A Conversation with Professor Aswath Damodaran of NYU Stern School of Business

A Desi Woman Podcast
A Conversation with Professor Aswath Damodaran of NYU Stern School of Business
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Transcript:

Soniya Gokhale (00:05):
Welcome back to another episode of A Desi Woman Podcast. I am your host, Soniya Gokhale, and the voices I am seeking may have never been heard before, but their stories deserve to be told. What is a Desi woman? She is a dynamic, fearless, and strong woman. She is your mother, your grandmother, your daughter, your sister. She is every one of us who is on an endless pursuit of self-empowerment and fulfillment. I am Soniya Gokhale, and I am a Desi woman.

Soniya Gokhale (00:40):
Hello and welcome to another edition of A Desi Woman Podcast. I’m your host, Soniya Gokhale, and today we are delighted to be joined by Kerschner Family Chair in Finance Education and professor of finance at New York University Stern School of Business Professor Aswath Damodaran. Professor Damodaran’s contributions to the field of finance have been recognized many times over.

Soniya Gokhale (01:05):
He has been the recipient of Giblin, Glucksman, and Heyman Fellowships, a David Margolis Teaching Excellence Fellowship, and the Richard L. Rosenthal Award for Innovation in Investment Management and Corporate Finance. His skill and enthusiasm in the classroom garnered him the Schools of Business Excellence in Teaching Award in 1988 and the Distinguished Teaching Award from NYU in 1990. His student accolades are no less in profit. He has been voted Professor of the Year by the graduating MBA class five times during his career at NYU.

Soniya Gokhale (01:43):
In addition to a myriad of publications and academic journals, Professor Damodaran is the author of several highly regarded and widely used academic tacks on valuation, corporate finance, and investment management. Aswath is known as the valuation guru and is regularly featured on television media outlets such as CNBC, MSNBC, and Bloomberg to name a few. Aswath, welcome to the show.

Aswath Damodaran (02:11):
Glad to be here.

Soniya Gokhale (02:12):
Well, we are so excited to speak with you, and you are absolutely a regular on many prominent financial industry news shows and media outlets. I reached out to you because I really want to understand a little bit more about your journey to this country.

Soniya Gokhale (02:33):
And one of the things I greatly appreciated in your comments to me in our introductory emails was that obviously this podcast is entitled A Desi Woman Podcast and that would be connoted of myself, but you made a comment about how there are many more South Asian men that dominate sort of the talking head sphere or having an opportunity to have a platform to speak as opposed to women.

Soniya Gokhale (02:59):
It’s certainly an oversight from your perspective. But I want to hear more about not only that, but your journey here. You mentioned that you’re so grateful for the opportunities this country has offered. If you could speak more about that, we’d really appreciate it.

Aswath Damodaran (03:14):
Each of us is always the sum total of all of our experiences. Whether you’re a migrant or you say you grew up here, I think even within the US, if you think about somebody who’s born in Tennessee who goes to work in New York, you might as well be in a foreign country. To me, it’s never been I come from a foreign space or foreign culture. It’s been I can learn from what’s going on around me. When I think about my past, I came here a long, long, long time ago, 1979. I left an India that’s very different, very, very different than the India that’s out there.

Aswath Damodaran (03:49):
Actually I’m very careful not to make statements about India, because what I say or tell people about India will not match the India that they live in because I come from a very different place in time. The place in time that I left was actually an India that hadn’t changed in hundreds of years. In 1979, India was very much the same India that had been in the 1800s, the 1700s, 1600s. It was almost frozen in time and space. To me, coming to the US gave me a chance to do things I could never have done in the India of 1979.

Aswath Damodaran (04:25):
If I’d been born 40 years later, things would have been very different. But for me, when I left India in 1979, and I was actually coming to a place where it was easier for me to do things that I couldn’t have done in the India that I left. I’m eternally grateful for the opportunities I got in the US to be myself. No, I would never become an academic in India because what I did give up to become an academic in India would have been too much. Here I was able to have my cake and eat it too.

Aswath Damodaran (04:57):
I was able to tell people what was on my mind and still be able to earn a decent living saying that. If I have a platform now, it’s for a very simple reason. I say what’s on my mind. I don’t worry about the consequences, and I’m lucky enough to be at a place in my life where I can do that. I’m grateful for a lot of things that life has given me, and my journey has been one of those things. It’s been a journey of learning, but at the same time a journey of freedom.

Soniya Gokhale (05:24):
Wow! That’s an incredible, incredible assertion that you make. And I really appreciate the fact that you don’t speak to India. I do you think that just speaking from experience and various interviews I’ve done, some people do comment upon and India. But as you stated, it’s in a bubble based upon what they recall, perhaps not attuned with what’s happening now,

Aswath Damodaran (05:46):
I don’t want to interrupt you, but I want to say something. I just recently valued Zomato. For those of you, I mean, you should be familiar, Indian online food delivery company. One of the things I pointed to was that Indians have not been as active in ordering food from restaurants as the Chinese are. The Chinese are prolific. The market is huge. The Chinese market is 110 billion and the Indian market is three billion.

