Aswath Damodaran on the Difference Between Pricing a Company and Valuing One, and More

Aswath Damodaran is a professor of finance at the Stern School of Business at New York University. In this podcast, Motley Fool analyst Bill Mann caught up with Damodaran for a conversation about:

• Corporate lifecycles, and why investors should understand them.
• The problem with trying to follow great investors.
• The fall of research analysts, and the rise of passive investing.
• An investing lesson from Charlie Munger.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Feb. 4, 2024.

Aswath Damodaran: If you have a absolute rule of, I'll never buy a stock with a ratio greater than 25, God help you. Because all you're going to be stuck with are dying companies and value traps in your portfolio.

Mary Long: I'm Mary Long, and that's Aswath Damodaran, a leading professor of Corporate Finance and Valuation at the Stern School of Business at New York University. Bill Mann caught up with Damodaran for a wide ranging conversation about how the wrong statistics can lead investors astray, what really drives interest rates, and the difference between pricing a company and valuing one.

Bill Mann: I do want to start here at the beginning of 2024 by asking you, I guess, what might be an unfair question given your willingness to share with people online. At the outset of the Internet age, we believe that information available to us would help us make better decisions, and in a lot of realms of our lives it has. What is your impression of how the instant availability of information has helped the average investor, if it has at all?

Aswath Damodaran: I think we have to start by drawing a distinction between data and information. We have a great deal more data now than we did 25 years ago. That's without contest. That is absolutely true. Our challenge now is to convert that data into information. Here's the problem we're facing, we're drowning in data to the point that we give up. I mean, psychologists have discovered that when you provide people with too much data, they go to mental shortcuts, so in an ironic way the more data we have available, the more we fall back on simplistic rules because we just can't handle the data. So to me, the challenge is figuring out how to take those mountains of data we have available. Nobody should ever say we don't have enough data anymore. We got too much data, and I ask the question, how do we convert that data into usable information? That requires discipline, it requires the structure of thinking through datum, and that's partly what I've wrestled with. I won't claim to have the answers, but I wrestle with every year when I update the data on my website, is how do you convert that mountain of data into something that you can actually use in day to day investing in valuation.

Bill Mann: It does seem that a lot of times that we as investors try to solve for the complex before we even get to the simple, so if you will indulge me, I thought we might do something that would be a little bit fun is to describe how you might go about sorting through the data with the company and untangling what the company does, how it makes money, and what its prospects might be. So why don't we take a fictional company, let's call it Universal Export just because I do love a James Bond reference. It's 10-K has just landed on your desk. What, to you, are some of your first areas of exploration?

Aswath Damodaran: The first thing to figure out is what does the company do? I mean, you said Universal Exports. That could be a trading company or a manufacturing company. Very different business models. I think the first step is to figure out what exactly, especially with a name as nebulous Universal Exports, what the company does.

Bill Mann: Besides hiding spies.

Aswath Damodaran: Exactly. Now, in fact, it's even more dangerous when you look at the name of a company and you assume that it does something which it doesn't. I mean, across the world, there are companies that call themselves one thing and they do something different, is start by examining what does a company do? Who does it sell it to? Why do they buy it? Then you can start looking at the numbers. I think we're too quick, and again this is the problem with the data age. We have so much access to data, we jump into the financials and we start computing every conceivable ratio known to man, when in fact it's good to step back and say, what does the company do? How does it make money? What makes it different, if at all? That becomes the basis then for what you will learn from looking at the numbers.

Bill Mann: You describe yourself as a teacher first. I want to reference another teacher for a moment. Someone who I believe you know rather well as Joel Greenblatt, he's written a number of books. Perhaps most seminally, he wrote two books, the first of which was, You Can Be a Stock Market Genius, which I put on the rankings as the best named book of all time. Then another, The Little Book That Beats the Market. He mentioned in the second book, that in the first book he felt like he was writing at a seventh grade level. But what he really found out once he started teaching even MBA students at Columbia is that he had really overestimated the financial acumen of students, so the magic formula that he put together was a way to try and compensate and simplify, so from your perspective and your experience, when you see so much data that's out there, that you know and I completely agree with you, it doesn't edify at all, what are some of the first steps that you can take to simplify the data, either numerical or factual, or in any realm that you think is important?

