I really enjoyed doing this interview with Professor Damodaran.
I had about 18-20 questions prepared and I personally thought the interview would last for about an hour and thirty minutes given his flair for long answers - however, I only got about 45 minutes out of him. He was very generous and gave me a two hour time frame for the interview.
There were some topics he touched on that I wish I got deeper into and asked him follow up questions on. There were one or two questions I wish I prepared better for - Damodaran clearly isn't the one to hold back!
There was a slight interruption at around 23 minutes where Damodaran lost connection, and I have made a slight edit in that part.
I've personally learnt so much from Damodaran myself from his online YouTube lectures. There was no reason for him to agree to do an interview with me - so I am particularly grateful to him for agreeing to do this.
Although Damodaran can sometimes have no BS attitude persona - he came across as a very kind and authentic person when we spoke for a few minutes before and after the interview (and during the interview too, of course!). He was very gracious in answering some questions I had about my path.
He gave a fantastic piece of life advice at the end of the interview - to thine own self be true and look at yourself in the mirror and ask yourself if you are satisfied with your own path.
I have highlighted certain parts of the transcript which I felt were packed with great insights and wisdom and is attached below.
I hope you enjoy this interview!
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Transcript
Viraj:
Professor, thank you so much for being here. [We have a] super exciting guest. The amount of work that you've put out in the world… your passion is just truly contagious and I’m super privileged to have you.
I guess I wanted to start out with your background. You grew up in Chennai, India. What were your interests when you were in high school? What was your answer to the question - what do you want to do when you grow up when you were 17 or 18 years old?
Damodaran:
I mean the first thing is 17 or 18-year-olds should not have long term plans. I think that is one of the problems I have is - I have a lot of lot of people who reach out to me and they're sophomores in high school, juniors in high school, and they're already thinking 20 years ahead… thinking about what they need to do to get into the right schools, and [where] they want to intern… I think that's incredibly unhealthy.
It's a phenomenon that I think is global. I see it in the US obviously, but I see it in India even more I think, because it's so competitive.
I think we are not letting our children be children - it's in every dimension of their lives and that's not healthy because, you know, at 17 your thoughts should be about…. your time horizon should be a week, a month. It doesn't mean you shouldn't study and get grades, but you shouldn't be thinking about, hey… what do I need to do today to get into the right school, the school that I want to get to?
So as a 17-year-old, I had 17-year-old thoughts which were, you know, short time horizon. I wasn't thinking long term.
I wasn't a deep thinker. I wasn't saying at 15 or 16 or 17 - I want to get a PhD, I want to go teach. I mean, life comes at you and making too many plans is almost an invitation to be disappointed.
Viraj:
Did you although have an interest in business from an early age? I think you did your BCom [Bachelor in Commerce]…..
Damodaran:
Not really. I mean, I like numbers.
Now, if you can call that an interest in business. Again, if you're interested in investing in at 15 or 16, you're a little bit of a freak if you ask me. I mean, it's not something you should be doing, it's not something that a healthy 15-year-old should be thinking about.
Viraj:
Was the plan for you to come to the US for your second masters - did the thoughts of that start during undergrad or grad school?
Damodaran:
That happened somewhere in there, but at that point in time, the reason you had to come for a second Masters was a 16-year school requirement for most graduate programs in the US. In India, because of the way schools were structured you were done in 15 [years]. Besides that, it was economically, even for well to do Indians, going to the US for an undergraduate degree would have been out of your reach. You would not have been able to get the foreign exchange OK’d for it… it would cost an arm and a leg.
So, at that point it wasn't a choice of do you want to go for an undergraduate in the US, it was really, do you want to go for a graduate degree? And even then, [it] was a lot more difficult to do than today.
Viraj:
Professor, I'm skipping some years here, but the legend is that you had an offer at an investment bank in your final year as an MBA student, and you also had this TA position in your accounting class and that's when you found your calling that teaching is what you wanted to do for the rest of your life.
I guess how did your family react to that when you told them, I’m turning down this high paying investment banking job and I want to do a PhD to become a teacher? I think you did not wrestle with it for a long time, though, because after your first TA class, you went immediately to the PhD department, to the faculty to ask how can I do this?
Damodaran:
In 1981 if you told an Indian family that that you were working for an investment bank, the reaction would have been what is an investment bank? 1981 was a very different time and age, especially in India. 1981 India and 2024 India bear no resemblance.