Aswath Damodaran (06:15):
One thing I said in the blog is I said, “Don’t take this as a generalization, but I grew up in an India where my grandmother had never, ever been to a restaurant in India in her life.” And her reaction we asked her, do you want to go to a restaurant, was, “Why would I want to go to a restaurant when I can hire a cook to cook exactly the food I want?” And I said, “That’s the India that I grew up in. The Chennai that I grew up in had 10 million people and only five restaurants, because people did not go out.” But.

Aswath Damodaran (06:45):
I’d be amiss if I said, “That’s the way India is now,” because this is 40 years later. It’s a very different world. People go out a lot more, but I think that kind of small experience is what I’m talking about multiplied over and over again in different aspects of life.

Soniya Gokhale (07:02):
That’s an immensely important observation. You’re absolutely correct. I didn’t realize the difference between China and India. What a fascinating variation there. Well, I want to move into my first question for you. Ben Graham, the value investing legend, like to say that in the short run, the market is a voting machine. But in the long run, it is a weighing machine.

Soniya Gokhale (07:24):
With the stock market achieving new highs on a nearly daily basis and with the price earnings ratio of the S&P 500 approaching 35, a level seen historically only during periods of earning stress, how do you weigh the long run health of the current bull market? And could you share a few of your favorite stock market valuation metrics?

Aswath Damodaran (07:49):
I mean, first, I think that it’s foolhardy to play games timing the market. Nothing good ever comes of it. You can think the market is overpriced. I can think the market is overpriced, but it’s kind of irrelevant. The market is not some gigantic machine. It’s a collection. It’s a consensus of what all of us think about the future. I love that quote from Ben Graham, but I actually prefer a different contrast. I said, markets price stocks, but you are going to value them. There’s a difference between pricing something and valuing the same thing.

Aswath Damodaran (08:21):
Value is driven by what you think you can make in the future in terms of cash flows, what you can make as a business. Price is based on demand and supply. It’s driven by mood and momentum and all those other forces. We’re in a good time for markets. People are buoyant. Now, whether that buoyancy is a little over optimistic, I mean, we can disagree about that, but I think that we’re in an unusual time. The question is, is this reflective of a change, a structural change, that has happened in the economy?

Aswath Damodaran (08:51):
Because much of what we know what’s normal comes from looking at the past. You look at the last hundred years and you say, “The PE ratio for us stock should be greater than 16. Interest rates should be about four to 5%.” But remember, that’s looking at the past. I know one of the things I wrote about in 2020 during COVID is finally people are waking up to the fact that it’s the 21st century. It took them a while. It took them 20 years into the 21st century to wake up to the fact that this is a new time, a new economy.

Aswath Damodaran (09:19):
I’m wary of saying, “Hey, things are different. Therefore, they must be wrong.” I’m always open to the possibility that there’s change happening under the surface that might explain what’s going on. Now, I struggle. I mean, I agree. I struggle with reconciling that high PE ratio, which is based on expectations that growth is coming back with low interest rates, which is built on the presumption that growth is going to be a naming. And I said, look, the stock market and the bond market are disagreeing with each other. And that never ends well.

Aswath Damodaran (09:52):
Somebody’s got to adjust, and that adjustment doesn’t necessarily have to come as a crash or a correction. It could be just a long-term nothing happening in the market. You go four years with a flat market, that essentially accomplishes the same objective. So that’s part of the reason I don’t time markets and make judgments based on overall metrics because things change. I have to be open to the possibility that real changes can cause metrics to look too high or too low. But that doesn’t necessarily mean that there’s a correction on the horizon.

Soniya Gokhale (10:26):
Okay. That absolutely resonates. Could you share a few of your favorite stock market valuation metrics? I guess you sort of spoken to that.

Aswath Damodaran (10:33):
I use only one. To me, I don’t use a metric. I mean, that’s just the value of a business, the present value of the cash flows. That’s not even a metric. It’s a statement of basic business. It’s what a discounted cashflow valuation is. It sounds like something fancy. But for as long as people have bought and sold businesses, it’s been built on, hey, how much do you generate as cash in, cash out cash flows, how quickly you’re going to grow, and how certain are you about these cash flows. If we can answer those questions, the value falls out of it.

Aswath Damodaran (11:01):
I value companies. Metrics I think are lazy because you’re looking for one number that’s going to say, “Hey, go out and do this.” In fact, the only market metric that I track is called the equity risk premium. What that basically is, is our back out from what people are paying for stocks. I back out from that number, what that expected return is going to be in the future. And I do it without judgment. I say, “Okay, now, based on what stocks are being priced at at the start of August of 2021, investors can expect to own five and a half percent a year.”

