Ritholtz's Masters in Business: Aswath Damodaran Interview

n y u sterns Aswath Dama Doren. He is a professor at n y U Stern and specializes in valuation and let me spend a moment or two just explaining exactly what that means. Whenever you make a purchase, be it a private, non publicly traded company, it could be private equity, it could be venture capital, or a public company, or a hedge fond or a mutual fund or anything like that, or a market or an index, you are

making a valuation decision. You are basically saying this company is worth paying this much money for because I expect there to be gains in the future, and there are a few people in the world who are better at making that assessment than than our guest. Um. I'll leave out all the specific details of his curriculum VITAE. It's too long to list. I need. All I need really need to say is he's a rock star professor um. Incredibly insightful, eloquent, intelligent, uh sort of guy, really really

interesting conversation. I this was one of those interviews where I expected it to be good and I was delighted with how absolutely fascinating the guests was. So with no further ado, my conversation with n y U S. Aswath Damadharin. This is Master's in Business with Barry Ridholts on Bloomberg Radio. My special guest today is n y U S Professor Aswath Demodrin. He is the Kirshner Family Chair in Finance Education at the n y U Stern School of Business.

I'm only going to give you an abbreviated version of his curriculum vita. Otherwise we'll take up the full hour. A b. S. At Madras University and MS from the Indian Institute of Management N B A. And PhD from

the University of California at Los Angeles. He is the recipient of too many fellowships and awards for teaching excellence to to note other than to point out he is the five time winner of the Professor of the Year at n y U. He is also the author of several highly regarded academic texts on corporate finance, valuation, and

investment management. He's written so many books. Let me just reference a few, The Little of Stock Valuation, investment valuation tools and techniques, corporate finance theory and practice, investment philosophies, successful strategies, and the investors who made them work, and on and on us with Delmaradin. Welcome to Bloomberg. Thank you, I'm glad to be here. I'm I'm excited to have you because this is an area that is so important to investors and we really don't dive as deeply into

it as we probably should. So so let's just start right from the beginning. Where should investors be thinking when they look at the question of valuation. I think the first thing investors have to be asking is whether they should be doing evaluation in the first place, because valuation requires two things. One is it requires a willingness to learn the basic tools. And many investors want to do valuation,

but they don't want to learn about accounting. They want to do evaluation, but they don't want to learn about present value. They want to do valuation, but they don't want to understand the basics that drive risk and return. And that's lazy. It's lazy, and it leads to you spending a lot of time thinking your value companies and you walk away with actually nothing to show for it. So the first question I would ask you is do you have time to be willing to do things you

might not enjoy doing learning those twos? What is the alternative to not learning to do just put your money in an index. Fun in the world would be far better off if you just put your money in the next one, went back to doing what you did with the rest of your life. Be a doctor, be an engineer, be a plumber, do what you do in your regular life. You investing for what it's meant to do, which is to preserve and grow what you save from your job.

And I think for a lot And that's the other point it emphasized, because a lot of people invest for the wrong reason. They want to get rich. I mean that's the reality. We invest because we want to beat the market. It's a lottery ticket. We're gonna We're gonna find the next to Apple, the next Google, and I think in the process we make mistakes, and then we beat ourselves up about the mistakes we make, and that leads to more mistakes. Sounds fairly like a familiar story.

So so let's talk about the accounting work. I assume you're talking about looking at account statements, looking at balance sheets, looking at cash flows. How does the average investor wrap their head around. I would say keep it simple, because I think if you take an accounting class, the problem is an accounting class is all about debit and credit and getting you into the nitty gritty of the footnotes.

I actually did an exercise where I do these webcasts where I actually took the propran gamble ten K, and what I did was I did a webcast where I talked about how little of the ten K is actually useful in valuation and how much of it is noise. Accountants throw in small stuff with the big stuffy. They're incapable of telling the difference the stuff that maddens the stuff that doesn't because there accountants the detail oriented, they've

focused on it. I was about to say, not only the detail oriented, but when it comes to a ten K, the typical responses, hey disclose it all better to get it out than be accused of hiding something later. In fact, that the point I make is data is not information. We're mistaking the two. We have a lot more data than we used to have thirty five years ago. Typical ten K now is five times longer than it used to be thirty years ago. Really, that's fascinating because of

all the disclosure requirements. And that's part of the problem is people think that if you throw everything into a ten K, you are being more informative. I actually suggest that maybe we should go back to fifteen page ten ks, where you focus on the things that really matter, like a nutrition statement on the side of the canda soda. Here's the important metrics that you need to know. I'll give you an example of a completely useless section of a ten K where they describe the risks that they

might face, like twenty pages. It's exactly it's a lawyer writing that stuff. Right in case we get suited. We told you competition could come in and take the market, as if you didn't know that when you invested. So I would actually argue that we're moving in the wrong direction by pushing more and more disclosure requirements When In fact, we need more focus in financial statements, better and more focused exactly releases as opposed to just to your volume.

In fact, I do a fifteen minute webcast and exactly the accounting. I need you to know things like do you know the difference between gross income operating income in net income? If you don't, you're in trouble, right, So the basic stuff so that once you can, it's more financial statement analysis and accounting that I want you to know. Can you read a statement of cash flows? That's that's

quite quite interesting. So when we talk about non cash charges and amorization and appreciation and goodwill and all these fun geeky terms, are these of any assistance to the average investor? Most of them are not. I'll tell you I've described good will as the most destructive accounting item ever created in history. So let's let's delve into that. Define goodwill for people who may not be familiar with the phrase goodwill is the accountant admitting he screwed up.

Because that's the way to think about it. Right. So if you have a company with the four billion dollar book bellion, I pay ten billion the accounting, there's a six billion dollar problem to explain away, so he shows it as good will. So it's very squishy, it's very elastic. You could put whatever you want into that. It's it's a plug variable. You put it in because your balance sheet has to balance. It is a very unpleasant requirement. So good will exist for one reason alone. It balances

balance sheets. It's a plug variable. In fact, I send these suggestions to I F R S and to GAP that they never seem to take. And one of the suggestions I've sent a few years ago was, let's rename goodwill as an algebra when you have a missing barriable to make X, because then we wouldn't do crazy things like paying for goodwill. I'm Barry Ridlts. You're listening to Masters in Business on Bloomberg Radio. My guest today is Professor as Damadarn of n y U Stern School of Business.

He is an expert in the valuation of corporations. Let's talk about two of the hottest companies out there, both of which seem to have a somewhat ambiguous valuation, Tesla and Amazon. So let's let's talk about Tesla. You've done so much work on that. What is the bottom line with the valuation of Tesla. I mean, with all young companies, it's a story that you tell about the company that drives your evaluation. The narrative, and with Tesla, the narrative

can lead you to different places. I mean, I'll give you I'll give you an example. When I first valued Tesla was about three years ago. I value them as a luxury automobile company. I gave them the margins of luxury automobile companies, and I gave them the growth you can get as a luxury automobile company. Came up with about a hundred dollars per share. Okay, the problem with Tesla is you've got, for lack of a better word, a delusional CEO who kind of keeps expanding the story

on you. Right because in a sense, today he's an automobile company. Tomorrow is a clean energy company. They have tomorrow god only knows where. So the story for Tesla I call it the ultimate story stock, which is people have stopped talking about numbers. The numbers really, and that's why Tesla stock price can take all this punish mint of deliveries not being on time. It's still hang in there because the people who invest in Tesla have bought

into Elon Musk's story. Is there an Elon Musk premium? I think there's an Elon Musk fandom, which essentially Tesla investors are not investors like other companies. They don't invest in the company for the earnings that cash flows. They're not worried about delivery schedules not being met. They're buying

the Elon Musk story. So there was There was just an article out the other day, that Bloomberg release that showed, amongst luxury automakers BMW, Audie, Mercedes and others plus Tesla in terms of sheer volume last quarter, Tesla's beating everybody.