Aswath Damodaran: You're describing why we take statistics classes. That's why we should remember our statistics because that's exactly what statistics is designed to do. You take huge amounts of data and try to make sense of it. Unfortunately, the way we're taught statistics in college is so bad that we tend to forget our statistics very quickly, which is unfortunate because I think one of the central skill sets you need as an investor is not your accounting acumen, but how well you can deal with data and how much you remember your statistics classes. If the only statistic you remember from your statistics classes is the average, you're in big trouble.

Bill Mann: Yeah.

Aswath Damodaran: I'll be quite honest, a lot of equity research analysts that I talked to seem to remember only the average. Think of how many times they say, well this company's PE ratio is lower than the average. You say well, you do know the average is not a good statistic when you have skewed distributions, and their reaction is, what is a skewed distribution? A skewed distribution is a fancy word for if all your outliers are big positive numbers and you have no big negative numbers to offset, which is the case with PE ratios, the average is a hopeless statistic. What do you use instead? Well, that's why we talk about medians and we talk about aggregate numbers. So I think that one of the skill sets that I ask people to pick up, and it doesn't have to be an advanced statistic, it's just basic statistics. In fact, a couple of years ago, I put together kind of a bare bone statistics class which looked at statistics from my perspective. What are the kinds of statistics I need to know when I enter into finance? It's 12 sessions altogether, it's about four hours of sessions plus you know with excess and maybe 10 hours of work, you can get yourself up and running with statistics, because that's exactly what statistics is designed to do. Is in your face with 50 companies with very different PE ratios and ask you what is a high PE ratio in this group? You should be able to answer that question with basic statistics, but strongly encourage people to take another look at their statistics book if they haven't sold it back. Or at least take a look at my statistics class to get up to date with, here's what I need.

Bill Mann: I will make sure that the links to your statistics class. I could not agree more and I love the fact that you went directly to Wall Street analysts, who obviously as a group are a sophisticated bunch. But one of the things that I notice, just to edify your point, is a lot of times you will see someone who's leaning upon a statistical average and so therefore, what they do is if you have a company that's well below the average, they will say, well, you know, the downside for this company is 17% upside. Which it may be statistically defensible but it's not logical.

Aswath Damodaran: It's not even statistically defensible because implicit there is a belief in what I call mean reversion. You can't just pick on sales side equity research for this. I mean, I've been a harsh critic of old time value investing and I've been to Nebraska, what, six times to the Woodstock and Omaha. I've never been to the meetings themselves, but I've gone to talk to those people who show up at that meeting year after year. The last time I was there, the 300 portfolio managers in the room, all of whom profess to be value investors and I asked them a very simple question. When was the last time you actually valued a company? The answer was, most of the people in that room had never valued a company. I said, how do you become a value investor? They said buy stocks with low PE ratios and you're going to be OK. That's mean reversion, basically driving an entire investment strategy. I wrote a piece called Mean Reversion Works Until It Doesn't, and I think that it's a very lazy way of investing. I don't think anybody deserves to earn excess returns or beat the market by betting on mean reversion, and 90% of all time value investing was just mean reversion, and when it's not working, I have very little sympathy for the investors who wring their hands, the markets become all irrational. Look, we're not making, you should never have made money. The only reason you probably made money, people didn't even know what the mean was, because they didn't have the data. Now, anybody with the database can figure out what the mean is, so what are you bringing? I have an old saying, if you don't bring anything to the table, don't expect to take anything away. A lot of investing is built on mean reversion and assuming things move back to the average and neither is a defensible assumption.

Bill Mann: Yeah, companies have life cycles for example, so you have a company that is in a late stage or a terminal decline, of course, it's going to look cheap, but you're not necessarily bringing anything to the table in terms of understanding of what that business does.

