- Professor Aswath Damodaran was keynote presenter at the 2020 CA ANZ Business Valuation conference
- His presentation covered 5 key lessons on how to stay calm in a crisis
- Damodaran’s presentation is available to download and watch online from the CA ANZ website
The 2020 CA ANZ Business Valuation conference was held in October, with a record number of participants enjoying the online presentations and workshops.
The highlight was keynote speaker Professor Aswath Damodaran, presenting 'A Jedi guide to Investment Serenity During A Crisis' – an appropriate and timely topic given the state of the world economy as it grapples with the fallout of the COVID-19 pandemic.
Damodaran's presentation focussed on 5 key lessons – here's a summary of what he discussed.
Lesson 1: Listen to markets and not experts
Damodaran observed that share markets are experiencing significant volatility, prompting conference attendees to remember that price is not the same as value.
He noted that while value is driven by expected cash flows, price is driven by mood and sentiment. Value is proactive and price is reactive. Therefore, it is expected that there would be a 'gap' between the two – and that price and value may never converge.
Damodaran has been monitoring the monthly changes in share markets around the world since February 2020, measured by market capitalisation around the world. His observations cover the period from the onset of the pandemic, to mid-August 2020.
He discovered that emerging markets, such as Africa, Latin America and Eastern Europe, were the worst affected, while small-Asia and the USA were impacted least – and actually slightly improved. Meanwhile, energy, financials and real estate were the worst-affected sectors, while IT and healthcare market capitalisation increased.
Based on these insights, he concluded that the market and share prices:
- act as a barometer of uncertainty
- punish or reward certain companies, and
- offer the liquidity that is needed during a crisis.
Lesson 2: Opinions are trumped by data
Damodaran believes that value investors are destined not to make money, due to the gap between price and value. He says that while market data can help reveal value, it is interpreted by people in different ways – often to justify their existing opinions.
As such data interpretations can vary significantly and may not necessarily reflect what the pure data says.
Lesson 3: There is no smart money
Damodaran claims that in a crisis, there is no 'smart money'. He observed that there was a clear disconnect between share prices increasing and the economic damage caused by the crisis.
On the face of it, it appears that the markets have gone crazy and there is nothing to explain the increase in share prices. Share markets are, supposedly, predictive and reflect the consensus view of the future.
Therefore, market movements and responses are very hard to predict. And professional investors, as represented by major funds, very rarely out-perform market indices.
Lesson 4: The fundamentals matter
Market responses can be very difficult to interpret, as they are driven by emotion, greed, crowd mentality and fear. So, in a crisis, it's more important than ever to focus on fundamentals to help determine a company's true value.
Lesson 5: Numbers and stories
The narrative behind valuations – why it is what it is – is about much more than the numbers. But it's also critical to ensuring the valuation is correct. Management knows the business better than you. So it makes sense to use their suggestions to fine-tune the narrative, and ensure that it supports the valuation.
Damodaran concluded that at times like these, where there is uncertainty portrayed in the markets, that valuers need to go back to basics.