Interesting interview of valuation expert Aswath Damodaran
(1) Prefers using equity-risk premiums to PE ratios for understanding if stocks are expensive or not.
it includes their growth rates, it includes what people think about risk, it includes what the risk-free rate is. In other words, everything we’re supposed to think about in investing. As opposed to what? As opposed to looking at a P/E ratio. A P/E ratio is an interesting, a useful metric, but by itself it’s extremely dangerous. Because if you use just the P/E ratio, you’d have been out of stocks for the last decade. That would’ve been catastrophic for your portfolio. Why? Because the P/E ratio over the last decade looked high. It looked high relative to historical P/Es, but there was a good reason why it looked high. T-bond rates were at historic lows. You weren’t bringing that into the P/E ratio. I have not found another metric that incorporates as much into it as the equity risk premium. So, that’s why I compute it at the start of every month for the S&P 500 and once every six months for every market in the world.
if it’s a good measure, it should forecast returns on stocks well for the next decade. It does better than any alternative metric—earnings yields, dividend yields, all the other metrics we use—but the correlation is only 17%, which basically means that it doesn’t help you time the market. That doesn’t surprise me. I’ve never been a market timer. I don’t see why there should be money on the table for market timers because you bring nothing to the table. What new information can you bring in that tells me what the S&P 500 will do over the next decade?
(2) When valuing companies ignore macro uncertainty (inflation 10 years from now). Use macros to decide allocation in equities. And valuation to decide which equities
(3) Buybacks are favored over dividends more for the signalling flexibility than the tax advantage at this point
(4) Very anti-ESG. Unclear what ESG is measuring (and shifts over time). Studies showing that ESG has high alpha are badly done.
Also believes consumption changes the planet, not investment. If ESG succesfully raises cost of capital of oil capital but demand remains high then oil companies will just go private and find non-public sources of funding. "n the last decade, private equity investors invested $1.2 trillion in fossil fuel primarily from U.S. and European fossil fuel companies abandoning reserves."
(5) How can you make money through valuations? Need to have conviction when the market turns irrational