And is that a fair statement? And I think Tesla has some incredible strengths, which is I mean, can you imagine another automobile company telling the world that they're going to come out with a new model in two thousand and eighteen and four hundred thousand people signing up today and putting down insane It's nobody else will do it. So how about just the idea of someone saying, I have an idea, let's make a new automobile company that

has hasn't been done? And how many And that's why I feel frustrated with Tesla because at the core, it has something very powerful, this connection to customers, that no other automobile company does. And the reason I'm frustrated is I want them to build this incredible, great automobile company. I want focus here. Instead, what do I get? I get them acquiring Solar City and telling me that they're

building battery panels and solar power. Well, you're gonna buy a battery pack, put in your garage, put the solar cells on your roof, and now we've made you completely independent off the grid. Look what we've done for you as an automobile purchaser. And in a sense, I think, once you've established yourself as an automobile company, maybe you want to do this, But already you have enough on your plate. Why would you want to load up more

stuff on your plate? Especially because I think Solar City is a commodity in a commodity business with a huge amount of dead So it's almost like you're adding three distractions to a company that already has so much to focus on. If I were Testla, I'd looking at getting the Tesla three delivered on time, because that's going to

be disastrous. If you've got four hundred thousand people expecting the car to be delivered in two thousand and eighteen, and that doesn't get and this is this is the low cost under forty dollars exactly every person all electric automobile, which ironically General Motors um turns out to be ahead of Tesla with Chevy with their their first they had the vaults and now they have the vaults, They're actually

gonna beat Tesla the market. Yeah, but I think Tesla will win that game simply because General Motors wants to go after the fifteen maybe the lowest. I mean a Tesla will never be a fully mass market automobile company because I think in a sense they will always trade at a premium over a GM car. So I think they will have that price premium and a profit margin. But all of that presupposes that they make the trains run on time. I could talk about Tesla all day.

Will come back to that. Let's talk about Amazon. I mentioned there was a uh euron Musk premium. Is there a Jeff Bezos premium at Amazon? And I think it's deserved. I mean, Amazon has been one of my pet obsessions for twenty years. It's a company that I valued first in seven and I valued pretty much every year since. I tell people I bought Amazon four times and I've sold Amazon four times, which kind of tells you where I am with Amazon, Right. Have you regretted all of

those cells? No, because I think in a sense, I I have to stay true to my faith, which is I buy companies because I think, like an investor, the price has to be less than the value. Amazon is a company where the price can take off and go well ahead of value for extended stretches for years. And I think part of the reason I think people are willing to pay a premium is I've never seen a company where a CEO has been more consistent about his narrative.

In fact, he's the the anti Elon Musk. Right. If you go back to and then you read the letter that Amazon said to I don't know whether you've ever read that Jeff Bezos. There's a great letter that's online on what he told people he would do as a company, and he's done it, and he's stayed exactly true to the script. There have been a handful of pivots, but he's pretty much been fairly consist Their minor shifts, of course,

course changes, not wholesale reversals in any ways. In the fact, I describe Amazon as a field of dreams company, right, which is if we is what the story he told is, if we build it, they will come. Basically said, we're gonna go after revenues first, We're not going to worry about profits, and once we build the revenues, the profits will come. And he stayed true not just to that story in terms of what he said, but how he acts. You look at the Kindle, you look at it basically

go product by product. So yeah, let's go through. You have the Kindle, you have the Amazon Fires, Amazon Tia, Amazon Prime. Right. Basically, Amazon Prime is I started Amazon Prime a few years years ago. I was late to the party, and it's just become indispensable. Amazon Music, Amazon Video, and what they share in common is Amazon sells every one of those products at cost or below. They're open about it. Amazon Prime they charge you go to the ten K, they actually tell you how much it was.

They give you the cost or how much it costs them to service. It's about three. Basically they're saying, look, why's subsidizing it, But they say it's okay because if we build it, they'll come. Your colleague, an n y U professor Galloway, has been suggesting Amazon should go out and buy the US Postal Service. Of course, they're shipping costs are now in the billions, soon to be tens of billions of dollars, and you know whatever our FedEx

and UPS. I'd be terrified where where Amazon is going next? Right, because Amazon has this insane capacity to destroy almost every business for everybody else in the business. Now it's done in the retail business already. The reason I will I will be hesitant to buy Netflix X is because Amazon is entering big time into that business. Ups and FedEx. You look at Amazon entering the business because here's what

Amazon does with every business they go into. They sell below cost, They challenge you to match up with them, and they can keep going long after you dropped out of the game. So I think that Scot's right. I mean, I think that there is change coming to this business. I'm Barry Ridhults. You're listening to Masters in Business on Bloomberg Radio. My guest today is Aswath Damadarn. He is a professor of finance at n y u's Stern School

of Business. He is also an author of numerous books, including the Little Book Evaluation and Investment Philosophies, Successful Strategies and the investors who made them work well. We were previously talking about Tesla and Amazon, and but these are public companies and the market gives us an approximate valuation every day. Let's talk a little bit about private companies where there isn't that public valuation. How do you go

about valuing a non traded private company. I think knowing the prices a crutch, right, I mean, in a sense you value should not be a function of knowing the price. We use it in public companies often as a feedback loop to make sure we aren't screwing up too badly. So it's true when you value a private business you look for that crutch. It's not dead, though it depends on the private business. I valued over multiple times on

my blog. And there there is a pricing. It's a VC pricing or a Saudi Sovereign Fund pricing of the company. But is that a true pricing. I've I've heard people make that argument. But what you're essentially doing is instead of taking the collective wisdom of millions of investors. However, misguarded. They may be at times you're lying on one person rinning a check and that valuation. In fact, this is statistical.

It's a statistical problem. In the regular market, you have hundreds and hundreds of people trying to assess the price your one person. So all you need is one crazy person. In fact, I wrote an article on VC pricing just a couple of weeks ago on how VC pricing can very quickly get out of control because all you need is one crazy person to drive the pricing process out of control. It's a feedback feedback, it's a feedback loops. So but it's so that's that's part of the problem.

The other part is when a VC says I've got five percent of a company and I paid fifty million, you can't extrapolate that simply because vcs, when they invest in the equity and a company often get these options on the side right roundside protect so it's much more so it's a much sweeter deal than exactly. So it's a much more difficult place to get a price, but at least you have a price. I think it gets really tough if you ask me to value the hot

dog stand outside right, because I can value it. There is no price I can compare it to, and it makes me uncomfortable. It makes everybody uncomfortable not to have something check, and that I think is a psychological problem with valuing private businesses. You value the business, say, how

do I know I'm even within the ballpark? Right? You're stuck, stuck relying on the metrics that exactly that you use um And to make sure people understand, when you talk about options, vcs very often have the right to reinvest in a subsequent round at a same or discounted price to whatever that next valuation is. When you say options, it's not actually options, it's it's so they're getting this upside advantage. You also get a downside protection sometimes, which

is the value decreases. They are allowed ways of escaping from that. So vcs are pretty careful about putting those options in, and founders go along because it allows them them to inflate that because I'm sure because when the journalist says, you know, so such in the Terranniss valued at nine billion, they're often extrapolating from a VC investment. So it serves the founder and the vcs to at least put out the surface number that everybody is buying into.

So you mentioned Taranis, which was widely known as a unicorn before the nar would have turned out to be pretty much nonsense. And now the whole thing is sort of mid collapse. We're watching it doing enron Um not quite the same underlying issues as Enron had. But when when the business school case is written on that, it's going to be really interesting to see how people missed all the warning signs. What about some of the other

Silicon Valley unicorns, the billion dollar private companies. You mentioned Uber? What is uberworth? Well, according to the pricing, it's worth over sixty billion. What do you think it's worth. I think it's worth a number, and well it's my estimate of the value. I'm not sure what the legit number is because Uber is very I think the part of the problem with Uber is we know what it can do.

