Why we are certainly excited about our upcoming podcast guest
Ahead of our imminent podcast with valuation expert Professor Aswath Damodaran, we outline some of the concerns he has about value investing – not all of which we would necessarily disagree with
“Value investing has lost its edge – partly because of its dependence on measures and metrics that have become less meaningful over time and partly because the global economy has changed, with ripple effects on markets.” Ouch! Here on The Value Perspective, we have grown well used to doubts being cast on the efficacy of value investing but that does not mean we complacently ignore them.
Especially when those doubts are voiced by one of the world’s most respected academics in the field of finance – as is the case with the above line, which appears in a characteristically thoughtful and forensic three-part analysis of value investing by Professor Aswath Damodaran, individually entitled The Glory Days, A Lost Decade and Rebirth, Reincarnation or Requiem?
Damodaran, who has taught corporate finance and valuation at New York University’s Stern School of Business since 1986, is also the author of a dozen or so books on his specialist subjects, including our personal favourite Narrative and Numbers (2017). As such, we are very much looking forward to welcoming him as our guest on the next episode of The Value Perspective podcast.
Value and valuation
Ahead of that, however, it seems appropriate to address some of Damodaran’s thoughts on value investing – and specifically those in the third part of his aforementioned trilogy, Rebirth, Reincarnation or Requiem?, from which the line at the start of this piece was taken. After all, you might be forgiven for thinking, the fields of value and valuation have plenty of common ground so what has prompted his misgivings?
Very briefly, Damodaran suggests value investing has “lost its way” at three levels, in that it has become “rigid”, “righteous” and “ritualistic”. Ouch again – though when we read that, here on The Value Perspective, our immediate instinct was it might be fairer to argue that, rather than the discipline itself, it is different elements of the value congregation who may have developed some or all of those characteristics.
Indeed, Damodaran acknowledges that point, observing: “Put simply, value investing – at least as practised by some of its advocates – has evolved into a religion, rather than a philosophy, viewing other ways of investing as not just misguided, but wrong and deserving of punishment.” He then goes on to suggest a number ways value investing needs to change in order for it “to rediscover its roots and reclaim its effectiveness”.
You would not expect us to agree with every aspect of Damodaran’s thesis, here on The Value Perspective, but, then again, there is little in headline arguments, such as “Be clearer about the distinction between value and price”; “Don't take accounting numbers at face value”; “You can pick stocks, and be diversified, at the same time”; and “Don’t feel entitled to be rewarded for your virtue” – with which we would take issue either.
Damodaran’s view that value investing’s ‘margin of safety’ is not a substitute risk measure is also interesting. For our part, we do not see it as a pre-valuation proxy for risk so much as a good thing to have on your side once you have valued a business. As Damodaran himself emphasises: “The margin of safety comes into play only after you have valued a company, and to value a company, you need a measure of risk.”
It is his urging that value investors should face up to uncertainty rather than seek to avoid it, however, that most intrigues us, here on The Value Perspective – because, as regular podcast followers will be aware, the central theme of our current series is how to improve decision-making at times of uncertainty. We are very excited about the prospect of broaching the subject with Professor Damodaran very shortly.
Juan Torres Rodriguez
Fund Manager, Equity Value
I joined Schroders in January 2017 as a member of the Global Value Investment team. Prior to joining Schroders I worked for the Global Emerging Markets value and income funds at Pictet Asset Management with responsibility over different sectors, among those Consumer, Telecoms and Utilities. Before joining Pictet I was a member of the Customs Solution Group at HOLT Credit Suisse.
The views and opinions displayed are those of Nick Kirrage, Andrew Lyddon, Kevin Murphy, Andrew Williams, Andrew Evans, Simon Adler, Juan Torres Rodriguez, Liam Nunn, Vera German and Roberta Barr, members of the Schroder Global Value Equity Team (the Value Perspective Team), and other independent commentators where stated.
They do not necessarily represent views expressed or reflected in other Schroders' communications, strategies or funds. The Team has expressed its own views and opinions on this website and these may change.
This article is intended to be for information purposes only and it is not intended as promotional material in any respect. Reliance should not be placed on the views and information on the website when taking individual investment and/or strategic decisions. Nothing in this article should be construed as advice. The sectors/securities shown above are for illustrative purposes only and are not to be considered a recommendation to buy/sell.
Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.