Personal Finance

I respect markets, but I don’t revere them: Aswath Damodaran

Kumar Shankar Roy |BL Research Bureau | Updated on: Mar 13, 2022
Aswath Damodaran teaches corporate finance and valuation at the Stern School of Business at New York University

Aswath Damodaran teaches corporate finance and valuation at the Stern School of Business at New York University | Photo Credit: Aswath Damodaran

While I think about markets all the time, money is not even close to the top of the list of key factors in my decisions

Aswath Damodaran, Professor of Finance at New York University Stern School of Business, is at the intersection of three businesses - education, publishing and financial services. While he is famous for disentangling value drivers and understanding market pricing and behaviour, what was unknown hitherto is how the ‘Dean of Valuation’ manages money, his personal finance journey and valuable lessons that he learned along the way. Fortunately, he opened up to BL Portfolio on these topics and more, making time for our readers despite being extremely busy with his teaching assignments. 

Tell us about your investing journey.

To start investing, you need money, and I really did not have any savings of note until I was mid-way through my MBA programme at UCLA (The University of California) in 1980.

My initial forays in investing were based up listening to financial experts on TV or newspapers tell me what to invest in, and I realised very quickly that there was not much substance there.

I entered the PhD program at UCLA, (not) because I wanted to be a teacher, but because it was in finance, I had to look at the research and the data on what had happened in the past, and that is when my first thoughts about markets began to be formulated. I was fascinated by how millions of people could arrive at a consensus price for a company in markets, and very quickly came to the recognition of both the wisdom and madness of crowds.

I respect markets, but I don’t revere them. Since I have started teaching, though, I lived and talked about markets, and I decided that it would be hypocritical of me to teach other people how to value companies, and not to invest in companies, based upon own valuations. Since many of my valuations happen in real time and in public (on my blog, in my classes), my mistakes are visible for everyone to see, and that makes me a better investor, since I have to confront them and move on.

What does money mean to you?

I cannot imagine that there are too many people for whom money is the end, and if there are some, I feel sorry for them. Of course, money is a means to an end, but it is not an essential means. While I buy into Mae West’s adage that it is better to be rich and unhappy than to be poor and unhappy, I do believe that the biggest joys in my life, my family, my teaching and my friends, have little to do with money. 

Tell us about your portfolio asset allocation. What are the guiding principles that you follow when you save and invest? 

By asset allocation, I assume you mean the asset classes that I spread my money around. Other than keeping enough of a portion of my portfolio in cash to cover financial needs, I don’t even think about portfolio allocation. The reason is simple. I am not a market timer. If I could call the direction of overall equities, interest rates or commodity prices, I would spend more time on asset allocation, but I cannot. I follow a simple rule in investing. Play to your strengths, and market timing is not one of my strengths.

One thing I do at regular intervals is gauge how my portfolio, which changes infrequently as I add or subtract investments, looks like in terms of geographic and sector spread. I believe that a good portfolio should reflect how market cap is spread around the world and across sectors.

What are the financial goals that drive you as an individual? What are the goals that you are proud of achieving, and what are those that took more time than you planned for? 

To be honest, at this stage in my life, my financial goals have little to do with my objectives or needs. I am lucky to be have enough in savings/investments that I don’t have to worry about meeting my economic needs. If I have any financial goals, it is to pass enough along to my children and grandchildren that they have a base to draw on, but not so much that they don’t have an incentive to work and save for themselves.

Looking back, though, I am proudest about the fact (and much of this has to do with luck and my career path) that there are almost no choices that I have had to make in decades, where financial needs were the primary consideration. The greatest blessing for a human being is to be able to never have to think about money, and while I think about markets all the time, money is not even close to the top of the list of key factors in my decisions and choices. I am often asked why I don’t work for a hedge fund, or why I give away my data /classes for free, or why I don’t do consulting and my answer is always the same. I have more enjoyable things to do with my life, and I am lucky enough that I can make these choices.

What causes maximum stress to you in investing, and how have you handled it?

This may sound weird, but I have never felt stress from investing. Don’t get me wrong! I get stressed and worried if my wife, kids or extended family get sick, or even if one of them is having a hard time with life. I even feel stressed when my car will not start, or I am running late for a flight. With my investing, I have a test called the sleep test and here is how it goes. If you lie awake at night, wondering and worrying about your portfolio’s gyrations, you have failed the test. I can tell you honestly that I have never lost a night (or even an hour) of sleep over my portfolio, even on its darkest days.

 How do you define investing success or failure?

Serenity. If you find a core investment philosophy that fits your personality, you develop strategies that reflected that philosophy and you make your choices after doing as much due diligence, as you can, and the rest is not in your control. Win or lose, I have everything I can, and I don’t second guess myself. Consider it take the karmic path in investing. 

What have been your biggest financial investing successes? And, what about the failures? 

My biggest investing successes (holding Apple from 1999 to 2010, Microsoft from 2013 to today etc.), I would chalk up more to luck, and being at the right place at the right time, than to skill. When you hit a ten-bagger in investing (where you stock goes up ten-fold), it is really luck and perhaps divine intervention that is more responsible, than your skills and models. If by failures, you mean the stocks that I picked that went down a lot, I don’t think of them as failures, since I have more about investing from my mistakes than from my successes. As I see, it is a win/win, no matter what happens. Delusional, I am sure, but it keeps me happy.

If you had to sum it up, what would be those twenty golden words of investing advice for investors across the world?

Investing is about preserving and growing wealth that you earn in other pursuits. It is not a pathway to getting rich quickly.

Published on March 12, 2022

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