Aswath Damodaran (11:35):
Now, that’s what you’re going to earn in stocks given what you’re paying for them. You could say, “That’s too low, that’s too high,” but that’s what you’re pricing it at. In fact, it’s a number I report on my website at the start of every month. I’ve been doing it for almost 30 years, but I think it’s a number that I tracked just to get a sense of what can I expect to earn as a return, because that has consequences. You’re 30 years old. You want to set aside money for a pension, and you’re investing in stocks.

Aswath Damodaran (12:00):
You might look at the pattern and say, “I think I can make 10%.” But if you’re pricing stocks five and a half percent, sooner or later, you’re going to start earning five and a half percent. There’s consequences for how much you save, how much you’d have in your pension, what your 401(k) is going to look like. I think it’s the only market wide number that I track on a regular basis. I compute the B, the price to book, all those multiples. I find them utterly useless to be quite honest.

Soniya Gokhale (12:27):
Wow! Okay. Well, thank you for that response. The business environment has changed rapidly as nations, corporations, that investors adjust to the impact COVID has had on everything, from how consumers shop to manufacturer source components. And in addition, advancements in technology appear to be accelerating, allowing for more disruption. This creates an environment where existing business models are coming under pressure and new business models are emerging. My question for you is how do you capture the impact of business model evolution in your evaluation work?

Aswath Damodaran (13:05):
You got to make your best judgment, right? I mean, what was that Donald Rumsfeld has said? He said, “You can’t expect the unexpected.” He’s had lots of memorable things, and that one sticks in my mind. Now, I know people, it sounds almost absurd when you say it. I find a lot of analysts spend their time trying to forecast the unforecastable, worrying about things. I borrow from an Indian term. I said, “Take a karmic view,” which is there are things you control and things you don’t. Sitting there worrying about the things you cannot control is a waste of time.

Aswath Damodaran (13:36):
Make your best judgements with the full understanding you’re going to be wrong 100% of the time. And that’s okay. The reason you’re wrong is not because you didn’t do your homework, but because you’re not God. Disruption has just made that uncertainty in being wrong more common than it used to be, and it does make people uncomfortable.

Soniya Gokhale (13:54):
Absolutely. Absolutely. Well, as a level of interest rates have a material impact on stock market valuation, what is your view on the debate taking place on inflation? Is inflation transitory, as Chairman Powell would like us to believe, or do you see higher levels of inflation becoming more permanent, ultimately leading to higher interest rates?

Aswath Damodaran (14:18):
I don’t think we’ll know until next year, by which point it will be resolved for us, right? This isn’t a debate that’s going to last very long, because the facts are going to come in. Some point in time, you’ve got to stop using code as an excuse for high inflation. If it’s still around in March of 2022, the excuses are done. I don’t think it’s what Powell thinks. This is why I tell people, “Look, if you think central banks can control inflation, you’re delusional.” Inflation is whatever it is. Central banks can try to fight it, but it’s painful when it happens.

Aswath Damodaran (14:51):
Because I remember, I started my life and investing with Paul Volcker as Fed chair trying to fight inflation. He had to put the US through one of its worst recession since the Great Depression to break the back of inflation. Inflation is not something that central bank set or government set. They can try to measure it, but inflation is something that happens because of fundamentals. I think that the jury is still open. I don’t care what Jerome Powell thinks or what Janet Yellen thinks. It doesn’t really matter.

Aswath Damodaran (15:23):
Because ultimately, it’s going to be set by whatever fundamentals drive consumption and what happens to prices. Right now, the one thing you can’t debate is inflation is high. The real debate is once the shutdown is fully unshut, we’re all back to work, are we going to see inflation drop back to one or 2%, or is it going to stay at 4%? Because if it stays at 4%, interest rates constant at 2%. Again, it doesn’t matter what the Fed thinks. If inflation is 4%, rates are going to go up. It’s not a question of whether. It’s a question of when.

Aswath Damodaran (15:55):
We’re going to find out sooner or later. It remains I think the biggest danger to this economy and this market is if inflation stays persistently high.

Soniya Gokhale (16:05):
Yeah, there’s no question about that. Well, you’ve been an outspoken critic of Bitcoin saying that it’s neither a store of value nor a currency. How can Bitcoin’s popularity be explained and what changes are necessary in cryptocurrencies in general, for them to survive and become more mainstream?