You know, nobody in India would have heard of Goldman Sachs in 1981 other than the very top tiers in Mumbai. I mean, these were not the kinds of firms… it wasn't even in their in their frame of reference. To them it was really - our son is in the US, we wish he'd come back home.
This was all kind of irrelevant to them as to where I worked and how I worked. So the bigger disappointment, at least initially was - you're not coming back home, [we] thought you were coming back home to be with us again. I think that that was really their reaction, it wasn't that I was going to go for a PhD… their reaction was we won't see you for a few more years because again, given expenses, you come back once a year.
[It wasn’t] like today [where] you can pick up WhatsApp and have a one-hour conversation. I remember my mother used to call me for 5 minutes every week and she would time it because it was so expensive, and at 5 minutes the call was over.
So you essentially were sending your child away for an extended…not really a child, you know, [a] grown up, but still you’re a child if you're a mother - and you weren't able to stay in contact for more than a few minutes a week.
Viraj:
Was that the plan for you as well when you first initially came here, that you'd be here for a few years in the US?
Damodaran:
I told you I don't make long term plans. I just go a day at a time. I'm an incremental thinker. I think there's too much long-term planning and too little living in the moment. I've never been a long-term planner.
Viraj:
Professor, what were your research interests when you were a PhD student?
Damodaran:
I don't do research. I just did whatever I needed to do to kind of get through.
I've always been interested in markets - not as a researcher, but just as an observer.
Markets are to me incredible mechanisms. I mean, people don't even think about how, you know, the amazing component of markets - which is millions of people get together with very different views on something and they arrive at a consensus.
In these days where crowd wisdom is the magical thing that we talk about, and we get our information from Yelp and Rotten Tomatoes - remember the origins of that were financial markets - that was the original crowd wisdom.
So, to me, markets have always been fascinating. All my research revolves around markets one way or the other.
Viraj:
Professor, do you remember when you did your first valuation?
Damodaran:
Yeah, probably. I don't even remember the company I valued. I just remember it was work. It was a lot of grunt work and that still remains true, a lot of valuation is grunt work. Today the grunt work would be taken over by Excel, but to be quite honest, the way I think about value hasn't changed and the mechanics of what I do don't are not that different than what they were 43 years ago.
Viraj:
You've spoken a lot about the difference between valuation and pricing and how investors mistake pricing for valuation. How would you define valuation and pricing, and what are biggest dangers of mistaking pricing for valuation?
Damodaran:
Valuation is about assessing a business, its cash flows, its growth and coming up with a number that you'd be willing to pay for a business. Pricing is looking at what other people pay for similar things and deciding how much to pay. Fundamentally, very different ideas.
In an efficient market the two will converge, but [in] a market that is not efficient, the two can give you very different answers. Is one better than the other? It depends on what you came to do.
If you're a trader, your interests are entirely in the pricing game. It doesn't really matter to you what value is, you just have to buy at a low price, sell at a high price, claim the difference.
If you came to invest and you truly mean that, then you care about value because you buy something when the price is less than the value and you hope and then you pray the two converge.
So philosophically, very different. I'm not one of those who believe that one is superior to the other. You make a million dollars as a good trader; you get to spend it exactly the same way if you make a million dollars as an investor. So, there's no virtue in being an investor, there's no vice in being a trader - but you need to be honest with what you're doing, and most people are traders.
The market is a trading game, it's not an investing game. Most people who are in markets trade. I have no problem with that, but I have problem with this delusion that they're actually value investors, [that] they care about value. Be honest, do what you came to do and move on.
Viraj:
You've spoken about how mean reversion worked well in the 20th century….
Damodaran:
In the US - to add the qualifier. Because the US was half the global economy, it was the largest and most successful economy of the 20th century and was the most mean reverting economy of all time. So mean reversion worked on everything because you were in a mean reverting economy where things always reverted back to where they used to be.
Viraj:
Many value investors, for example, use historical base rate convergence…and I think Michael Mauboussin has spoken about this…….[I was going to ask him whether he things historical base rate convergence of various financial and operating metrics, and having a margin of safety in regards to those qualifies as valuation]
Damodaran:
In the US, again, I add the qualifier. Almost all of the historical data that is used is U.S. data. I mean, if we step back and think in terms of sampling bias - taking the most successful mean reverting market of the 20th century, collecting data from that market… which is what we've done, finding out what the data tells us, and then investing in the 21st century based on what you learned from US 20th century data strikes me as insanity. But that's what we keep doing.
