Invest Like The Best recently featured the dean of valuation, Aswath Damodaran.
Great conversation covering:
-The importance of stories when valuing companies
-Why inflation is causing havoc in today’s market
-His contrarian thought on the future of ESG
Here are my notes:
1. Unexpected VS Expected Inflation
You can plan for expected inflation.
But unexpected inflation is deadly.
You don’t have time to build it into prices.
Examples: For bonds you have to market down its price because the coupon rate is not high enough.
For companies it’s tough to plan its long term investments and build for the future.
It’s harder to project your expected costs and returns.
2. Impact of inflation on discretionary vs non-discretionary goods
The former is more exposed to the impacts of inflation.
E.g. Walmart and Target have said how badly they are hit by unexpected inflation.
But not for Kroger because you can’t delay buying groceries.
3. Inflation is a tax on the less well off
Inequality will be exacerbated.
The solution is a painful one—put the economy into a deep & long recession.
Inflation is like a genie is a bottle, once it gets out, it’s hard to get it back in.
4. Return on Invested Capital isn’t a magic bullet.
Aswath doesn’t focus on ROIC because:
-Easily manipulated
-Mature companies command a great ROIC but doesn’t grow
-Great growth companies usually come with a poor ROIC in its early years
5. 🚩companies who focus on reducing cost of capital
If a company is making 35% returns, who cares about reducing 1-2% in COC?
If a company is spending most of its effort reducing COC, it means its best days are over.
6. Argues against concentrated portfolio
He hates the word: conviction.
Because conviction goes with arrogance.
You are asking for trouble if you load up your bets on 5 companies.
Spread your bets.
7. Injecting stories into valuation Listen to:
-Management
-Bulls
-Bears
Based on all you have learned, construct your own story.
Don’t look at Wall Street numbers till then cause it’ll influence your thinking.
8. On ESG
-Services that claim to measure ESG disagree with each other
-No evidence that ESG made companies more valuation
-No evidence that ESG funds beat the market
-Percentage of energy obtain from fossil fuel didn’t improve
That’s all I have for you!
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