Aswath Damodaran – Investment Philosophies NYU Classes [Part I]

Updated on

Aswath Damodaran just started uploading his NYU class lectures – we have posted the first batch below, which we hope readers will enjoy. Check back since there is a lot more coming or better yet, sign up for our free daily newsletter to ensure you never miss a post.

The first ten videos can be found below.

Also see The Little Book of Valuation: How to Value a Company, Pick a Stock and ProfitInvestment Valuation: Tools and Techniques for Determining the Value of Any Asset,Damodaran on Valuation: Security Analysis for Investment and Corporate Finance and Applied Corporate Finance

Aswath Damodaran, in part one of these investment philosophies videos, highlights the risks in investments, discusses the trading cost, investment valuation and market momentum.

Investment Philosophies: Overview of class

Investment Philosophies: Understanding Risk – The Risk in Bonds

In this session, we examine the risks of investing in bonds. Even if the payments on the bond are guaranteed (there is no default risk), you face interest rate risk after you buy the bond and we look at simple measures of interest rate risk exposure. We also look at the additional risk that comes from default, how best to measure that default risk and how much to demand as compensation for exposure to that risk.

Investment Philosophies: Understanding risk – The risk in stocks

When you invest in the equity of a private or publicly traded company, you get a claim on the residual cash flows of the company. The risks you face can be categorized on three dimensions: price risk versus cash flow risk, total risk versus just downside risk and stand alone risk versus risk added to a portfolio. In this session, we look at the menu of choices that you have as an investor in how best to measure this risk,

Investment Philosophies: Financial Statement Analysis

In investing, we are dependent upon accounting statements for raw data in assessing companies. In this session, we look at the three basic financial statements: the balance sheet, where we record what a company owns and owes at a point in time, the income statement, where we measure revenues, expenses and earnings during a period and the statement of cash flows, where we explain changes in cash balances by looking at operating, investing and financing cash flows. We look at how a financial perspective can vary from an accounting perspective in each of these statements.

Investment Philosophies: Valuation – The Basics

Can you invest in something without knowing its value? While many people do, it strikes us as imprudent. In this session, we look at the basics of valuation, by laying out the ingredients of an intrinsic valuation model: cash flows, discount rates and growth. In particular, we note the importance of being consistent in your assumptions and note that higher growth can add value or destroy value. In the last part of the session, we look at relative valuation, where we value an asset by looking at how the market is pricing similar assets, and note the importance of controlling for cash flows, growth and risk, when using multiples.

Investment Philosophies: Trading Costs & Taxes

When you trade, you incur costs and these costs can be a drag on your investment returns. In this session, we look past the brokerage costs of trading to bring in the larger costs: the bid-ask spread, the price impact and the opportunity cost of waiting. These costs not only vary across companies and time, but they can vary across strategies. In the last part of the session, we look at how much of an investor’s returns are consumed by taxes and note that more trading generally leads to larger tax liabilities.

Investment Philosophies: Market Efficiency – Laying the Groundwork

Our beliefs about market efficiency and inefficiency determine how we invest. In this session, we look at what an efficient market is and note that market efficiency does not preclude market mistakes (price can be different from value) or investors beating the market (though they tend to be few and far between). We also look at the requirements for a market to be efficient: liquidity in markets and traders/investors who are trying to exploit the inefficiencies. Finally, we eke out the implications: markets are likely to be less efficient if trading costs and trading frictions are high and value-seeking investors are few and far between. While most markets are efficient for most people at most points in time, there are pockets of inefficiency that we can be exploited in investing.

Investment Philosophies: Random Walks and Momentum

If markets follow a random walk, the price change in the next period should not only be independent of past price changes and completely unpredictable. Rather than debate the theoretical underpinnings of the random walk hypothesis, we look at the evidence on whether price changes in consecutive time periods are correlated and come to wildly divergent conclusions, depending on the time period in question. With very short intervals (minutes or hours), there is little detectable correlation, with much of the observed correlation being caused by market microstructure effects (the bid ask spread and liquidity). With daily or even weekly returns, the correlation turns negative, with paper profits to be made of the price reversals. As you go from weeks to months, the correlation turns positive with price momentum carrying the day. Finally, as you look at returns over many years (3 to 5 years), price reversals become the rule rather than the exception. This instability explains why it is so difficult for momentum investors to keep making money, since the key to making money seems to be avoiding the inflection points where momentum turns to reversal.

Leave a Comment