Aswath Damodaran: In fact let me add to that. I mean, the 20th century, the reason mean reversion works so well. First it worked really well in the US, which is the most mean reverting economy of all time. You had companies with really long life cycles. Think of the Gs, the GMs, the Fords, the company that built the 20th century had long life cycles so you could get away with mean reversion. Twenty first century, the type of company you're going to see is closer to Yahoo than to G. Yahoo was founded in 1992, peaked in 1999, started its decline in 2003, died in 2015.

Aswath Damodaran: The life cycle for companies has compressed. In a compressed life cycle, assuming things move back to the average, might be the most dangerous assumption you can make in investing. Because there is no average you're going to move back to, you're moving toward death as a company and you're betting on this company as it slides down that life cycle.

Bill Mann: It's fascinating that you bring up Yahoo. There was an example that I've been studying recently. It was a company that in 1999, I thought was going to be a world-beater Ed. Let's just say, for 3 or 4 years, Nokia was a world-beater. But there was a fascinating interview with its CEO from the time that Nokia was at its peak and he said something fascinating and at first I thought it was excused making, but then I thought about it and I was like, he might not actually be wrong. Where he said, I don't feel we made mistakes. What happened was events overwhelmed us.

Aswath Damodaran: That's why my newest book that's coming out this year, it's called The Corporate Life Cycle. In a big chunk of this book is to show that people assume that if you have great management, you can live forever. I have lots of problems with the word sustainability precisely for that reason. People talk about sustaining companies. A company is a legal entity. The reason for your existence is gone, you need to leave. Because if you stay, you suck up resources. A lot of what happens to companies is out of their control. Can good management delay aging? Yes. Can it stop aging? Now, once in a while, you might have a great management that manages to reincarnate a company. Apple, Steve Jobs, Microsoft, Satin Della. You know what happened to those companies? They become case studies that get used by Harvard, so that everybody can be sold the message you too, can be an Apple or a Microsoft. It makes consultants and bankers really rich, but shareholders really poor. I think the sooner we accept, just in our human existence that aging is part of the natural process that companies go through, the better off we will be. But unfortunately, I think we're revere empire builders. We make those CEO's who make their companies bigger into heroes and we have to stop doing that.

Bill Mann: I love that you put it that way. I immediately went to, maybe something that's a little bit adjunct to that, which is one of the best-known business books from the last 20 years, has been, The Outliers by Thorndike. When I read that book, I said, I am being given case study after case study, that's in the right tail of the distribution. There are companies, hundreds of them, that made similar decisions, that ended up like Nokia. So I'm not sure what you can draw from those case studies. As you said, Apple itself, there's a lot of money that's going to be lost trying to replicate Apple.

Aswath Damodaran: Why pick on Thorndike? Let's face it, how many great investor books do you see in a bookstore? You go and have the books are about great investors. I think we need to stop reading about great investors. Because the reason we read them is because we think if we replicate what they do, we're going to make money. In fact, I teach a class called Investment Philosophies, precisely, to push back against that concept. There are hundreds of books on Warren Buffett, but you know what? I would wager that if you took all the people who read those books and you looked at the returns that those people made in their portfolios, they'd have been better off buying index funds instead. The reality is great investors are a product of both the investor qualities they bring in and the time in which they operate. Warren Buffett had the advantage of both and I don't think it's easy to replicate something like that.

Bill Mann: No. He has said that himself, that when he started investing, if you were the cheapest insurance company in the state of Nebraska, you had a mote. Whereas, even 20 years later you were going to be found out by an international or a multi state company. You were no longer able to count on those types of advantages.

Aswath Damodaran: I think also the other thing to keep in mind when you think about why value investing has had such a tough time in this century. Value investing has not won in this century. This is a really long drought, and at some point, you got to stop and ask, is this steady stake?

Bill Mann: We are the Chicago Cubs of investors.

Aswath Damodaran: I think in a sense, we've got to accept that the century of value investing dominance is behind us, doesn't mean value investing will always lose. I think we're going to see a year in which growth investing win, which is healthier, because it means there's no easy way to make money anymore. I think there are many factors conspiring against value investing, including the fact that data is more easily accessible. Including the fact that you have big investors who take advantage of small mistakes and including the fact that life cycles have shortened.

