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Old style value investing doesn’t work anymore, says Damodaran

Valuation Guru Aswath Damodaran has made a wakeup call to those who believe in old-style value investing. The Professor of Finance at Stern School of Business at New York University (NYU) says value investors have got stuck in the 20th century.

In an interaction with ETNow, he said value and growth investing has become a very lazy categorisation of investing. “The former style lost out to the latter over the last decade. Stocks with low price-to-earnings (P/E) ratios and high dividend dividend yields have been hurt the most,” he said.

Often referred to as the ‘Dean of Valuation’, Damodaran said as an investor one should not convince oneself that he is right and the rest of the world is wrong. “I think book value has completely lost its meaning. Value investing is not just buying low P/E and price-to-book stocks. I describe valuation as a craft. The Covid-19 crisis has humbled me further. There is so much to learn,” he said

Commenting on the events of Calendar 2020, he said it would be an awful year. “However, the question is what will happen beyond 2020. The 100 per cent of Covid-hit cannot be recovered. The post-virus economy will be different from the pre-crisis one,” he said, adding that debt-burdened and young companies are exposed to defaults and distress.

Damordaran, who has just released his book Narrative and Numbers, where he argues that “we would need stories, not mechanical valuations, to truly evaluate companies this year,” said the virus has clearly affected corporate operations and some services will face permanent loss. “Hotels, aviation, global travel have lost revenues. Startups that are into crisis will be snapped up by the biggies,” he said.

The ongoing crisis has also hurt companies with high fixed costs like Tata Motors, he said. On the other hand, such a crisis will also produce big players like Amazon. He said that it was the dotcom bust, which gave birth to the Amazon what it is right now, not the boom.

“People forget how close Amazon was to getting bankrupt before recovering,” Damodaran, who teaches corporate finance and equity valuation, recalled.

He called the market a consensus of optimists and pessimists. “You can disagree with the market, but you have to respect it,” he said.

Damodaran said the US Fed has played its cards very well in this crisis. “Central banks must not act heavy-handedly in this round,” he cautioned.
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