Factor investing right, Fama French – you look at what’s done - basically its U.S. data telling us this is what happened in the US. Eugene Fama doesn't say you can go out and make money by buying low price to book stocks. It's not his problem that people have used his research to set up all kinds of hare-brained investing schemes built around US historical data.
Small cap premium - it's complete fiction but look at how many people buy into the fiction... so it's not as if practices are not driven by the US data - it's almost like people can't get their heads out of that data.
Viraj:
In venture capital, for example, do you have no option but to price the company? Since historical figures aren't available, TAM [Total Addressable Market] is very difficult to estimate for nascent products. Do venture capitalists have no option but to price companies?
Damodaran:
They don’t want to value. It's not that they don't have an option. The fact that you can't estimate something can’t mean you cannot come up with an estimate. Just there’s more noise. The fact that you don't have historical data doesn't mean you can't project revenues. Historical data is a crutch, it's not a necessity.
It's not that you cannot value companies, but how do venture capitalists get rewarded? How do they get judged as successes or failures? Why is Mark Cuban viewed as a successful venture capitalist?
Viraj:
He sold out, at like, the peak of the bubble.
Damodaran:
He created a company, and it wasn’t that they sold out at the peak of the bubble. His company went bankrupt a year later. We don't remember that. He didn't build a great business. He timed his entry and exit perfectly and that is at the heart of all venture capital success.
I'm not saying it doesn't matter who you invest in, but timing overwhelms everything else. Getting in and getting out at the right time. That's a trading skill.
Venture capitalists are traders - they buy at a low price; they sell at a high price. So, it's not that they cannot value companies, that might be their excuse, it’s they don't care about value.
They don't care about business models, they care about scaling up and exiting, and we're left with these gigantic scaled up companies with no business models as a consequence.
Viraj:
You said that the Portfolio Managers who also go to Omaha each here and who supposedly worship the altar of value investing - even they do not actually value companies. What are those guys getting wrong?
Damodaran:
Well take the Ben Graham book, right? Look at every screen that is in it. It's a pricing screen. Price to earnings ratio less than 10, price to book less than one. This isn't investing.
I'll wager that most value investors have never actually fully valued a company.
I mean, you could try it out, you know? Ask your favorite old-time value investor when was the last company you valued?
They'll talk around it as much as the one they tell you great stories about a stock having a low PE and great management, but that's not valuation, it's still pricing with a screen.
Value investing historically has been pricing with value screens - low price to book and high return on equity.
Look at Bruce Greenwald's book. It's a book about screening. I'm not saying it's bad or good, but why have the word value in your name if you never value a company?
Viraj:
One of the criticisms of the DCF is that it's incredibly sensitive to the terminal value input, and people don't like using betas. How do you sort of counteract the weaknesses of the DCF? It is conceptually [right]…..
Damodaran:
Well, first, if I heard that argument - it's coming from somebody who doesn't have the faintest idea about what a discounted cash flow valuation is.
Mathematically, is the terminal value a big part of your current value? Absolutely it is, and that's the way investing works. When you buy a stock, assuming it's [the] right kind of stock - the one that goes up, think about when you make your money, you don't make it while you hold the stock, you make it when you sell the stock…terminal value.
This notion that terminal value is very sensitive to your inputs comes from people have no idea how to do terminal value right. They play with the growth rate. Of course, if you play with the growth rate, your terminal value will explode on you. Why? Because you're creating growth out of nothing. To grow at a higher rate, you have to reinvest. You bring in that equation - it's amazing how terminal value gets constrained.
On the second notion of beta - stop, this is absolute nonsense. This is an excuse for not doing intrinsic valuation. You need a risk-adjusted discount rate. If you don't like betas I offer 10 alternatives in my classes. You don't like betas? try this, [or] try this until you come up…..don't tell me risk doesn't matter because you don't like betas. You're throwing the baby out with the bathwater.
So, most people who critique DCF's have no idea what the DCF is.