Bill Mann: I was thinking a little bit about what you were saying about Warren Buffett, is that, again, getting back to the heuristics of what people would take from saying, well, he's done it this way. One of the first and primary lessons that people took from Warren Buffett was, don't invest in technology companies, because their life cycles are too short and it is difficult to be able to predict what they're doing 5 years from now. The point you're making is yes, but that's the reality of even the great businesses today.

Aswath Damodaran: That's the flip side of disruption. That's what I hear when I hear the word disruption. We thought automobile business was set for life. During the 20th century, every attempt to start a new automobile company, remember the DeLorean attempt, every one of them crashed and burnt. So when Tesla came about, our reaction was, this isn't going to work. The automobile business has an insurmountable mount. Fifteen years later, we're looking at what I think is the death march for legacy automobile companies. GM, Ford, Volkswagen, Daimler, you're seeing these companies looking at a precipice that they might not be able to avoid.

Bill Mann: Yeah. So, some of the biggest success stories in the market are companies that would almost never have attracted statistical value investors.. There are companies that even if you came in day one of an MBA class and the professor said, I want you to break out a discounted cash flow statement and give me your predictions for a company. A company like Tesla, a company like Monster Beverage, even Costco, the assumptions that went into what actually happened, you'd fail. There's no investing professor who would say, it is reasonable to suggest that a company is going to grow at 22% for 20 years.

Aswath Damodaran: Bill that's not true at all. You take the greatest companies at the top of the pyramid now. During the last 20 years, every one of them has been cheap. Three or four or five times. You should talk about Nvidia? I bought Nvidia in 2018. People assume that when you see a company go off 5,000% in 20 years, it's had an uninterrupted run of success. That's not the way the markets work at all. I bought Tesla twice in my lifetime, at times when it was cheaper. So I think that is the mistake that value investors make, is they rule out these companies before they even look at them. Now, my point is, never say never. That's one word in investing that you should avoid. I will never buy this company. At the right price, I will buy any company. At the wrong price, there's no company in the world that I want to buy. It's all about the price. So the truth is, people give up too easily on these growth companies and you do a discounted cash flow valuation and you don't follow rigid simplistic valuation models. My promise, now there are lots of d.c.s, but very few of them actually capture the essence of intrinsic value.

Bill Mann: Yes.

Aswath Damodaran: Think about a business, think about the story, think about how that plays out. I own six of the seven winners from last year, I got incredibly lucky. Every one of them, and as I look at those companies, I didn't buy them last year, obviously. I bought them at times I bought Facebook. After its collapse, you remember the Meta earnings report?

Bill Mann: Yeah. They were done.

Aswath Damodaran: I think that's something you saw. When you look at companies, I wish I owned the company, don't give up on it. Track it, try to get evaluation of the company going and there will be a time when this too will become a company that you can buy. That's part of the reason I push back against, I mean I admire a lot of what Joel's done, but any approach that builds on book value and price to book return on equity, the combination that drives all time value investing, is going to bias you so badly against growth companies that you're not even giving them a chance to make it into your portfolio. Give companies a choice and don't go with metrics that rule them out. P your priced book. If you have absolute rule of, I'll never buy a stock with a P ratio greater than 25, God help you, because all you're going to be stuck with are dying companies and value traps in your portfolio.

Bill Mann: Are there pieces of financial information that to your mind, have risen in importance over the last 20 years?

Aswath Damodaran: I would say one piece of financial information, of financial good sense that seems to have gone out of the window is what drives interest rates. The answer to that is right. If right now we ask most investors, you ask what drives interest rates? The answer is very simply the Fed. What a lazy and dangerous way to think about interest rates?

Bill Mann: It's a wizard de Vos answer is what it is.

