They call him the Dean of Valuation.
Professor Aswath Damodaran can tell you what a company is worth.
He also calls himself a value investor, but here comes something surprising:
He doesn’t believe that value investors can beat the index.
For nearly 40 years as a professor at Stern Business School at NYU, Professor Aswath Damodaran has dedicated his life to teaching something he doesn’t think works. At least not in investing.
How does that make sense?
I defied storm warnings and floods to travel inland in Portugal to the medieval town of Tomar to attend a three-day course with Aswath Damodaran.
He teaches discounted cash flow, beta and risk premiums with surgical precision.
Spreadsheets. Discount rates. Decimals.
But why spend time on all that and plug it into spreadsheets if it doesn’t work?
It can, of course, be useful if you’re selling your company.
But I’m not. I’m here as an investor, and now he’s saying…wait what?
Aswath Damodaran’s Surprise Over Dessert
I’m seated next to the professor at the introductory dinner on the first evening.
Most of the dinner is spent on polite small talk about different food cultures around the world.
From smørrebrød in Denmark to famous cod dishes in Portugal.
When dessert arrives, he drops the bomb.
“Active investors can’t beat index funds.”
Excuse me, what?
I nearly choked on the pickled fruit with cream.
We’re here to learn how to value companies so we can beat index funds.
It’s depressing if I’ve traveled all the way to Tomar and defied storms and floods for nothing.
Am I going to sit through two days of spreadsheet talk for nothing?
I play all value investors’ trump card:
“What about Warren Buffett? He achieved extraordinary returns with the original partnership.”
For those who don’t know: From 1956 to 1969, Warren Buffett delivered an average annual return of 29.5 percent.
That’s far above the index.
The history books say so.
It’s a fact.
But he shot that down right away.
“Buffett only did better than index funds because he didn’t charge a fee,” the professor replied.
He answers with a smile. I think he enjoys teasing.
In Buffett’s original partnership, he had a compensation structure of zero in management fee. He received one quarter of the returns above 6 percent.
It’s the same way I’m compensated in Grünbaum Value Invest.
The model is often referred to as 0-6-25, and very few operate with that structure.
Most hedge funds charge 2 percent of the entire invested amount in both good and bad times. And 20 percent of the returns.
Does Professor Aswath Damodaran invest in index funds himself?
No, he actually does invests in publicly traded companies.
Why?
“Because I think it’s fun.”
Does he beat the index? Maybe. Well, get back to that. But here is the story of how he invests.
Here’s that story.
1. Tell a Story
One of his more uncomfortable observations, besides the one above:
We have more data than ever before.
Yet people have become worse at valuing a company.
Why?
They sit in spreadsheets adjusting decimals.
They discuss beta down to the third decimal.
They change the discount rate from 8.7 percent to 8.9 percent and feel precise.
But they can’t clearly explain:
How does the company make money?
Why will it still be relevant in 10 years?
What assumptions have to hold for this to work?
Valuation isn’t precision.
It’s structured storytelling.
You start with a story.
Then you translate it into numbers.
Not the other way around.
2. Focus on Cash Flow
At the same time, you can’t rely only on the story.
You need to focus on earnings and cash flow.
In the investing space, there are always themes. Buzzwords.
Something that sounds good. Corporate governance. Environmental. Equality. Zero emissions. Future-proof.
You can fall completely in love with your own story about a company, especially if you top it with some buzzwords.
Aswath Damodaran’s filter for buzzwords and bullshit is simple:
Does it change the expected cash flows?
If not, it doesn’t change the intrinsic value.
That doesn’t make the topic socially irrelevant.
It just means valuation is narrower than the public debate.
3. Don’t Trust Management
Management’s forecasts are biased.
He’s very clear on that point.
Don’t blindly trust management’s growth expectations.
They have an incentive to be optimistic.
4. Be Careful With Banks, Debt, And Cyclicals
There are some categories he’s significantly more cautious about.
Banks are one of them.
Not because banks can’t be good businesses.
But the risk is difficult to assess.
To be able to value a bank, two assumptions have to hold:
That sensible people are running it.
And that regulation works.
“2008 broke my trust in both dimensions.”
He also warned against shrinking companies with high debt.
Not high debt alone.
Not declining revenue alone.
But the combination.
He called it “a crash in waiting.”
And that’s exactly how he sees it.
Cyclical companies also require extra humility.
They’re often tied to oil prices or other external factors that fluctuate wildly.