It can grow revenues like crazy. It's in kind. I go to cities where you would not think Uber would be there, but it's there, such as give me a few. I was in Moscow's Apolo, Jakarta and Delhi last summer. Every single city, I asked the audience, how many of you got your Uber and in every single city. To the people in the in the session said they came in by Uber. That's astonishing. They're that widespread. That's the good news that they know how to grow because they

have a very low capital intensity model. To grow in the city, all they need to do is hire a guy, put them in a motel room, ask them to get some drivers together. Because they don't own the cars, they don't have the driver, they don't the drivers don't work for them. The problem for Ruber is they have a business model which is indefensible. What I mean by that is they can grow revenues, but they can't make money right because entry is easy. So that what was happening.

What's happening in the U S and it's concerning every right sharing company is Lift offers Uber drivers two thousand dollars to switch to lift. Uber offers Lift and to make them exclusive, so they pay them money. So basically what's happening is the expenses are way out of control. So well, revenues are doubling, costs are tripling. So the way I described it, you've got to get an exit from this, but you've got to come up with the

defensible business. You've got increased stickiness, and much of what you're seeing in the right sharing space in the last year is how to increase stickiness. Staking is in the sense of keeping drivers attached to you, keeping customers with you. I'm very results you're listening to Masters in Business on Bloomberg Radio. My guest today is Professor Aswat Damadarn. He is of n y U Stern School of Business and he is an expert in valuing companies, both private and public.

Let's let's talk a little bit about valuing stocks and the market. Generally. We've if you've been an investor for any length of time, you may have noticed that valuations in general have been creeping up over the years. Not just things are a little pricey today, but generally things have gone up in price in the stock market. And there are a number of different theories as to why. First,

is that a fair valuation. Two stocks generally look pricier this decade, in last decade than five, six, seven decades. It's not debatable, right, the p ratios are up, capes are up, price to book ray shows up. You take any multiple there at high but hears the way to think about it investing is not an absolute game. You

say I invest or not. It's a relative game. So if you're not going to invest in stocks, the question is ware you can invest instead, And what do you have is a game that has fundamentally changed on that dimension. In two thousand and seven, if you didn't invest in stocks, you might have put your money in T bonds and made four percent in corporate bonds and made five and a half to six percent. But today you don't invest

in stocks. You invest in T bonds you make one point five percent, or corporate bonds and make two and a half percent. Stocks look expensive relative to their own industry, but they don't look expensive relative to what my other choices are. So in other words, you can't just look at a single metric in isolation like priceto earnings ratio

and say, hey stocks or cheaper stocks. If it was that simple, you buy it when the pe was low, you sell when the pus high, and then you get that's not That's been my pet peeve with especially chilla, the chilla cape right, because it's become this single metric, it's a nobel price when they're pushing it. Therefore, it might so, first if you think about the cape, and

you look at the history. It goes back to seventy one, and you can show all kinds of relationships in cape now and returns in the future, So it's and there again the statistics are incontestable, which is if you have if the CAPE is high now, returns in the future I have tended to be lower. So people then say, okay, that means you should be out of stocks now because the CAPE is at twenty six or twenty seven or

twenty depending on how you compute it. But that assumes that the underlying alternative, which is what you can make if you don't invest in stocks, hasn't changed, and it has. Someone used the number not too long ago that if you were out of stocks when the cape was um, either someone elevated or very very of it over the past thirty years, you would have missed of the stock rally. So you can't look at it in isolation. In fact, what I did was I took Schiller's own numbers. Let's

to be accused of using some variant. I took Schiller's own numbers that go back to eighteen seventy one, and I put in an Excel spreadsheet which is on my blog where I try different market timing strategies based on Cape. Like, for instance, I said, what would happen if every time the CAPE was twenty above the median from the previous fifty years, I sold stocks and the CAPE was twenty five? Because I mean, ultimately, if you want me to time

markets based on strips, and then I tried. I could not find a single timing strategy over the last fifty years where I could use Cape to make money. I tell people correlations are not cash because all too often when people tell them to send me the stuff on Cape, it's look at the correlation in CAPE and future returns. And I said, I've never been able to make money

in correlations. Tell me how I used this to make money, And at least based on the testing I did, I couldn't find a single way you could use Cape to make money from timing. Monk, we just just look at the past decade. If you would have used Cape, you would have sat in in a pretty nice bond rally, but you would have missed a two plus percent equity rally. It would have been would have been pretty pretty off. Um. So, so let's talk about a couple of people have some

theories I think are interesting. Cliff Fastness of a qu R said, it used to be very expensive to buy stocks. You didn't have indexes, you didn't have a lot of things that made it friction lists and and efficient. It was time consuming, expensive, and you had to be paid. Investors had to be paid or reasonable ry to return to compensate for that initial friction. And most of those frictions, according to Cliff, have gone away. Is that a fair

way to look at it? I don't buy it. I mean, I don't think there are enough, there were ever enough frictions in this game to explain anything but a very small prime because as transactions costs, argument you can always make about value that what you pay today is a

function of expected future transactions. Where I'm using transactions costs broadly, and it's always been the case that have been in a less liquid market, you're willing to pay less upfront simply because you worry about in the US market, And I mean, unless you're going back to nineteen twenty five or five, for the last fifty years, I've pretty much had this option of investing in index one's. So the Van Guard five index one goes back to what the

nineteen seventy seventy. So I've always had that option. I've chosen not to use the option. And transactions cost starting in the eighties started sliding very very quick, so it's almost it's not like we've gone from seven percent bid ask spreads to half a percent. So if in fact, there's a very simple, testable way you could test a cliff strategy, which is to break companies down into large market gap all the way down to the least traded stocks.

And if he's right, the least traded stocks shouldn't mean the ones that went up the most. The that's where they so the most liquid stocks you should actually see underperforming the least liquid stocks. If the argument for prices going up was this, hey, transactions costs have gone down. What about the concept that in the old days to build a company you needed a lot of capital, a

lot of steel, building, staffing. When you look at Facebook's purchase of WhatsApp, of WhatsApp, or or go through the whole list Instagram, go through, they're they're making these purchases small little companies run by four or five people. You don't even need the servers and the know how you used to ten twenty years ago. It's all in the cloud, it's all modular. Those sort of things are readily available. So companies today are so much require so much less capital,

so much less staffing. They deserve a higher multiple because the cost structure is so cheap. It's a mixed blessing. Right. Because you can grow really fast, you can also shrink really fast. Right, Because I have this stare of a life cycles infrastructure companies, the old time infrastructure companies. It

did take you decades to build up the company. But once you've built up the company, you could live off the fat for a really long time exactly, and you could make money for thirty forty fifty years before the decline set in. And the decline was slow because the same forces that took you a long time to grow are now working in your favor as you decline. In contrast, you take a tech company. I described tech companies as aging in dog years like a tenure Tech companies like

a seventy year infrastructure company. You can grow really fast because as you pointed out, it doesn't require the kind of capital investment you did as as an old time infrastructure company. But it also means you don't get to enjoy the fat for very long. I mean, I think of BlackBerry in two thousand and six, it was a star. By two thousand and nine it was dead man walking. Basically, it's a company that went to where. And that's I think when you think about valuation, is valuing across a

life cycle. I'm not sure that the value of a twenty year old life cycle tech company is going to be higher than the value of a hundred year infrastructure company, because I've got two valued across the cycle, and the tech companies are probably more susceptible exact to rapid change than someone who's making dishwashing soap or something exactly. That's that's a very different So let's let's talk about some of your favorite valuation techniques. What do you think is

the most informative measure of a company's valuation. I ultimately am a believer that companies should be price based on three things. One is their cash flows. The second is the value of their growth, not growth per se, but how much it's costing them to get the growth and the expensive growth, not just the growth percentage. So I bring in both sides. Growth has a good side. It makes my revenues grow faster. Growth has a bad side. I've got to set aside earnings to cover the growth.