Aswath Damodaran: It's a wizard de Vos answer, which is the Fed, if it wants to, can bring rates down to zero, and this is at the heart of many of the investing mistakes people have made is they think the Fed can set rates. In fact, leading into this year, what is the source of optimism? The Fed is going to cut rates. The only rate the Fed can cut is the Fed funds rate. None of us has ever borrowed money at the Fed funds rate. Last year, if I asked you what did the Fed do? The Fed was raising rates. What we started the year at in terms of T bond rates? 3.88%. You know what we ended the year at? 3.88%. What the heck did the Fed do? The truth is we've lost common sense perspective on what drives interest rates. What drives interest rates is inflation and real growth. We need to return to first principles. To me, the macro mistake that people have made is assuming the Fed drives interest rates. As a consequence, all you have to do is watch the Fed.

Bill Mann: You hear it all the time. Again, it's a heuristic. Don't fight the Fed.

Aswath Damodaran: Wall Street is full of euphemism. Most of them don't work. I don't even know who makes up these euphemisms. If you're saying, if interest rates are going up, don't invest. If you expect rates to go up, then you probably should invest, absolutely. I don't have a problem with that. But why make it about the Fed?

Bill Mann: Maybe that's what Universal Exports business is. They are euphemism creation company.

Aswath Damodaran: That could be.

Bill Mann: That's their business. We talked about this a little bit earlier, but I think another area of exploration is the fact that so many businesses in the United States and the economy used to be driven by assets, and now it is driven so much more by knowledge, by information, by data. How should investors think about adjusting how they think about whether a company is expensive or not, given that so much is based on intangibles?

Aswath Damodaran: Stop thinking like accountants. Accountants has this obsession with tangible versus intangible. The accounting balance sheet, as we know it, is built around, I know account is trying, but let's face it, they're incapable of doing this right. The problem is not that companies used to be driven by assets and they're not anymore. It's the type of assets that drive value. GM might have been driven by physical assets, plant in capacity. But guess what? Apple is driven by just as valuable as set of assets, perhaps more so. The fact that you cannot see something doesn't make it not an asset. I give a very simple example, you take a patent and I sell you the patent. Do you have an asset? Absolutely, you can't see it. But to me, an asset is something that generates expected cash flows. That's my definition of an asset. I've never had issues with companies with intangible assets, because to me, it's all about the cash flows. If you have a patent of technology, you can get cash flows, I'm going to give you a high value. This is precisely why I think book value based investing is a very dangerous way to approach investing. Because whether you like it or not, book values are accounting driven, and accountants, as I said, can't wrap their heads around. I know fair value accounting is out there, but it's an oxymoron. You can either do accounting or valuation, you can't do both. The truth is, book value is less and less meaning every year. Not because it doesn't matter what you own, but accountants are incapable of capturing that well.

Bill Mann: In fact, the rules prevent them from doing so in a lot of cases. You can't even take physical assets and value them up, but you certainly can't take, look at Disney for example. Show me Mickey Mouse on their balance sheet. Maybe the most important asset they have is their character library and it's not there.

Aswath Damodaran: It's not just that they cannot take into account. They're trapped in a legacy of their own making. In a sense, and I sympathize with the accountants because when they try to come up with a rule for an intangible asset, it's like Apple coming out of the new operating system where they have to figure in all the old operating systems that people have, so in a sense, you've got to make compromises. Accounting is trapped in a legacy that makes it almost impossible for them to think sensibly about intangible assets. A few months ago I valued Birkenstock, perfect vehicle, we're talking about valuing intangible assets. I valued the brand name, after all, without the brand name, what is it? A really ugly looking trend. I value the fact that they brought in a new management team 12 years ago. They replaced the family running the company with a professor, and he's turned out to be incredibly good. I even value the Barbie buzz, which is during the summer as you remember, the Barbie movie the highest grossing movie on the globe. Barbie wore Pink Birkenstock, which pushed up sales at Birkenstock stores about 30% during the summer. My point is, these are all intangible. I can value it, it's easy to do, but I don't want accountants to even try to bring that on the balance sheet because they're going to screw it up. It's better that they stick with old fashioned accounting, let me or other people do valuation, handle the valuation. But I think in a sense, my problem with accounting is accounting wants to feel relevant again, that's part of what's pushing fair value accounting is they want to be in a position where balance sheets actually compete as a measure of value. It's never going to happen. Might as well just give up and go back to old fashioned accounting and let valuation take care of the rest.