They have no idea, so in a sense I don't even waste my time arguing with them because it’s like arguing with somebody who doesn't understand the basics of what they're arguing about. I let them go. Do you want to trade, trade? I mean, I don't go around asking people to do intrinsic valuation. That's why I said upfront. I don’t view doing intrinsic valuation as noble and doing pricing is shallow.
I just tell people, look, it works for me. Intrinsic valuation works for me because I have an investing mindset. If you don't have one, it doesn't make you a bad person, doesn't make you a shallow person, just makes you a different person.
Do what works for you. I'm sick and tired of people wagging their fingers at other people, telling them what they should or shouldn't do. It's not my money. Do whatever you want.
I'm not in this business of telling people that they eat your intrinsic valuation, so what they that's their reason for not using DCFs.
I just think they don't understand DCFs, but I'm not going to sit there and argue with them, because why would I want to convert them to doing discounted cash flow valuations? What business is it of mine what other people do?
Viraj:
What are then the alternatives compared to using betas for the cost of equity calculation?
Damodaran:
You just need a risk measure, right? So tell me what, so I'll turn the question back and tell me what your proxy for risk is. Is it earnings variability?
Viraj:
Probably.
Damodaran:
Is it tenure of management? Is it so? Tell me what it is, and I'll build a risk measure around. It's easy to do, right?
Most people who critique betas don't even understand what they're critiquing.
One critique could be it's a price-based measure and in an intrinsic value, price shouldn't matter. You're right. There is that fundamental inconsistency, the second it looks at only the portion of the risk you cannot diversify away. You say - what if investors are not diversified? Those are two legitimate critiques.
So, you tell me what your problem is with betas other than Warren Buffett told me he doesn't like betas, therefore, I don't like betas, which is about as shallow or reason as you can [have], and I'll start devising a measure of risk that reflects what you think about risk.
Viraj:
I think that was my reason, given that it's what Buffett has said, and a lot of people would probably say the same thing [haha].
Damodaran:
Buffett says some very smart things, but he also throws these comments off his cuff, which I think are horrifically misleading, horrifically misleading [emphasis].
But I think I will leave it at that because, if you're reading Buffett, you have to decide what to take and what to leave.
And remember, he's human. Human beings have their blind spots, and Buffett and Munger had their blind spots, and if you truly want to be a value investor in their mold, you have to recognize their blind spots as much as you recognize their strengths.
Viraj:
On the subject of trading versus investing, and you just brought this up - it's very important to be honest about who you are. Are you a trader or an investor? And I 100% agree with that. But you've also said there's nothing wrong with being a trader, but isn't the purpose of the marketplace to find an efficient price? [I was going to finish with - wouldn't strategies like technical analysis and momentum distort efficient pricing?]
Damodaran:
Oh, c’mmon. That's, you know, you can design a marketplace you want. The marketplace is filled with what? Human beings. Why do human beings come to the market? Name me one investor who comes to the market who says my job today is to make the market more efficient?
It might be output, but it's going to be output that happens accidentally. Nobody comes to the market saying I want to make the world a better place by making the market more efficient. You come to the market, if you're a passive investor because you want to preserve and grow your wealth, and if you're an active investor because you want to get rich. Again, greed is good in markets. It's what drives us to markets. Market efficiency might or might not happen, but it's not in your control.
Viraj:
I did want to ask your view on this professor, do you think investing is a team sport? Funds typically have various analysts covering a lot of sectors. Buffett was a one-person team for decades, ao was John Templeton. You are a one person team.
Do you think actively managed funds who hire armies of analysts out of business schools and out of engineering departments these days, are they really better off in the process?
Damodaran:
You didn't have to ask me that question - the result speaks for themselves. Right. What is the average active investor? Remind me again how much the average active investor beats the market by each year.
Viraj:
After fees, they do not.
Damodaran:
Even before fees, they don't. It's actually horrific, you know. After transactions costs, before management fees, active money managers underperform the market by 0.5% to 1% and with management fees by far worse. This is the most horrifically bad profession on the face of the Earth.
You claim that your profession is about managing other people's money, you charge them for it, and you deliver a return lower than what they could have made investing in an index.
Do the armies of analysts that they hire make a difference? Well, you can tell me what a great story you want about how these analysts are, and the from the come from the best schools and have this great model, but this is about results and the results speak for themselves, right?
