Fireside Chat with Valuation Guru Aswath Damodaran

Written by Devyani Nijhawan and Sanchit Kumar, Class of 2018

When January 23rd comes around next year, 280 juniors and seniors will be flocking to Paulson Auditorium to attend Professor Aswath Damodaran’s ‘Equity Valuation’ class, while more than 25 others will be anxiously anticipating to get off the waitlist and into the course. The course, in Damodaran’s words, aims to teach how to “separate fact from fiction, sense from nonsense, and real analysis from sales pitch in equity research reports, valuations, and general discourse.”

A Stern veteran who joined the school in 1986 and a valuation pundit who is hailed and revered across the globe for his finance knowledge, Damodaran has authored eleven books on equity valuation, corporate finance, and portfolio management. In addition to being the youngest recipient of NYU’s University-wide Distinguished Teaching Award, he has also been awarded the Stern School of Business Excellence in Teaching Award by eight graduating classes. Moreover, he was named the most popular business school professor in the United States in a poll of MBA students conducted by Business Week in 2011.

Describing himself as a teacher first, he is admired by both students and professors alike.

Charles Murphy, one of Stern’s most eminent Finance professors renowned for his ‘Financial Service Industry’ course, describes him as “the Michael Jordan of professors.” Further, David Perkal, a professor in the Accounting department famous for his ‘Financial Modeling & Analysis’ course, says, “Professor Damodaran is the preeminent professor of and foremost authority on corporate finance and valuation. As a full-time MBA student at Stern in the late 1990’s, I was fortunate to have enrolled in Corporate Finance and Equity Instruments and Markets, and can unequivocally assert that his impact indelibly shaped my career aspirations in the financial services industry. In fact, I base my lecture on discounted cash flow valuation on Professor Damodaran’s materials that I used as a student.” Adding on to his list of admirers, Abby Lyall, a Stern junior concentrating in Computing & Data Science and Finance with a minor in Computer Science, took his Corporate Finance class and said, “I liked his unconventional teaching style and admire how he has made a name for himself in the world of valuation by using simple reasoning and common sense. Many people fall into the trap of relying too heavily on traditional valuation methods, such as DCFs, without thinking critically about them – being skeptical is one of the most valuable lessons I learned from Professor Damodaran’s course.”

The Gould Standard sat down with Professor Damodaran to get an inside scoop from the valuation guru himself.

What motivated you to pursue a career in teaching versus another career?

“I like to be my own boss. Yes, I could be a banker or an equity research analyst; there are other people who are better suited than I am to those fields. But, I was given a gift to teach, which gives me an inherent advantage in the classroom. Essentially, we all want to make a difference, impacting the way people live or think. In my own small way, I believe I can make the biggest difference in the classroom. I focus on impacting one person at a time – It’s all about incremental change that adds up and ripples out. People say they want to change the world, and they get frustrated because the world is a big place. Dream smaller and once you find what you like doing, while helping a few people along the way, changing the world will take care of itself.”

What does a typical day look like?

“I am very much a creature of routine. Here, for instance, was a typical Monday this semester.”

5:30AM – Wake up and run 4 miles (side note: he runs 360/365 days)

7:30AM – Take the train from New Jersey

8:45AM – Get into work

9:15AM – Answer emails: “Every morning and evening, I spend 45 minutes answering emails. I get about 250 emails a day, 80% of which are not from students but from people around the world. One minute I spend answering a Saudi analyst’s question about what risk-free rate he should use probably saves his team two and a half hours of debate and discussion.”

10AM – Prepare for class

10:30AM to 12PM – Teach

12:15PM – Send a follow-up email to students with a class summary and check-your-understanding quiz

12:15PM to 4PM – Day dream, tweak stuff, and eat bon-bons

A dabbler, Damodaran can be seen spending the rest of his day doing anything ranging from reading interesting business news stories in the Wall Street Journal to being interviewed across the globe. When reading something, he believes in “questioning and reasoning,” storing questions in his head and letting them stew. When his ideas take form, he starts putting pen to paper – “Once ideas take form, the first thing I do is write them down.” He writes one blog post a week on his blogspot website ‘Musings on Markets’ that provides a repository of information to both finance and non-finance folks alike. On his approach to writing his blog, he says, “I write as if I were explaining the concept to a class, and my blog is a medium to provide people a way of seeing the process by which I arrived at a certain conclusion.” He further adds, “I’d rather be transparently wrong and opaquely right to let people view the process and not just the output and conclusion.”

Can you tell us about a time when you were surprised by an event?

“I am surprised all the time. It is what makes what I do interesting. For example, when Facebook went public, I valued it at $30 per share. I assumed Facebook to be a Google wanna-be. I used revenues similar to Google’s for the first 10 years, and I arrived at this conclusion. However, every time Facebook has come up with an earnings report, the company has created contradictory evidence to my story. They seem to be expanding their vision as a business, and I could choose to ignore it. But as they got more successful with mobile and consumers began spending more and more time on Facebook, I revisited my story. So at the start of this year, I explained how I was wrong before and this version is my new story for Facebook. It does not mean I got it right this time but I will have a chance to revisit it again. Every valuation I do is in-process and never quite done. Finding excuses does not make your mistakes go away. Reframing my story is my response. I valued Apple 28 times in the past 6 years. I call it ‘keeping the feedback loop open’.”

What piqued your interest in valuation?

“Valuation brings together a lot of things. I’m a natural numbers person. I love telling stories.  As a teacher, storytelling is part of your craft. Recently, I got an email from a wildlife enthusiast in South Africa who is trying to attach a value to a rhinoceros because he wants to understand how much to fine someone who kills a rhinoceros. I thought to myself, ‘How do you value a rhinoceros?’ The rest of this week as I am on my morning run I will think how to value a species? Valuation connects the dots and gets away from the laziness that is so common to business and people sounding good. When someone throws in a buzzword (such as ‘synergies’), you question what does that mean?”

Do you have any advice for students?

“Be yourself! Especially at business school, people are going to school and taking classes because you are told to plan ahead. You are told to work backwards, to start with the job you want to have and constructing an education that will get you there. All too often in business school, the answer is ‘I want an Investment Banking or Consulting Job and accordingly fill my resume’. Not only is that a very bad way to structure an education but it is an incredibly dangerous way to plan your life. Who knows what 4 years from now will bring? Will investment banking or consulting even exist? The way I view this education is you came to learn. Your test for taking a class is not whether it is easy but whether you could have learned the material on your own, which means taking classes that appeal to your weak side and not your strong one. This approach may be in direct conflict with your investment banking path as it may affect your grades. But you need to understand that this is a world in which you are going to be judged based on what sets you apart from the rest. Think how you can create a unique combination of who you are as a person, your life story, and what you learned in school to bring something to the table that no one else does.”