got dividends, there were tax disordinary income at the highest marginal tax rate, that was 70%. Capital gains then were taxed at 28%. So, the question is if tax efficiency is the issue, why weren't buybacks the dominant way of returning cash pre-1981? And why have they actually increased? So there's actually less tax efficient now than it was 30 or 40 years ago. Return cash. So that argument kind of the other argument I heard was management compensation in the 1990s.”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“Three dollars. Two out of three dollars collectively. A trillion dollars was returned in the form of buybacks, $550 billion in dividends. Clearly, this is a trend line. It's not just the US. Across the world, you're starting to see this phenomenon. So that's really.”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“And you tell me, I'm curious as to what your answer is. 40 years ago, 95% of the cash return by companies took the form of dividends. In 1981, when I started, dividends were the way to go for return cash. Last year, 67% of all cash returned by companies The form of buyback”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“Let's take a basic one. Let's take buybacks. It's a story, it's a political hotspot and everybody's talking about it. And I've always wondered, why has there been a shift away from dividends to buybacks over the last four decades? It's incredibly noticeable. I'm going to write down.”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“There are no Renaissance people left on Wall Street and investing, people who can talk about drama and talk about numbers at the same time. And I think that's a loss.”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“Many of you are more naturally number crunches, about 200 put up their hands. Ex bankers, recovering accountants, auditors, actuaries, scientists, mathematicians, And the other 150, a natural storyteller is liberal arts majors because MBA programs have become incredibly diverse. And I tell them what my end game for the class is. I said by the end of this class, and I turn to my number crunches, I said, look, I hope you have enough belief in your own imagination that you're willing to let go because they've spent a lifetime being told that being subjective is a weakness. Making judgments about something is a weakness. And then I turn to my storyteller and said, by the end of this class, I hope you have enough confidence with numbers that you become a disciplined storyteller. To me, what makes for good valuation is you're either a discipline storyteller or an imaginative number cruncher. And I think that combination is getting increasingly hard to find because we're very early in life. I see this with my wife teaches fifth grade and already people are being slaughtered. Natural number cruncher, they're going to take number crunching classes.”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“Sometimes narratives can become fairy tales, and that's why you need numbers to keep your discipline. In fact, when I start my valuation class, I have 350 MBAs who take my class, and it's an amphitheater. I start with a question.”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“In fact, I think the first numbers were collected by the insurance people in the 1700s, but it was very proprietary, only they had access. So Excel really has allowed for this acceleration of number crunching. So to me, what attracts me to valuation, it's that bridge between stories and numbers. You tell stories about companies that you convert into numbers, and those numbers eventually become valuations. And I find that attractive. I don't want to be a number. I'm not a natural accountant or an actuary. I'm not a natural strategy who can tell the stories. I like to connect stories to numbers and valuation is the place to go to do that.”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“And I got it right. I am interested in numbers. I'm naturally a numbers person, but I've also been interested in storytelling. To me, storytelling is much more, I mean, if you think about the history of humanity, for thousands of years, the way we pass down information was with stories, not with numbers. It's only in the last century that numbers have come to the forefront.”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“The motor in. Too many vials, so you don't know which one to emphasize and which one not to. So finally, After about his fifth try, he said, I give up. I'm going to call you Dean. And I said, why? He said, oh, Dean evaluation, it's easier to say. So this has nothing to do with expertise and everything to do with having an unpronounceable last name.”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source
“I was in CNBC about a decade ago, and the host had trouble with my last name, and he kept trying and trying and trying. It's so easy.”
2023-04-06 · Masters in Business · Aswath Damodaran on the Future of Business Education · IDENTIFIED FROM THE TRANSCRIPT · source