Bill Mann: Who else can we insult?

Aswath Damodaran: Anybody you want. [laughs]

Bill Mann: What are the things that has happened? I don't happen to think that this is healthy and aggregate. But really to your point, I see why this happens. We've seen a bunch of return to prominence and return to use of adjusted numbers, where a real rise in companies that talk particularly about adjusted EBITDA. Charlie Munger had his own very colorful term for EBITDA itself, which is in itself an adjusted number. But are there actual adjustments given that we're talking about the imperfect language of accounting that you find to be either egregious or on the other hand, useful?

Aswath Damodaran: Let's face it, much of what you see out there is pricing. Equity research analysts don't value companies. They pricing, what does that mean? They compare companies on a ratio, price earnings. When you're doing pricing, you want to make the denominator as consistent as you can across companies. There is, I think a logical reason for adjusting is if I'm going to compare 20 companies and some Cap X and some expense, an item, I want to make sure they're comparable. Some of the adjustments are just to make things comparable in a pricing domain. Some are just I think reflect the laziness of sales had equity research analysts and I want to pick on them again because we talked about accounting not doing the right thing. Eventually even accountants do the right thing. It takes a while, you got to drag them into do it. Let me take two examples. Stock based compensation. This has always been an expense. I don't even know why there's a debate about it. It took accountants about 18 years and in 2007 or eight, they decided, finally, if you gave options or restricted stock to your employees, that had to be treated as an expense and lowered income. They did the right thing. But guess what analysts did? They reverse what accountants did because they were too used to the way they thought about these numbers before. 2019, accountants finally come to their senses and say leases are debt. They've always been debt. I've always treated them as debt. But 2019, after seven decades of talking about it, they did it. Guess what accountants are doing now? They're reversing the lease adjustments to income so that they can get back to a number they used to use before. This is a scenario where accountants try to do the right thing and then people try to reverse it because in a sometimes of the misguided sense of a stock based compensation is non cash. Depreciation is non cash. I can see the rationale. Stock based compensation is not non cash, it's in kind. Its like a pizza store owner giving away pizzas to its employees to supplement their wages because they can't pay them a high enough wage. Guess what? It's eating into your profits. It's got to be factored in. I think a lot of the adjusted numbers I can see what people are doing. But you know what? Investors get what they deserve too. I think that companies do this because investors and analysts are willing to go along with this premise of it's adjusted, so we'll lose the adjusted number. But I think if you do it, I think you have nobody to blame but yourself.

Aswath Damodaran: I think it's aware.

Bill Mann: I think it gets, and David Einhorn spoke about this in this last year. That it may be even worse today given the rise in passive investing. I happen to think that one of the greatest inventions of the last century in investing was the index fund. But when you have so much of the market that is indexed, they are taking a naive approach and I get the sense, and I'd be interested in your take, that the fact that so much of the market isn't even looking can't possibly be helpful for the discipline of the companies themselves.

Aswath Damodaran: I'd have more sympathy for the argument if analysts had actually been doing [laughs] an analysis. Unfortunately, it's never been the case. I remember when ATM's first came out and I think it was the head of Bank of America talked about what would be lost, would be the experience with bank tellers. I said, man, he's not been in a bank in a while. [laughs] I remember the banking advice I got from our bank teller and how much I'm going to miss it. I think that equity research analysts are like the bank tellers before the ATM. Nobody is missing them because they weren't bringing anything to the table. I have sympathy for the argument. I think that in fact, one of the most famous papers in finance is called The Impossibility of Efficient Markets. Sandy Grossman and Joe Stiglitz wrote it in the early 1980s, and the argument they were making was a very simple one. If everybody believes markets are efficient, markets will become inefficient. Because everybody believes markets are efficient, nobody's doing the work looking for market mistakes. But the reason they wrote it is to the point that this is an ebb and a flow. People believe markets are efficient, they start to passively invest. Market mistakes become bigger than active investors come in again. You don't need very many active investors to keep markets on their toes so much as that argument has merit, I think that the truth is that David Einhorn, the Bill Ackman's, the Carl Icahn's have a place in this process. As to the short sellers, I think we need to be OK with the fact that short selling is not a vice that. How do we end up with this premise that being long is a virtue and being short is a vice? It's almost in built in the way we think about investing. But I think we need people digging for information and they're not going away. There's a natural process which would keep them around.