Viraj:
I do agree that one of Buffett's sayings - the circle of competence [is misleading] - if you look at his investing history, he’s probably invested in every industry out there. What would you say your circle of confidence is at this stage and are there any particular industries you shy away from because you cannot value them?
Damodaran:
I told you that there are lots of things that Buffett says I disagree with - that's one of those. Because if you define what your investment is, your circle of competence, you know what you'll end up investing in - cheese that stays liquid for the rest of its life in Kraft Heinz, and so [what] do you like to drink in Coca-Cola.
As you get older, your circle of competence gets smaller and smaller given the world you live in.
Hey, you know what? If you're going to be an investor you have to stay curious. You have to talk to people far younger than you. Ask them what TikTok is all about. You can't dismiss things because it's not in your circle of competence. That's nonsensical.
I know nothing about semiconductor chips - is that going to stop me from valuing and investing in NVIDIA? It shouldn't. If it did, I'd be out of the market in the 10 or 20 best stocks in the market because it's not in my circle of competence. Look, I don't even know what that means [circle of competence].
Are you just going to invest in fast food companies and beverage companies for the rest of your life because that's your circle of competence? Maybe add Netflix do the mixing, I watch a lot of Netflix.
It's kind of a nonsensical idea.
Your circle of competence should be based upon - what am I comfortable doing?
Am I comfortable trying to detect mood and momentum and making bets on it, be a trader, or am I comfortable understanding what a business model is? And you don't need to understand the specifics of the product or service to understand business models.
I understand NVIDIA’s business model - they design chips, they get TSMC to make them. They mark them up like crazy, they sell them - half their chips get sold to the four big tech companies and they do this in markets that they get ahead of everybody else by a year or two years and they've done it repeatedly, that's a business model.
Do I like it? The market loves it. I love it too. I don't love it as much as the market. So again, be careful about what you read into the circle of competence, because people look at that and say - that must mean I should invest only in companies where I understand the product. You will never invest in a B2B company then - because you don't buy a chip, you don't buy network systems or buy cloud space? Does that mean you don't investment companies that are in the cloud business?
So, pick and choose what you take out of Buffett's words because they can get you into trouble.
Viraj:
Professor, I'm sure you read that paper by AQR – Cliff Asness said that in the last 30 plus years that, he thinks the equity markets have become less informationally efficient, and it's crazy to think that could be the case, given the explosion of information we have today. I know you've spoken a lot about the curse of that [information excess] - I wonder whether you think AI has the potential to make markets slightly less efficient?
Damodaran:
Slightly less efficient?
Viraj:
Yes.
Damodaran:
Trading always creates noise. I don't have the same conclusions as AQR does. Trading creates noise and it strengthens momentum. It's always done that, and what's happened in the last 40 years is trading has become easier. When trading becomes easier, there will be more noise and more momentum, and that's what we're seeing in markets. It doesn't mean markets are less or more efficient, they're just more noisy, and momentum when it catches on will be stronger in both directions.
Now you’ve got to live in the world you're in, not live in the world you wished you were in. As trading increases, this is almost inexorable - that there will be more noise and more momentum. What will AI do? It will probably feed into that. [Damodaran loses connection]
That has to be set against a backdrop that information itself has become more easily accessible at much greater volume. So more trading, more information, and what you get is a feature, not a bug. It is what it is.
It creates opportunities for both traders and investors.
Viraj:
What is your view on good old fundamental investing? Are people with no programming skills destined to be useless?
Damodaran:
What does that mean? What is good old fundamental investing?
Viraj:
People I would probably categorize as value investors, people who are doing intrinsic valuation businesses.
Damodaran:
But tell me what they do.. I'm never sure what people mean when I say they do fundamental analysis. What exactly do they do?
Viraj:
People who do who do intrinsic value of businesses and figure out what businesses are worth.
Damodaran:
No. What do they do when they do intrinsic value of businesses?
Viraj:
The try and forecast of future cash flows, depending on the business.
Damodaran:
Do they? I've very seldom meet people actually do that. So I'm trying to figure out who these people are, because I'd love to meet them.
Viraj:
I definitely think that that - the whole value investing industry so to speak, that has has sort of shrinked….
Damodaran:
Yeah, but I think you are mistaken. [When] people talk about fundamental analysis, but they never really mean intrinsic valuation. They compute ratios. Every ratio known to man.