The net effect is what drives the value of growth. Companies globally destroy value as they grow, destroy destroy value as it grow. It's one of the scariest statistics on growth. So always a mixed fee things when the company says we're going to grow, because my first reaction is exactly so that I look at the value growth and I look at risk. So when I do a discounted Casulow valuation, people think of it as some kind of new model. People have always valued businesses based on cash flow growth

at risk. I'm sure there's a Venetian glassmaker in the four hundreds, and he might not have gone through a d c of model, but I'm sure he asked questions about, hey, what are your cash loss He knew better than to trust your accounting numbers. Even then, he talked about growth in the cost of growth, and he talked about risks. So to me, when I value a company, I've got to bring those into what I end up with as a as a number for the company. What's what's the

third factor? It's risks, So it's cash flows, growth, the value, growth, and risk. So those three factors play out no matter how complicated my discounted. That's the end game that I'm looking at. So what do you think are the most overrated valuation metrics? I think accounting valuation to me is pointless, right, So I mean book value or i've I see price, the book gets tossed out. All that's exactly now. And

to me, there's that two things on book value. The reason people get so caught up with book values first they think that it actually is a measure of what you would get if you liquidate the company today, which is absolutely absurd. So what about tobin Que ratio? And

I think it's the same lazy approach, right. The tobanqueue approach was developed for a different era with a lot of manufacturing company, heavy heavy heavy manufacturing companies where perhaps they had factories, they had machinery, They are things that could be liquidated in bankrupts exactly. So again there's there's

a attachment. We have two techniques that we're developed for a different age, and we keep trying to apply those techniques to the new age companies, which are eighty percent the market now is that of by market cap or by number of market gaps. So basically are are at least some aspect of them. But as a new age

it's their value comes not from physical assets. So I think of Co Cola as a new age company in the sense of the physical investments at Coca Cola makes a completely useless in my determining what the value of Coca Cola really So it's what is it? Brand recognition, intellectual property exactly right. So it's a capacity to charge a dollar for a can of water with crap and sugar and syrup thrown into it. It costs the three

cents to make. It's it's pure pricing power. That pricing power is not going to be reflected if I look at the plant and equipment. In fact, when they're sold off their bottling, they were telling us a look, you know, physical assets don't matter. It's all about brand name, right. It's the purest brand name play you can make because the bottling is separated from from the rest of the company. So what about a company like Walt Disney where you

have a mix of assets. You have you have the theme parks, you have the television studios, you have there's so many different moving parts. How do you put a valuation. I'm a Disney investor. You know what scares me the most? At forty percent of Disney's value comes from ESPN. That's the facts. You have a lot of competition for ESPN. And here's why ESPN has been the greatest cash cow

in broadcasting history. Every person who's listening to the show who has cable, well, it's not that they're paying seven dollars each month of their cable bill is going to ESPN. Now what happens when we unbundled in people's That's what scares me, right because for two decades it was cable or nothing. And now my son was who's who's not quite thirty, has got the cable because you know, and the reason he's able to use it doesn't watch live sports.

So to him watching Hulu, Netflix, the way I describe ESPN, it's the only thing left between cable and the abyss. Because you take life sports out of cable, you've taken the lifeblood out of cable. So if people want to find more of your research and writing other than the books on Amazon, where can they find your your valuation discussions and where is your blog? I describe myself as a Kim Kardashian evaluation, I am. I'm never shy about

exposing the material that I have. So I write a blog, whichever I do write once a week, and where is that? And that's it's a Google blog. So it's actually it's called music on Musings on Markets. It's a Google blog. So if you type in musings on Markets and my name, it should pop up. And I don't put right every day, but I write whenever I find something interesting right about. So this week I wrote about Deutschebek Why because I was just interested in the necessarily exactly the mess that's

been created. Wells Fargo should be next to New Cross. But I drom I value the San Diego Clippers when Steve Barmber bought it for two billion, because I was curious, it's really worth two billion? I mean, I'm sort of the Los Angeles Clippers because I lived in Los Angeles. I know how much of a poor cousin the Clippers out of the Lakers in l A. And I said, you're playing two billion for the Clippers. If that's true,

how should I pay for the Lakers? I valued Aryan Foster, the running back for the Houston the NFL team at one point issue tracking stock on his earning st right. So I valued a running back in the NFL. And this summer I was actually I was watching my kids and these are grown up kids with a Pokemon Go all over, and I said, when it was a Nintendo really doubled in value just because everybody's using Pokemon Go. So when I think about value, I just think about

value across the board. I'm I would know what the pricing of bitcoin is. Why is bitcoin press? So I'm I describe myself not as an expert in valuation, but as a dabbler invaluation. I'm just fascinated by how people attach numbers to things, and I look at them in my blog. So musing on musing zen market, people are gonna just look for Aswadamadaran and using zo market. There's

a website I have called the Modern Online. So if you'd open The Modern Online, which is where you actually apologize for it not being pretty, because I'm the reason is I get offers from people who are web designers and they keep saying, I can make your website look really much more attractive, and you can because I need to be because I visit my website at least once every day or two to add stuff. It's a constant because you look at the amount of stuff and on

the website, it's got there incrementally. So the way it works is Wednesday, I taught Monday, I taught a class. When I teach the class, it's actually recorded. A YouTube video is created out of the class, and I go to my website and I put the YouTube video, and I put the link to the class, and I put the lecture notes I put. I put pretty much my entire life is on the website, so you can get my classes, my writing, my essentially any aspect of what I do in business, I put on that website. So

I do that. I give a YouTube channel. I have a YouTube channel on which I put playlists. The players some of the playlists are of my classes. Every time I do a blog post, I've learned that I can double the number of people who are exposed to that blog post by putting a YouTube video on the blog post. And what do you discuss the post? I've discovered people have stopped reading. A lot of people will never have

done the other direction. To me, I could read so much more than watching a video or listening to it, and people have told me they'll listen to this podcast. There are a couple of apps that will let you listen to it at I think one point five times the speed. There's an optimal number. But I've tried to do that and I found that that's really especially a conversation that might be a little more complex or nuanced. I find it's a challenge. So what I do? Then?

I do the blog post. It's actually I sit in front of my computer with slides, so teacher treated like a class. I said, if I had twelve minutes to take this blog post and teach a class around it, because that's to me, I mean, I love teaching, and to me, a blog post is just another opportunity to talk about a company, so and generalize the discussion because I don't want a blog post to ever be about just Deutsche Bank. So when I value Deutsche Bank, I want would be able to take what I do in

dotche Bank and value wells fargoing. You're not You're not giving them a fish, you're teaching them to fish. Here's an example. Now apply the selfwhere in fact, where I describe it as would rather be transparently wrong than opaquely right. And what I mean by that is, this is a business where people want to be opaquely right. You listen to c NBC. You see people coming on, and they talked for about six minutes. In the end of six minutes,

you say, what exactly did they say? They've been so opaque, that they're so careful because they don't want to be wrong, that they've kind of covered every base and they put smoke and mirrors in there. I'd rather be open about what I think. So I'm gonna say, dotes what twenty one and a half and I'm buying it at thirteen point two. Here's why I think it's what twenty one And I could be absolutely wrong about every single one, but at least if I'm wrong, you can tell me

what part of my valuation I screwed up on, you know? Um. Professor tetlock Of of Wharton UH describes what you just discussed as weasel words that when you whenever you see someone discussing something and they're hoping to be opaquely wrong, you'll hear them say there's a possibility, there's a better than even chance. And when you step back and look

at all these statements. In reality, they have no meaning because no matter what the outcome is, they get to say, well, I told you that this was a possibility, it's happened, and when it doesn't happen, it's like, well, I said it was only a possibility. I could tell the Giants may win the Super Bowl this year. They may, I think they And if they don't, well I told you they only all right. So if people want to find your work, they could go to Musing on Markets by

