‘Without data, all we have are fairy tales’ – with Aswath Damodaran
Obtaining data is simple enough nowadays – the real trick, says podcast guest Professor Aswath Damodaran of New York University’s Stern School of Business, is knowing what to look for and what to ignore
In his 2017 book, Narrative and Numbers: The Value of Stories in Business, Professor Aswath Damodaran of New York University’s Stern School of Business – our most recent guest on The Value Perspective podcast – makes the case for data and data management being central to good decision-making. “Data keeps us disciplined,” he tells us during our conversation. “Without data, all we have are fairy tales.
“I might push back on a valuation of Tesla because I know what the revenues of Volkswagen look like – but I don’t know that instinctively. I can look it up and it won’t take a lot of time. The advantage we have today is nobody has the excuse of saying something is too much work – it would take me all of one and a half minutes on Capital IQ to download the revenues of the top 25 automobile companies in the world.”
Obtaining data may be easy but, as Damodaran goes on to note, so much data now exists that, if you have no idea what you are looking for, “you are going to drown in it”. “I call this the Google Search problem,” he continues. “If you try to find out more about a company just by typing its name into Google Search, I promise you are going to enter a nightmare of big stories, small stories, non-stories, rumours, tweets and so on.”
Where to look
To underline the importance of knowing what you are looking for before you start looking, Damodaran will take his students through either a company prospectus or a ‘10-K’ form – a comprehensive financial report US businesses are required to file. “To give you some perspective, a typical prospectus now is 300 pages while a typical 10-K can be 200 pages,” he points out.
“If you start on page one and work all the way through to the end, you will be lost completely because all kinds of stuff will be coming at you – some useful, some not. So what are the questions I really need to answer? I need to know about the company’s growth and profitability so I need to know about its business model. And then – how does it create growth? What does it invest in to create growth?
“This way I can look at specific parts of the 10-K with each of these questions in mind. Obviously, I can look at revenues in the financial statements over the last few years to get a measure of whatever growth stories there are. So that is a number. But I will also look at the footnotes to see where the revenues are coming from. Why does that matter? Take Netflix as an example – lately its growth in users has come primarily from India.
What to ignore
“You may think – so what? Well, Indian subscribers have an option to watch Netflix for $3 a month on their phones. That actually makes a difference because, when Netflix says subscriptions are up 10%, say, it is important to know if those subscribers are paying $15 a month like the US or $12 a month like in Europe or $3 a month like in India. That is data but it is data that can get lost if you start reading from page one.
“With data then, you must have focus. In fact, knowing what to throw away is actually more important than knowing what to look for because, to be quite honest, out of the hundreds of pages of a 10-K, I use probably 12 to 15 pages. After a while, you realise there are entire sections you might as well skip over – like the obligatory risk section and its 30-odd pages of ‘this could happen’.
“Obviously, that is written by lawyers for lawyers to make sure the company never gets sued but I have never read a risk section in either a prospectus or a 10-K that has helped me with a valuation. So the competition could get stronger or margins could get lower? Thank you for letting me know – I would never have thought of that on my own!”
Data v information
Ultimately, the key distinction investors have to make is between ‘data’ and ‘information’. “We are looking for information and we have to wade through a lot of data to find it,” says Damodaran. “That is what I mean when I describe valuation as a craft – you don’t learn it by me talking about it. As you value companies, you learn some parts seem to matter more – and the next time you read a 10-K, you will go to those parts first.”
Software developers actually approached Damodaran once with a view to watching how he read 10-K forms and automating that into an app. “But I don’t need an app,” he shrugs. “I can do that on my own and, over time, so can anyone else. There are lots of shiny baubles saying, ‘look at me’ – and, if you look, you will get lost very quickly. Just train yourself to figure out what the distractions are and where to find information.”
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.
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