They basically compute - the pricing ratios, obviously, then return equity, return on capital, debt ratios…. so they compute 100 different ratios. They look at all the ratios, then they make a judgment about quality of management based on the ratios, and I guess that's what passes for fundamental analysis. And then what? After you've done all of that?
Viraj Sanghavi:
Let me frame this in a different way. Do you think people like yourself - who actually do intrinsic valuation are destined to be useless if they don't have programming skills?
Damodaran:
What? How a program?...
Viraj:
You've spoken about bots bot replicating your work…
Damodaran:
Well, programming skills do nothing for bots, right? Bots are just AI entities that that gather data and have powerful computers. In fact, if you have programming skills, you're already obsolete. The people who should most worry about AI are the people with programming skills. You're mechanical, you're rule based. You're the easiest to replace with the bot.
DCFs if they are mechanical, are pointless.
Viraj:
You’ve said that you are a dabbler, that's what you call yourself... you know just enough about various topics to be dangerous. I wonder how this mindset has helped you in investing and in life? Do you have any memorable stories to share regarding where you probably thought this “experts” view is just a way off?
Damodaran:
All the time. In fact, I start with that presumption here, when I hear “expert” - he or she probably is missing something big because they're so caught up in the echo chamber that they live in.
Yesterday I was on a panel talking to the Canadian Parliament Committee - don't even ask me how I ended up there - about how Canadian banks should be required to have climate change structures built in, and as I listened to the experts, my response was do you guys know how a bank works?
Because they talked about how banks should be required to do this and I said, banks don't have money, they either have shareholder money or depositor money, so if you're going to ask them to lend money to green companies at below market rates, who's going to come up with that money? That question never even crossed their heads, because in their mind they see five banks…they see them as lucrative targets, and they think they will ask the banks to do things to make climate change a lesser problem.
It's got to come from somewhere. Shareholders at banks don't have enough money to cover those costs, so guess who's bearing the cost? It's depositors!
And as a government, do you think this is a good idea to take depositors at banks, who tend to be the poor and the middle class, because the rich have fled already, right? And telling them look, you're going to put all your deposits at risk by requiring banks to lend it below market rates? … but that thought didn't even cross their minds because they were so caught up in their domain, they couldn’t step back and ask the question.
Being a dabbler means that I never get bored, because when I get bored I move on.
I get people who ask me, what do you think about the Adani group and my response is I don't think about them. I thought about them two years ago and I was interested, but I moved on. Why would I spend my life thinking about a family group in India and how it might or might not be breaking the rules? I have far more interesting things in my play.
Viraj:
Professor, you said that valuation is an exercise in faith, and you've criticized this word “conviction”.
Damodaran:
Not valuation - investing is an exercise of faith.
Viraj:
You've criticized the word conviction before. When a PM, for example, says I've put X percent, which happens to be a large percent, of my portfolio in this particular name, you sort of criticize the word “conviction” that they have in their analysis. Isn't faith just a subtler word for conviction?
Damodaran:
It's arrogant. It’s arrogance. That's basically the message you're telling me. You're saying I am so smart that I'm absolutely sure that my value is right, and the market is wrong, and I'm also absolutely sure that the market will come around to my point of view. Maybe they are in a position to do it, I have never in my lifetime ever felt confident enough to say that.
You diversify because you could be wrong on both counts. You could be wrong in your value. You could be wrong about the market coming around to your point of view.
In what universe do you feel that you're absolute enough on both of those things, and you can take half your portfolio and put it in one stock? To me, it's a sign of arrogance. Now I know there's [this] dividing line between smart money and the rest of us? I've been looking for smart money for 43 years and I've not found it. There's no such thing.
To me, the distinction is not between smart money and stupid money. It's between arrogant money and humble money.
I will never give…I don't let other people manage my money to begin with - but if I did, the one thing I would check for is how arrogant is my money manager? [If] the answer is very, I would leave that room right away.
Arrogance is the biggest sin in investing.
Look at Masayoshi Son. Who makes 300 year plans? People with egos and arrogance, and in 2019, he could do no wrong, right? But look at where that led him.
Look at the WeWork fiasco and ask who would be arrogant enough to think that leasing a building for 40 years and then sub leasing it for three or six months apiece is a good idea? That's a basic business model for WeWork but look at how far it got before it fell on its face.