That makes them difficult to assess.
When earnings are driven by something outside the company’s control, your story becomes more fragile.
5. Remember: You’ll Be Wrong
Aswath Damodaran reminds us that we can be wrong in both the story and the valuation.
It’s usually not the end of the world, because you can achieve good returns even if you’re not completely right.
“I don’t need to be right to make money. I just need to make fewer mistakes than everyone else,” he said.
That’s a very different ambition.
Not genius.
Not perfection.
Relative rationality.
It’s about protecting your wealth.
6. He Invests in “What Can Be”
Aswath Damodaran invests in technology companies like Nvidia.
Warren Buffett historically didn’t.
Buffett’s philosophy was built around stable, mature companies with predictable earnings.
Coca-Cola, insurance companies, chocolate, running shoes.
That philosophy works.
But it rarely takes you into young technology companies, where earnings are uncertain, and the track record is short.
Damodaran pointed out that if you only invest in what’s already solid and stable, you end up concentrated in one part of companies’ life cycle.
And the economy doesn’t always reward the same part of the life cycle.
You shouldn’t only invest in what is.
You also have to be able to invest in what could become.
That requires valuing potential.
Not just the present.
It requires that you accept greater uncertainty, but in a controlled way.
That doesn’t mean you should buy hype.
It means growth also has value.
If the price is right, and the story holds.
7. No Stock Dominates
He never enters a new stock with more than 5 percent of the portfolio.
Not even if he feels a strong conviction.
And if a stock grows to more than 15 percent of the portfolio, he starts trimming.
Sometimes he’s let it run to 15 percent. But after that, he takes the top off.
For example, he’s sold half of his Nvidia position over the past few years.
Has he left money on the table? Yes.
Does he regret it? No.
His starting point isn’t to maximize the return on the individual stock.
It’s to protect the portfolio.
His wording was clear: “Don’t do anything that can threaten your lifestyle.”
When one stock takes up too much space, it’s no longer just an investment choice.
It’s a lifestyle risk.
He isn’t trying to be brilliant.
He’s trying to survive his mistakes.
8. Too Much Activity Can Kill Your Return
He warns against following CNBC and all the other news media too closely.
It creates noise, can make you nervous and make you trade too much in the stock market.
He says it quite directly:
The more active an investor is, the lower the return becomes.
Both for private and professional investors.
He only buys a few stocks a year.
Sells a few.
He has around 40 active positions.
He doesn’t check the market daily.
Investing fills his theoretical work as a professor, but the market doesn’t fill his everyday life.
And that’s intentional.
9. Companies Have to Earn Their Place
A stock doesn’t just enter his portfolio and stay there.
It has to re-earn its right to stay.
He reviews every single stock at least once a year. Some more often.
Not only because the price has moved.
But because the story may have changed.
If the assumptions no longer hold, the stock has to go.
If the price has run too far ahead of the value, he has to sell.
Buying is only half the job.
The hard part is reassessing honestly.
He says you can’t call yourself a value investor, and at the same time say you “buy and forget.”
Value investing and valuation go both ways: at purchase and at sale.
If you bought because something was undervalued, you also have to be willing to sell when it’s no longer undervalued.
A stock doesn’t have lifelong membership in his portfolio, like it often has with Warren Buffett.
10. The Goal Isn’t to Get Rich
His goal with investing is to preserve and increase his wealth.
Not to get rich.
Not to beat the market.
And that explains a lot.
It explains the 5 percent rule.
It explains why he trims at 15.
It may also explain why he doesn’t necessarily beat the index.
He himself said in an interview that it isn’t about maximum upside.
It’s about survival.
If you start with the wrong goal, he said, it distorts all your decisions.
If the goal is to get rich quickly, you take different risks.
If the goal is to beat the index at any cost, you start to overreact.
His approach is more sober.
He says that 55 percent of his stocks beat the index.
That means 45 percent don’t.
He’s okay with that.
“I invest because I like the process.”
He’s satisfied performing in line with the index.
Two Words: Concentrated Value
Beating the index is simply icing on the cake for Aswath Damodaran.
My mandate is different.
My goal is to beat the index.
My goal is to build real wealth.
That sometimes requires concentration, conviction, and the willingness to be different.
Not for entertainment. For performance.
I once asked a billionaire how to get there.
He said: “Two words: Concentrated Value.”
I never forgot that.
If you want to learn more about beating the index, remember to download my e-book here.