Bill Mann: Do you journal or how do you go about holding yourself accountable for the decisions that you have made?

Aswath Damodaran: Luckily, I don't manage other people's money. [laughs] I have no desire to manage other people's money, none. It's a responsibility, I understand the pressures, tensions, stresses of doing it and I chose not to do it. I'm lucky enough, I don't have to do it. The only people I have to be accountable to are the people whose money I manage, my wife, my kids and so far they haven't fired me. With my kids incidentally, I increasingly move their money out of individual stocks into funds, index funds, as they get older because individual stocks require a lot more care and maintenance.

Bill Mann: I've been doing the exact same thing with my children.

Aswath Damodaran: I think they have lives to live. I don't want them to be worrying about the individual companies. Each year I shed a little more of the individual stocks I bought 20 years ago, 15 years ago, when they were young and replacing them with funds. Because for me, investing is about passing the sleep test, which is if you have a portfolio that's right for you, you go to sleep at night and you don't wake up in the middle of the night say I wonder how my portfolios do it. I don't want them to be worrying about what their portfolio is doing when they have real life worries in the rest of the lives with families, with jobs. This is not something you want to add to the mix.

Bill Mann: I couldn't agree more and I've done the same thing with our children where early on, their stocks were dominated by things like Costco and now they are dominated by the S&P 500 Index Fund. You're exactly right and for me in particular, it was a belief that I did not know that I could impart enough information or guidance so that they would have the same level of comfort on a company by company basis than I did.

Aswath Damodaran: In fact, the reason I think you and I have done this is because we were again, push-back against one of the old premises and value investing which is you buy something and you forget about it. How do you come up with this nonsense? If you're a true value investor and you buy because something is undervalued, there's a flip side to that, which is you need to sell when it becomes overvalued. It's a high-maintenance job, having companies in your portfolio. I enjoy the process or I wouldn't do it. It wouldn't be worth the stress and the time. I don't expect my kids to enjoy the process so I'm not going to pass it on to them. But I think with individual companies, you have no choice but to value every company in your portfolio every year. Which with 40 plus companies in my portfolio, means I have 40 companies that have to revalue every year. Luckily, it's part of my teaching, it's part of what I enjoy doing, but it's not something I pass on easily to somebody else.

Bill Mann: That's even before you think about adding a new idea, that is your installed base in the same way that Apple now has 30 years worth of old operating systems to maintain. You've got an installed base of companies that you have. Exactly. I wanted to finish with this, I know that you share many people's admiration for Charlie Munger who passed away this last year. Are there any pieces of advice or wisdom that from him that most impacted you? You've already said that you never actually made it into one of the meetings in Omaha. But he like you, I've considered to be a great teacher of investors.

Aswath Damodaran: I think in Charlie's lesson for all of us is when something conflicts with common sense, I don't care who's presenting this something. It'd be Goldman Sachs, it'd be somebody on CNPC if it doesn't connect with common sense. He said, disbelieve it. I found that to be incredibly powerful advice because I hear experts all the time and Alison said, that doesn't make any sense to me, and I don't care if the expert is a Nobel Prize winner. I happen to be on a floor with three Nobel Prize winners at NYU Stern. I admire all of them, but they're human beings. They make mistakes as well. I think that, nurture your common sense. I often get people asking me what should I read? What books should I read next? I say read less, think more. I think we're in a world where we're so caught up reading about what other people do in books and blog posts. That we're not spending enough time thinking for ourselves because common sense is like a muscle. If you stop using it, you lose it. I'm amazed at how many professional money managers have no common sense because they've not used it for so long. I think, exercise your common sense and push back against ideas that don't make sense to you.

Mary Long: As always, people on the program may have interest in the stocks you talk about and the Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Mary Long. Thanks for listening. We'll see it tomorrow.