Professor Aswadamadarin. Your YouTube channel, which is gonna be just search for your name on YouTube should find it. For those of you who enjoy this conversation, be sure and check out our podcast extras. Will we keep the tape rolling and continue chatting ab out all things valuation. We love your comments and feedback. Be Shoran right to us at m IB podcast at Bloomberg dot net. Check out my daily column on Bloomberg View dot com, or follow

me on Twitter at Rid Halts. I'm Barry Ridlts. You've been listening to Masters in Business on Bloomberg Radio, brought to you by Bank of America. Merrill Lynch committed to bringing higher finance to lower carbon named the most innovative investment bank for climate change and sustainability by the banker. That's the power of Global Connections. Bank of America North America member f D I C. Welcome to the podcast. UM, I don't know why I do this. I do this

every week. Thank you, professor. This is really so interesting. I mentioned to you I want to mention on the air. Um. There are a few cf as in my office. They were all excited when they heard you were, UM coming on the show. Oh, he's the man, he's the man on valuation. So a lot of these quite sans came from them. They make me look much smarter than I actually am. Um, let's talk about some before I get into my favorite questions. And I know only have you

for a finite amount of time. Let's let's see if I could find some of the questions that we skipped through before that I thought were, um, really interesting. So one of the questions that came from one of our c f A s Hey, there are certain companies that are cheap, aren't They cheap for a reason? And most companies that are cheap are cheaper a reason. The whole idea in investing is to separate the five percent of companies that are cheap that shouldn't be cheap from the

ninety percent that are cheap for a good reason. So you think the best approach for someone who's an expert in valuation is to take a value oriented investment tact that that's the best strategy. But if you're not going to be even one of those indexers. But I'm saying, value oriented to me, is a much broader concept than value oriented to know, old time value investor. So who Warren Buffett do you think that's a or Benjamin Graham old time? You're looking at it slightly differently, And here's

the difference. They actually want to buy companies where the price is less than the value. What's what's already on the ground. I mean, if you think about the classic net net strategy, the ten screens, what Ben Graham wanted was a company which had a hundred dollars in cash, no doubt, andrust trading at fifty dollars. How many of those are that exactly right? So, in a sense, the the sphere of old time value investing each year gets

smaller and smaller. So when I was in Omaha last year and I was talking to the portfolio mans, because for some reason, when they were pulled, they picked me as one of the people they wanted to listen to. They probably would never invite me back again. And I said, old time value investing suffers from three proms. One is it's extraordinarily rigid. Right, if all these rules right, it's very ritualistic. You've got to go through all the rituals

of being a value investor. And it's very righteous. They believe they're the chosen ones, right, they've done the right thing, and they think the rest of the world deserves They're very puritanical. Right, They're going to get it, and they deserve and they want the text. So they're actually waiting for the tech stalk collapse because they can wag their fingers and say I told you so, So you told that to them, and and that's why you think you're

not getting invited back. They did they chuckle or well. I think that they they know in their heart of hearts that this is I mean, it's it's I think there are enough people in there who got past the self delusion, who know, in a moment of honesty, that this is what's crippling old time value investing. Now, when you say crippling, some of the old time value investors, and I guess Warren Buffett has to be in that group,

have done fairly well for themselves. And in fact, the fact that we keep going back to Warren Buffett as the name more improving. He's more revealing than anything else. And even Warrant's not been warrened for quite a while. It's been for the last ten years. He's played a very different game, and it's an insider game where he gets special deals from companies, and he gets fantastic, fantastic deals because he brings the warm Buffett good housekeeping seal

of approvingly, they're buying credibility. That's when I love the fact that when you compare Lehman Brothers and Goldman Sachs, Lehman Brothers turn Dick Fold rejected a warm buffet lifeline and subsequently went out of business. In Goldman Sacks is doing better than ever because they took the buffet lifeline. In fact, I'll give you a statistic that I think is very indicative of value there if you compare active value investors, these old time value investors to a value

investing index fund. Because value investing index fund. Basically, what you do is you just buy all the low price to bookstocks and these talks. You put them in an index fund. The average active value investor underperforms the value index fund by about one and a half percent base. The average active growth investment investor underperforms the average growth fund by only fifty basis points. So they both underperformed. But the average value investor actually and wonder why that is?

And I think the reason is very simple. What does an old time value investor bring to the table that's unique. Anybody can compute low p right or low price to book or go the financial ratios. So at least a growth investor might have a chance because you've got to think about or they could they could have some competitive advantage and assessing a market and making judgments and whether wober will succeed or not. So the message I left them is, don't be so right, is because the average

growth investor actually does much better. You know, they both underperforming, both underperform. At least they're less underperforming than you are. So so let's talk about those um dimensions. Let's talk about the Farmer French factor model. You talked about a liquid small cap stuffs. We know small cap is a factor that tends to outperform. We also know valuation tends to outprice price book right, and then the same thing with quality if you eliminate the high debt laden companies.

So so, given what we know about those those factors, um, what is that telling us about just straight up valuation based investment? I think two things. One is we have too much data now and part of the problems you

have so much data and everybody's looking. Every year there's a new factor that people see up to six smart datas and you know, so now you they've added momentum, and they've added there's just six is three factor model, and so you could create any And that's why when people talk about these these index funds, which are they're early quasi index funds where you do a little bit of active stuff on the side. You're just not buying

it based on market cap. You basically using different basically tilted You're they're using the proxy data from the past. And here's my cautionary note. Any time use any of these things, you're implicitly assuming mean reversion, right. I mean, ever, if you look at ninety percent of investing it's based on and mean reversion worked incredibly well in the US market in the twentieth century, except for steam companies and levels.

And the reason it did was if you look at the history of economic growth over the centuries and you plot the US between and two thousand and that graph. On that graph, it's like watching a patient going to a coma because if you look at it typical, you know, when you go to a hospital, they say that it is an unusual period of history, an incredibly stable period, which made me reverse the whole post war exactly from not because you were the global economy, you could do it.

And I remember recessions used to be so predictable. You have a recession and six months in this would happen, and three months later and it was it was almost like you were on on a regular So many of these things that we know work from the farmer friends are based on looking at US data from through two thousand two, so you have to look at out sample data, and not even with the out sample data, I think there's been a structural shift in the world. The US

is no longer the center of the universe. To me, the wake up moment is two thousand and eight. I describe September twelve to two tho eight, that's a Friday before the Lehman collapse, as the last day of innocence for me. That's interesting because I used to describe the

world as developer markets versus emerging markets. I used to draw on meter version, And the lesson I got from two thousand and eight was and maybe there's been a structural shift, and all these things that look like they work will continue to look like they work, but if you put your money behind them, they might not work anymore because you're looking at a very different economic model. So I'm wary of all these because it's so easy to make money on paper. So so how come more

people are not beating the market. If if all these things beat the market, why is the average active investors still under performing the market by one to I mean, I've never seen active investing in the state of angst that it's in right now. I mean, I know active investors, and these are really smart people. Who mean I mean, I know I've known them for thirty years and they were They've always been extraordinary confident people, at least in

their own abilities. They might say collectively, they all lose, but we win because those people are having second thoughts about what they they They might never mentioned with their clients. Of course they couldn't do it. But when I add them in an honest moment, they said, I don't know

what I'm doing in this listeness anything. Charlie Ellis has been talking about the paradox of skill since the nineties seventies, the right, the whole idea that it's not that these people are bad or dumb, it's that there are so many of them and they're smart and good. That advantage goes away. If everybody is really well schooled and well educated and intelligent and and really skillful, how can that