Aswath Damodaran (16:27):
Its popularity is primarily as a speculative game, right? It’s not as a currency. In a sense, that is the biggest problem Bitcoin has. If you ask most people, why should I put my money in Bitcoin, their answer seems to be because you can make a lot of money. It’s not because you can use it to buy a house. So even though you get little pieces of news about Bitcoin being used as a currency, it seems to me that it’s right now at least restricted to El Salvador and hackers trying to get your money. It’s not a mainstream currency, and the reason is very simple.

Aswath Damodaran (16:58):
If you have Bitcoin, would you spend it to buy a house? Right now my guess is not because of what I call the FOMO factor, which is a fear of missing out, which is you paid for your house with Bitcoin and two days later Bitcoin jumps 30%, you’re going to look back and say, “What did I do?” People aren’t willing to spend Bitcoin because they’re holding it as a speculative trade. And that to me has always been the problem with Bitcoin is that people who pushed Bitcoin have used the speculative trade argument a lot more than a currency argument.

Aswath Damodaran (17:30):
For cryptocurrencies to actually become currencies, I think they need to stop being games you’re playing with in terms of trade. Currency is built to actually be currencies, which is you want to build an efficient system for checking transactions. Bitcoin is not efficient. I mean, people are working on making it more efficient, but it’s structured to trust no one. I mean, I’ve described Bitcoin as created by the paranoid for the paranoid, because you trust no one. That’s why you need Ukrainian miners checking your transaction when it happens.

Aswath Damodaran (18:04):
I think you need a cryptocurrency that has an element of trust. That element of trust is what makes currencies efficient. I mean, when you take a $20 bill out of your pocket of every time you have to check to make sure that it is in fact a $20 bill, that currency is not very viable. I think that that’s what cryptocurrencies have to work on is to think about what they need to do to become more efficient currencies.

Soniya Gokhale (18:29):
Well, I appreciate that response. Next, I want to move on to sort of some personal questions about what led to your immense success. I mean, I just want to know if you could share a bit about some of the challenges you faced. You alluded to them just a bit earlier and how if you’d stayed in India, you don’t think you would necessarily be where you are. But I want to know if there were mentors along the way, and clearly you love the academic field and teaching.

Aswath Damodaran (18:58):
I just love teaching. I don’t love the academic field. I don’t like academia at all. The way universities are structured in the US I think is almost criminal in terms of how much we exploit undergraduate students to fund research that nobody reads. I’m a teacher. Now, if I wasn’t teaching in college, I’d be teaching in high school. I’m a teacher, first and foremost, and I never set off. To me, success was always having a classroom that worked. To me, whatever external success I have come up with has been purely incremental.

Aswath Damodaran (19:34):
My teaching has driven everything that I do. What technology has allowed me to do is actually take a classroom that used to be physically constrained to 50 or 80 or a hundred or even 300 students if I have an amphitheater and make it the whole world. It’s technology that I would view as my mentor. The platform that I’ve been able to used to teach to a much bigger audience is basically what’s allowed me to get whatever profile I have out there. If there’s fame that comes here, I will share gladly with the internet.

Soniya Gokhale (20:06):
Wow! No, I’m pulling right from your blog, and you do use indicate contrary to the widely used insult, I don’t teach because I cannot do. I teach because I love teaching. I grasp that fully about academia and sadly share your sentiments there. Any other comments you have before we close out here today? Anything that you would offer? I know you’re certainly not one to pull out your crystal ball, but any other comments that you might have as we approach Q4 of 2021?

Aswath Damodaran (20:36):
I think COVID reminds us that we live in much more unsettled times than our parents or grandparents or great-grandparents did which is going to come with good stuff and bad stuff. I think we need to take the good with the bad. I think this is not the last one of these crises we’re going to be through, and we’re all connected at the hip. I mean, we no longer have crises that are restricted to India or Greece or the US. One person’s problem becomes everybody else’s problem. If you’re young, get used to a life that you’re on a roller coaster.

Aswath Damodaran (21:12):
It’s going to be ups and downs, and you’ve got to figure out your own way of coping. I mean, I call it… Last year during COVID, I wrote a series of posts and I called it my COVID journey and the pathway back to serenity. Because to me, being serene basically means accepting things that are out of your control. I think if you’re a control freak, you’re going to be driven out of your wits in this world. I think you’ve got to accept the fact that there are things you control and things you don’t. Now go back to work. Now, take a karmic view of things.

Aswath Damodaran (21:46):
Now, there are things you control. Do the best you can with them. Take an incremental approach to life and the things you don’t control. And all you can do is do your best to build into your decisions, escape hatches, the freedom to change if things change under you. But other than that, what else can you do?

Soniya Gokhale (22:06):
I agree with you, and we can always count on you, I believe, for a dose of common sense. As you indicate on your blog, which I’m going to have a link to all of this in the podcast notes. Aswath Damodaran, we cannot thank you enough for joining us today. Thank you so much.

Aswath Damodaran (22:23):
Thank you.

 

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