The World's Foremost Expert Explains How To Value Stock

Joe Weisenthal (0:08)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:14)

And I'm Tracy Alloway.

Joe Weisenthal (0:16)

One of the things that I like about this podcast is, is that we can ask the really dumb questions that, you know, everyone sort of takes it for granted, and we don't talk about them, but I feel like we can just ask the really simple questions of finance.

Tracy Alloway (0:30)

I thought you were gonna say you enjoy spending 30 minutes on the phone with me every week, but, you know, you like asking dumb questions.

Joe Weisenthal (0:38)

I always thought that what you said before kind of goes without saying because I hope it comes through in all of our conversations that this is my favorite half an hour of the week, because of course that's true. But you know what I'm saying, like last week, on this we're like, we talked to a currency trader, we're like, how do you pick what currencies to buy or sell? It's just like, just the really basic stuff.

Tracy Alloway (0:58)

Yeah, it's like a remedial course for people who are in the markets day in and day out, but it kind of gives us a chance to step back from the stuff that we take for granted, I guess, and actually dig into what exactly it is that we're talking about.

Joe Weisenthal (1:13)

It's kind of funny because I kind of like to think we're having a sophisticated conversation here, and yet you just described this as a remedial course.

Tracy Alloway (1:20)

Sorry, sorry.

Joe Weisenthal (1:22)

No, I think that's fair. I think we can do both.

Tracy Alloway (1:25)

Yeah, I think so. So, okay, so what basic pillar of markets or finance are we going to learn about today?

Joe Weisenthal (1:32)

So today, we're going to go to the heart of investing, sort of the simplest, most basic thing that people will think about when they think about what investing is, and that is thinking about what stocks are worth.

Tracy Alloway (1:47)

Oh, now, okay, so I guess this is kind of a simple topic, but it's definitely a really timely one, because I'm pretty sure I just saw a headline go by about a record number of investors who think stocks are overvalued in the US market, and of course, the notion of things being overvalued, not just stocks, that's a pretty prominent theme in markets right now.

Joe Weisenthal (2:14)

It absolutely is, and of course, you know, a few weeks ago, we had another episode with a pair of accounting professors talking about new ideas in stock market valuation, but I think when people learn about investing, they think about Warren Buffet, and they think about Benjamin Graham and Dodd and security analysis and reading income statements and just like trying to put a number on the stock and then looking at the stock and saying, well, should it go up or down from here?

And that simplicity there is, you know, just incredibly important thing, but how do you do it? I don't think most people really know how to even go about the process.

Tracy Alloway (2:51)

No, I guess we throw around words like P-E ratios and forward earnings and things like that, but let's dig into it a little bit more.

Joe Weisenthal (2:59)

So we have the best possible guest for this subject.

He is considered to be the foremost expert on the subject of valuing stocks. He is Aswath Damodaran, a professor at the Stern School of Business at New York University. He teaches about the topics of corporate finance and equity valuation. He runs a great blog where he discusses how he values certain companies. He's come on TV, on Bloomberg TV, several times to discuss it. So Professor Damodaran, thank you very much for joining the Odd Lots podcast.

Aswath Damodaran (3:33)

Thank you, Joe.

Before I start though, I'm gonna bash a few groups that I always start the bashing with. First, don't ask accountants about value. I mean, I think it's the wrong group to ask because realistically, I think accountants have a job to do and valuation is not one of those jobs. Second, anybody tells you there's something new in valuation is lying. Everything in valuation is old and tested.

It's old wine in a new bottle. Third, and I think this will set the table for the entire discussion, value and price are two different things. You can either value a stock or you can price a stock. Tracy mentioned price earnings, ratios, and forward earnings. That's a classic analyst technique. It's for pricing a stock and here's the contrast.