group essentially you beat anyone else. And he has a very simple way to think about, you know, Tom Friedman at this world becoming the investment world has become a flatter place. I tell people in six if you're an investor in New York, you started off already with a competitive advantage over a guy in Des Moines, Iowa. Because the sec offices you could get to them, right, you can go to get to get to a ten K or a ten Q. You actually had to show up

at the offices and get the physical copy. There were no online PDF versions, so you had competitive advantages coming from location, from where you work from. As the data has become more accessible and everybody has, you know, computers that they can use, and you can't claim I'm the only main frame computer in the world now have it? The words become a flatter place. So it doesn't surprise

me that the payoff to active investing has dropped. And the more people tried, the worst they're going to do because as they tried, they're expanding more resources to kind of run in place. So I think Charlie was prescient when he wrote that. Not that was way back, but I think it's kind of caught up with the word now. So um god, there's so many other questions I want to plow through before I get to my my run

of favorite questions, my standard questions. UM, let me ask you one or two other questions about we talked about Tesla, We talked about um Amazon in in the original forecasts or or or strategic plan that Besos made. I don't recall ever reading anything about the cloud based computing and how they had built such a substantial infrastructure on their own. How did the idea of of hey, let's sell this to people so we can monetize something that we have

to do ourselves. When did that come along? And that's a five or ten billion dollar business, isn't it? And I think it's in that sense of Amazon in the nineties never talked about because it was a book retailer. Seven really in the letter. In the letter you never mentioned that there were a book He said, whatever business we're in, we're going to go after businesses that we think our big businesses where the existing players are not playing the game we think, and we're going to sell

stuff at costa below in that business. So in a sense he was laying the framework for what was the first retail business, then the entertainment business, now the cloud computing business. Right it's it's it's the basic business models. We're going to go after big businesses. If I were a bank, my worst case scenarios that some of Amazon decides that the next thing they want to do is

big time fintech. Let's face it, there's no business where there's s value added by the existing players in the game, for sure. And you think about Amazon has everybody's credit card on file, what do they have half a billion quireants, and they know a lot more about me than I ever want them to know. Right you open up an Amazon page, it's kind of creepy because they said, oh, you might want to look at these five items, just like Netflix. Right see. I find it less creepy from

Amazon than I do from Facebook. So when I go to Amazon and um, Norah Jones has a new CD coming out, Amazon knows I bought a Norah Jones c D six years ago and it shows up in you may want to see these That's different than going to a hall. So I could kind of Hey, if I for kids who are listening, there used to be a store called Tower Records, and right by n y U on on Fourth Street and Broadway. If I walked into

Tower Records and they said, hey, I know you. You were here for the Peter Gabriel album a few years ago. Here's a new one, that wouldn't necessarily be all that creepy. But when I so, We're redoing a room in the house and I'm searching for polls like nibs for a for a cabinet, and I'm not on Facebook. I'm in a wholly different part of the Internet. And then I show up on Facebook and here adds for that's really creepy.

And that's why when I leave Facebook, I log out so they can't track me because I find that and I don't know if that's still true that used to be true. I find that really creepy, really obnoxious, and that's why I'm not an act. And you're right, Amazon, at least it's the commercial relationship, the stuff. You understand

why they do and I've bought that stuff. That's the other thing is if I've bought books or CDs from Amazon and they say our recommendation engine said you bought this, and this and this, you might be interested in this. That's not a big intrusive leap as opposed to, oh, let's see how Susie's baby is doing. No, I don't need you to sell me this. You know, chrome and leather a pole. I decided not to get it, stopped

following me around the internet. And I think that this goes to the heart of big data, right, because again, big data has become this buzzword that everybody throws out. Nine percent companies that claim to use big data have no idea what to do with it. I saw, you know, job job listing, for I think it was I don't know toys r US saying well, we want a big data specialist and saying, what the heck are you guys

going to do with big data? The companies that are the biggest users of big data are Google, Facebook, Nextlix, and Amazon because to them, big data actually is collecting information. And Netflix actually is even bigger into big data because they're actually making shows based on because they remember, not recommending,

they're actually going out building products because they can. They're not only did they know what you watch, they also know when you stopped watching it's it's again kind of creepy, you're going to show? They remember twenty seven minutes you

gave up on the show. To actually track what shows you're watching, what shows you stopping watching, when you're stopping watching, what might have caused you to stop watching, and in a sense that incorporating all of that into trying to make shows that are just for you, right, which is so bizarre because if you read William Goldman in Confessions of a of a Screenwriter, he describes the quote I love and applies to investing. As much as Hollywood, nobody

knows anything they passed on Star wars. No one wants to make it people. I think Indiana Jones was twelve. Studio said no to it, and he has a hundred examples of all these blockbuster films that left to the studio test and left to the big data people. Right, So it makes me nervous that the quality of as long as there are independents who can do that. On the other hand, I gotta say, in general, the Amazon recommendation engine pretty good. The net Flix recommendation engine really

not bad. Um. And I find myself sometimes logging out of Google Search because I want to see the objective. So when you search for something that modifies the Google Search out algorithm, anything I've clicked on is actually if So I have a Firefox and a Chrome open up at once. I'm not logged into Firefox, but i am logged into Chrome. Because every now and then I'll search for something and I'll see the same results that I've

seen previously come up. It's like, no, no, I'm looking for something new, not trying to find something I looked for before. I hop over to Firefox, and now it's a whole not logged into Google, it's a whole different run of results. So that raises a whole another question about how effective big data is and about the lines that are being crossed along the way, which is privacy. So when I hear people complain about privacy, I tell them, look, your privacy has gone already. It's you and I are

both over fifty. We care about privacy. Kids happily open the kimono for wait, I get a free coupon. Here, you have access to every They don't think in terms of privacy, which may they may end up regretting that. They will, they will absolutely regret it because I think two things are happening. One is our visions are being narrowed because, as you said, the one of the advantages of not being directed to the things you like specifically look at you. So Pandora has a recommendation engine, which

I think is great. But Spotify just started this thing where it's their new weekly playlist. Is hey, these are Obviously if you listen to all death metal, country music, probably isn't gonna work. But if you want to expand your horizons just a little bit, and that excitement of discovery gets lost if you're only fed the same stuff. All right, I could talk about this stuff forever. But I have questions I have to get to with you.

Of course, I think people want to hear less of me and more of you, so you know, let me find my favorite questions. Um, we got through a lot of stuff, even if we didn't get through everything. By the way you people are hearing this now, you should realize there's like eight pages of questions in eighteen point fonts. So I don't have to swint when I when I see it. So you and I talked a little bit

about this. You come from the southern part of India, you move to l a four um grad school, you teach there, you go get your n b A and your PhD. How do you give up the southern California climate and come to New York with our miserable winters? How? How? What are very reluctantly? I love New York as a city. I love the fact that it's never boring, that things are always happening. But I like leaving the city sometimes.

I know the feeling, and I do miss southern California weather, especially on those days where I have to go out shovel snow. So it's up and I it's it's been thirty one years in New York, and I think it's time. I'm at a stage in my life where I'm I don't have to be in New York all year. So at some point in time, more sooner rather than later, I'll be back in California and enjoying the weather exactly.

So let's talk about I mentioned UM Berkeley where you were a lecturer, U c l A, where you got your m b A and PhD. Who were some of your early mentors who guided your career in law. It's interesting when I was a PhD student at U c l A. We had a professor of the University of Chicago visit every summer because every winter because he didn't want the guy called Jeane Farmer. And Jeane used to love to play tennis, and I was I used to

teach tennis for a long time. I was given I was assigned as his r A simply because I could play tennis with him, and so it was I was exposed.