You take wealthy people with a lot of money at their disposal, and you make them arrogant, I mean, you're going to get some horrendously huge mistakes along the way.
Viraj:
Professor, I did want to get to the most important aspect of your career and life, which has been teaching. You've had some harsh words to say about higher education, but I guess a cynical parent would rebuke that by saying that you yourself have attended the best schools in India, I think you went to IIM and even in the US where you did your MBA and PhD from UCLA.
I wonder what are some of the most important things you got out of your formal education and what are the things that you wish you got out of them that you did not?
Damodaran:
You get a diploma, you get a degree. When I went to school, it wasn't like you could get your education outside the setting. You didn't have any choices, right? You couldn't go online and take a class.
If your objective is learning something, you don't need to degree to get it anymore. That's just an excuse.
You know what you need a degree for? So that you get pre-screened for employment. I tell people the most valuable day for you if you're a Harvard graduate is the day you got that letter from Harvard saying you got in. That acceptance letter is your most valuable day because you were pre-screened… and people say if you were admitted to Harvard, you must be smart, therefore, we'll interview you.
I think my problem with higher education is the absurd, the obscene amount of money that you get charged. My son went to Yale, $65,000 a year. That is obscene. There's no excuse for that.
And worse, I [the student] don’t get my money back if I don't get a reasonable product or service in return. This is not a good trade off. It's got to break. It's got to be disrupted.
It's a bad business model that's creating student loans that people can't afford to pay back, in absurd amounts.
In any just universe - this is the business that Amazon should be disrupting because it is the most inefficient, poorly run excuse for a business I've ever seen.
Viraj:
But it seems like the trend is just getting worse despite the influx of online education. It seems like the tuition [keeps rising….]
Damodaran:
You don't notice it at the top, right? It’s not healthy.
It's low hanging fruit that disruptors come for, so, if you are among top schools, and especially we get subsidies from governments, you don't notice until they come for you, and they will come for you. It'll happen sooner or later, unless you change, and I have zero confidence that universities can change.
Viraj:
Professor, we now live in a ChatGPT world. You've spoken a lot about the Google search curse when it comes to your students thinking things through themselves. How bad has the ChatGPT course been in your classroom, or has it been a curse so far?
Damodaran:
It is, I have to teach them how to reason right? That is my part of my job is to show them reasoning, not end product. When I value companies. I tell them, look, don't focus on the end number - focus on the process. That is what I want you to take away, because that's what will make you good at valuation, not the mechanics, and not the end product. I think that requires that we be transparent about the way we think through to an answer.
It's almost as important as the answer itself, and that is part of what I tried to do in my classroom, is give people a window into my thinking.
So when somebody asks me a question, at the risk of torturing them, I take them through this is how I would think about answering that question, and this is the answer that emerges from that thinking.
Viraj:
What is the best feeling you get as a teacher? And if you can share one particularly memorable moment in your in all these years, I'm sure there are hundreds of these… but what is the greatest reward you get as a teacher?
Damodaran:
It's collectively the things that people never tell you. It's aha moments, things that connect in your mind because of something you're listening to right now, completely unrelated - that come together.
You teach for those aha moments where people realize they're making connections. I mean, the brain is just electrical impulses, right? And, in those aha moments, those electrical impulses come together and essentially create a moment of learning.
People won't tell you – aha - they're not going to be loud about it, but you can see it, and that's why I like teaching in physical classrooms – it’s easier to see those aha moments when you are in a classroom.
And I think that's why I teach is - for those aha moments.
Viraj:
You put so much devotion and passion into your teaching. I wonder what reciprocity you expect from your students in return for the amount of energy you put in on your side?
Damodaran:
As long as they learn, that's all…you know, be curious and be willing to learn.
Viraj:
You've said that you're a naturally lazy person, but the amount of work that you put out into the world is just crazy.
Damodaran:
You know what that tells me? That a lot of people who work 16 hours a day, a lot of the time is not spent actually doing substantial productive work.
We fill our days with things that really don't make a difference. We think they do, their mechanics, their processes…… I took all of those out of my life.
I'm lucky enough to be able to do it. I don't have to follow a list of stuff that somebody above me says you have to do.
So I have this luxury of time on my hands, and when you have time on your hands - I think you can just focus on things you want to d, that you think you can make a difference in, and that's my definition of productivity - if I'm spending my time thinking about something that I'm interested in, it's a productive moment.
If I'm spending my time doing something that somebody else wants me to do, and there are things in my life I have to, right? When I have to file my taxes, I can't say I'd like to do something else… I have to do what the IRS leads me to do…that is not productive time.
Luckily, my life doesn't have too many moments like those, and that gives me the luxury to do what I want.
Viraj:
Was that also one of the attractions you had towards teaching as a faculty, the amount of independence you get?
Damodaran:
Yeah, I have no boss. That's why I've never consulted a day in my life. I've never worked or done an expert witness. Because the minute you accept the money - it's not fair for you to say, the lawyer is calling me over the weekend! You did an expert witness. That's their job.
You consult, and Goldman Sachs pays you a half a million to be a consultant - of course you are at their beck and call. You might think you're in control. Luckily, I've had the luxury again of not having to do that. I'm not saying it's a bad thing.
I just haven't had to do it, and I'm glad I haven't, because I can say what I feel and not worry about will somebody pick up the phone and call me and say, how could you say that?
If you read my Financial Times editorial on ESG - I did not hold back. I said there are only two groups of people in this space - useful idiots and feckless knaves. I could never have done it if I were a consultant and many of those feckless knaves were on my consulting list.
Viraj:
What does a day in your life look like when you're not teaching? For example, in the summer and fall? [when he is not teaching]… and coming back to that point like the amount of work that you put out in the world… just to come up with those slides, the write ups for those blogs, those are enormously long write ups that you have. I'm sure that takes a lot of time. You're just making it sound easy, I think…
Damodaran:
Before you write, you actually have to sort things through in your head. How do you sort [it out]? I mean, when I walk my dog, I'm not checking my iPhone. I'm letting things kind of clutter around my head.
The writing itself doesn't take much time, because once you've organized your thoughts - the writing is putting them on paper in the process, thinking about the weakest links and filling them in, looking for data to answer questions you have unanswered. So to me, writing is catharsis. It's basically the bringing together of thoughts I already have saying - this is what I think about this topic. As I said, I dabble.
Yesterday I put out a piece on what I call the sugar daddy effect - which is when you get you get reliant on a funder, corporate venture capital for a parent company, sovereign wealth funds for the government - does it change the way you act? The answer is absolutely. Because you don't have to be self-reliant - you can do things which are vanity projects and get away with it because somebody else is paying.
And it plays out in the aggregate and plays out that corporate venture capitalists do worse than regular venture capitalists. Sovereign wealth funds underperform regular investment funds.
Green investing has been a space entirely driven by access to capital being unlimited and almost, with no real no accountability. That entire post took me a day to write… but the thinking that's been and that's been in my mind for a couple of years, I've been thinking about the sugar daddy effect and I didn't feel ready to bring it all together until it kind of clicked last week where I said I think I'm ready.
Viraj:
Professor, my final question for you and I kind of know the answer for this…. I'm going to mend this question, but my question was what life advice and career advice would you give to your 20 year-old self? I think your answer would be to just take it easy, one day at a time.
When we first spoke, you mentioned the incredible amount of pressure on 17 years and 18 year olds these days…. the incredible societal pressure of going into a good university…
I guess what would be your advice for someone in that situation? A high school senior with all that pressure… and they just don't have that freedom, or space and time to think about what is it that they want to do and what is that they're passionate about?
Damodaran:
I appreciate the constraints that people operate under. I have 4 kids. I see that that play out.
I understand that you might not have it as easy as I did in terms of making the choice, because the world has changed around you.
That said, though, to thine own self be true, and if you can get up every morning, look in the mirror and say I'm OK with who I am as a person - if you can get comfortable with yourself, the rest of the world will take care of itself. If you live your life trying to make other people happy, if you live your life looking in the mirror saying what will other people think of me today… I think you have a lot more stress and pressure on you than if you say what do I need to do today, so that I'm OK with what I did?
Try that out for a couple of days. It might be that during the course of the day, you will have to make compromises…. because what other people think of you really matters - your professor, your managing director, your boss. I mean, clearly it matters.
But I think if you can get comfortable with who you are as a person - I think the rest of life becomes a lot simpler.
Viraj:
Yeah, that's a super powerful insight professor. And thank you so much for your time. It's been a pleasure. Really, really appreciate it.
Damodaran:
You're welcome. Take care.