So Jean was a very big influence on me. Um Dick Roll, who was at U c l A then, was a big researcher, and you know how difficult it was to test the Kapam and other models was a big influence Tom Copeland, who taught me corporate finance and then went on to McKinsey to write the first valuation but kind of embedded the liking for valuation and corporate finance. So I was lucky. It was an interesting and exciting time to be in finance. And I think in a sense it's um when I look at how finance has

kind of changed over time. It's like any other discipline. When you start the discipline, you ask really big questions, like in physics a hundred years ago, your Einstein and Bore asking questions about the meaning of the universe. You look at a physics journal, now you've got seven people co writing a paper on a title that nobody outside physics can even understand what they're writing about. As disciplines age, they narrow and the same things happens. You get specialists,

right So, and that's what's happened in finances. We have lots of specialists. And that's not through just in academia. It's happened in practice as well. The industry has matured, it's matured and it's created specialists, and we've lost something in the process. We've lost those generalists because when I first started working with investment banks in the nineteen eighties, I'd go into an investment bank and you'd have somebody

who has a bankerbody could talk about the theater. You could talk about stock markets, you could talk about born markets, you could talk about history. And I mean the old notion of a renaissance man. I mean there were a few of them around, and they brought perspective to discussions

that you don't have anymore. I've said in on banking discussions we have it doesn't really smart people around the table, but they're in an echo chamber where they talk to each other in the little segment of the world, and they've completely lost perspective. This guy is a biotech specialist. That guy only the software. It's not like anybody who's broad anymore. So I think we need some some you know. My newest book is coming out in two months. It's

called Narrative and Numbers. It's about storytelling and valuation, because to me, it's become all Excel, spread sheets and models all the time. People have no sense of commons that they're not bringing common sense and they're not bringing in So the book I wrote was about how when I

do valuation. I start with a story for the company with it's Tesla or Amazon, our doutsche bank, and the valuation comes out of this story, rather than me sitting in front of a spreadsheet and just making up numbers as I go along. That's really that's really interesting. Let's let's talk about the investors who influenced you. I referenced some value investors who you said, Hey, that's old school,

and we don't know how well that works anymore. Who are the investors who have influenced I learned a little bit from everybody. I learned from Warren Buffett. I've learned the importance of having a core philosophy that you go back to when in doubt. The active money managers are running to have no core philosophy, have investment strategies. You ask them, what's your philosophy? They side by low ps talks and I said, that's not a philosophy, that's a strategy.

And I think if you have a philosophy, it's a way of thinking of about markets, thinking about how markets make mistakes and why you should be able to take advantage of mistakes. So I've learned from watching people like Warren Buffett about how important it is to have a core philosophy that is yours, that's not somebody else's, that you can go back to. I've learned from Mike Mobuson was one of my favorite people to talk because when you talk about renaissance man, he's he's one of those, right.

He can talk about philosophy, can talk about psychology, can talk about finance, you can talk. And I love talking to him simply because he tells me things that I said. You know what, I never thought about that it came from a different discipline, but everything is kind of related. I'll give an example. This summer, I was in Florence and I was not that you've got the Bruno Leski

Dome in Florence is amazing dome. And I was looking at the dome in my As I was looking at the dome, I was thinking about the fact that Bruno Leski was He was an artist he loved and this dome required huge amounts of science and architecture, and he taught himself enough that he was able to build the dome.

And I thought about how he was willing to leave his preferred habitat and go into these areas because he had to be multi skilled, and how much we need more people like that who leave their preferred habitat and move into areas that don't come easily to them and try at least to get conversant with those areas out of their comfort zone, learn a new new discipline, and then bring it back to where you start. Um. Everybody loves this question. What are some of your favorite books?

Be they abound, investing, fiction, non fiction, it doesn't matter. I do. I mean I read. I've read Ben Graham, and I read it with a very different lens than most people. I don't read it for the techniques. Let's face, Ben Graham valued stocks as of their were bonds too. He was a natural fixed income guy who thought about how do I make a stock look like a bond?

So of dividends with the equivalent of coupons. But what I get out of is a philosophy about investing, which is you've got to have the essence of values, faith that you if you believe that something is worth something, you shouldn't be letting the price system provide your feedback and change your So I like I like security analysis. Evaluation is a faith based exercisectly it's a faith based exercise because you have to faith in your value and

faith that the market will correct its mistakes. And it's faith because you ask me for proof or either I can offer you nothing. Well, isn't that where mean reversion comes in? Hey, it's always eventually return to it always is what I don't historically. And see that's the problem is you ask me for guarantees. I can offer you data. I can offer you the past. But if you say is that going to happen for sure? And say I don't. So it's history plus faith equals future performance. That was saying, So,

so what other books do you like? Um? I like? And this is going to be off kilter. I called David Liss, who writes books, their novels L I S T l I S S. And one of his books was A Conspiracy of Paper. It's a it's a book set in the days after the south Sea Bubble in London. It's a novel around that and it talks about how

the bubble was created. Like people, so what would happen is south Sea Bubble is of course this this company that was created which really not for a purpose to be determined, for purpose to be determined, and it was there. It was a bubble in the sense people bought into

the story and the price went up and collapsed. But he talked about how the people running the company would send people out to to two bars or you know, and two taverns and whispered to other people about what was private information, but whisper loud enough that other people could hear them. It was your CNBC of its death. It was I was gonna say, the first investor relationships exactly right. So it's so basically as I was reading it, I was talking about I was thinking about how little.

So it's incredibly descriptive about how markets work then and how rumors got spread and how bubbles God created. And to me, when I look at how about, not much has changed, right, So, David Less conspiracy of paper, David List conspiracy. You know a lot of the classic books

fifty two hundred years old. They Richard Wykoff had a book, I think, How I Trade Stocks and Bonds, And if you opened it up today and substitute of the word internet for telegram and and the word railroad for shipping, it would be no different than the lettle More books, right, I mean the madness of crowds. I mean there's I actually don't read much current stuff. I like Michael Lewis

why because he can spend a great story everything. I don't think quite by it, because you can tell that he's such a good story writer that he has an agenda. He wants to go along with that agenda. So I try to fight it, whether it's Moneyball or flash Moneyball is hard to fight. It's it's hard to fight because the end of it is saying we should all be

doing it, but then we've discovered the downside. Well, once every that goes back to Charlie Ellis, once we're all doing it, the competitive advantage goes goes away, right, So so I love Michael Lewis for that reason. I like James Stewart for all of the Barbarians, Barbarians of the Gate and the book, and so I like reading not so dry. I read very few books which are about how to get rich quickly. I don't read any of the Warren Buffett. There's always more lessons in the failures.

When genius failed. That's that's one of the books I should have mass and then Bethany McLean's Smartest Guys in the room about Enron. The lessons are in the failures, not the lesson I'm looking for. To me, the big there are two things that get me into trouble investing. One is hubris, the second is over confidence. The two

are right. Any book that reminds me that hubris and over confidence historically have been set ups for disaster is a good reminder for me, right, because it's so easy to get caught up in I know more than everybody else. I can put stuff into martws and not recognize how much of this stuff you don't control. No doubt about that. Um. So, this is a question that comes from a reader. You mentioned tennis. What do you do to keep mentally and or physically fit? What do you do to relax outside

of the office? You know what? As I walk around New York, I get valuation cues almost everywhere, which is, you know, I'm looking at things and I'm trying to generalize from it. So to me, everything has some lessons for me in investing. Whether I'm at a ball game and I remember that we're going to a Yankee game and watching the This was in two thousand nine, with

the New Yankee Citium. I took my kids and watching the Yankees run onto the field, and I'm thinking about least commitments and debt because what I'm thinking what I'm seeing, you know, Mark to Shara run out of first based seven years at twenty three million. Actually, I took the present value of commitments and in the infield and it came up with seven hundred million dollars of commitments and said, if I were buying the Yankees, this is a dead issue that I should be worrying about it. So to me,

life is full of lessons. That's why the brunal Lesky Dome was a typical example. I'm looking at things and I'm saying, what can I learn about my Because to be a successful investor, I don't need to understand how Warren Buffett invest and how I need to understand what makes me tech, what makes me comfortable, what makes me uncomfortable. So I'm constantly looking for feedback from the world that I can use to kind of look inside myself, because self delusion is so easy when you're an investor. So

that's that's a little bit of Peter Lynch. You know, invest what you know. Although the self delusion issue I'm always wrestling with I remember the middle of the financial crisis. You can walk into any Manhattan right restaurant, no reservation, best seat in the house, it didn't matter. It was empty. But then when things started to take pick up again, and if you mid by middle nine, everybody weren't back to normal, but things were normalizing. But that's in Manhattan

where there was a trillion dollar bail out. A lot of it passed through this part of the country. There's a risk that our perspective in this little island off the east coast of America is huge. And I think when you look at things like Brexit, it should be a warning sign that we've lost perspective. Right we are, So it's easy in New York to say, well, this company should do this, We should be doing this on India aggregate incrementally, this is good for the country. What

we're forgetting that's the average exactly. And we're talking about a fifty five year old steelworker in Pennsylvania. He gets little consolation out of the fact that free trade is going to create more world world when he says, where the heck am I going to get my paycheck next month? And I think politically, when you look at what's happening

around the world. We're paying a price for almost deliberate blindness in the financial capitals of the world, the kind of cost that are being created in the rest of the country sometimes And and to me, that was in Brexit, when you saw the divide between London and the rest of the UK. In London, what was a sent voting against Brexit? It was a signal of how big the divide is between how the financial sector sometimes looks at things and how the rest of the market is looking

at those same things. And I also think that folks like you and I, who tend to be rational and tend to be data driven, assume everybody else in the world is rational. And sometimes people you know, you talk to people who voted against Brexit, and you could demonstrate for them this is gonna hurt not just London, not just England. This will ultimately hurt you. You will have less wealth because of it. And the answers I don't care.

I have to what the current situation is unacceptable. I had to vote my protests And in fact that's why I wrote the book on Storytelling a number crunching. I said, if you have a valuation, all you present his numbers. People will forget fifteen minutes after you leave the room. But the stories, the story stays, The story stays. And that's why I've had to incorporate my teaching, because when I first started teaching, I taught like a number cruncher,

all numbers, all the time. And I learned that if people want the things that people I have students have been at that thirty one years and the things that I remember from my class, and not the numbers that they talked about, but a story I might have toldn anecdote. So the power of emotions is huge in this process. We've evolved to tell stories long before there was written language. Stories are memorable, and that's not an accident, it's it's actually built in um. So what do you do to

to to stay physically and mentally fit? What do you do outside of work? I run, I watched a movie. I still play tennis. I still play tennis, and not as much as i'd like to because I don't like to play indoors, so that means I'm restricted to bang. And one reason I will probably moved to California sooner or later is because I can play tennis all the time. Down the street and outside. Um, I gotta work on my forehand. My backhand is good. My forehand is actually

for me to reverse back hands. You can groove in much better. And once you get into the back end, right, That's what I'm saying. My back hand is fine. I got I'm also a lefty. There's actually an investment lesson in that too. The reason your forehand gives you more trouble is you try more stuff. There's more you try big stuff, there's more stuff that you're supposed to just stroking.

And the same thing in investing. More activity often hurts you in investing when you try to do too much, and sometimes doing the more natural thing and not forcing more activity is the best thing you can do. And tennis, that shows up as your forehand versus your back hand. Right, I like you, I'm backwards. My forehand is better. The last two questions, UM, you work with a lot of millennials and college students. Someone comes to you and says, hey,

I'm thinking about going into finance as a career. What sort of advice do you give them? I asked them why why? Because why do you want to go on to find it? And if their answer is because I think I can make more money. I said, come back with a better reason and then we'll talk about this, because I think especially the subset of finance, it's investment, banking,

and consulting. The reality is, and I see this. My forecasts are all as I said, no grown up, but my seventeen year old is thinking about going to college. He's an amazing writer. He writes poetry that doesn't drive something that's beyond my comprehend because to me, poetry means the last word should always rhyme. He's a poet. He's a great writer. And he came to me and said, Dad, you know, I really love writing, but I think I

should be going to a business school. And I said why and he said, well, that's how you can make money. I want. I want to end up in banking and make money like everybody else. And I said, you know, so, it's a terrible way to structure your life. I mean, if you're going to go into finance, do it because you like being in finance. You like doing valuation in them.

And I think that that's I think the key to me is I think a lot of people are in finance and finance for exactly the wrong reasons and finance because this is what they don't like what they're doing. They don't enjoy it. It's not part of their solf. I mean, it's so to me. If they say that it's beyond money, then ask them what do you enjoy doing? Do you enjoy working on short term projects where you get a quick payoff or do you like working on

something long term? Because that tells me whether they're better suited for a dealmaking job like M and A, or whether they're more suited to a consulting job you work with a client for multiple years. Because finance is such a big area that I can find a place for you depending on what your skill set is, what you

enjoy doing. And our final question, what is it that you know about valuation and investing today that you wish you knew thirty years ago when you started teaching That I can be horribly wrong and be okay with it. I used to be afraid to be wrong, so I would pick companies where you're less likely to be wrong. I'm okay now with being wrong, and I know it's

not necessarily my fault. It's the there's so many things out of my control, and I think I've understood how much luck is the dominant paradigm in this business, much as we'd like to tell the world that it's skillful people to make money and this is a game. Or if you're lucky, you can do some really crappy stuff and get away with it, and if you're not, you can do everything right and still and still end up

losing money. So I've learned to be okay with people who invest off the seat of their pants, invest based on astrological science. If it works for them, it works for them. If you look use charts, if you can make money doing whatever you're doing, Who am I to come in and say that's a bad way of making money. Because you make a million dollars and I make a

million dollars, we spend it the same way. So why does it matter that I make a million off long term investing based on value and you may chamillion based on supporting resistance lines. Well, the question is is it luck or repeatable? You know, the worst thing that happens to somebody is they walk into a casino, they win money, or the first goofy stocks they buy makes money, and they keep looking for that same sort of It's the process, not the outcome exactly, and you have to enjoy the process.

And I tell people here's a very simple test and whether you should be an active investor. Let's say you get to be eighty five year in your deathbed, I come and ask you. I come and ask you about it. You've been an active investor for sixty years and you've actually made a nine percent return, and you could have made nine and a half percent investing in an index fund. So come and ask you whether you regret having spent

a lifetime trying to pick stocks. If your answer is yes, my suggestion is you don't be an active investor because I invest actively, not because I hope to be rewarded. I invest actively because I truly enjoy this. It's a process that you like absolutely. Professor Domadaran, this has been absolutely fascinating. Thank you for being so generous with your time. We've been speaking with n y U Sterns, professor of

finance who specializes in valuation. Professor Aswa Doma Dorn. If you enjoy this conversation, be sure and look up an inch or down an inch on iTunes and you'll see all of the other hundred and ten or so uh conversations we've had. I would be remiss if I did not forget. Thank my booker Taylor Riggs, my recording engineer, Charlie Vollmer, and my head of research Michael bat Nick. Be sure and send us an email and tell us what you would like to hear more of m IB

podcast at Bloomberg dot net. I'm Barry rid Halts. You've been listening to Masters in Business on Bloomberg Radio, brought to you by Bank of America. Merrill Lynch. Seeing what others have seen, but uncovering what others may not. Global research that helps you harness disruption. Voted top global research firm five years running. Merrill Lynch, Pierce, Finner and Smith Incorporated