One thing that made me respect Damodaran more was his case for TWTR. He said that his DCF analysis did not justify his $25 entry price but he saw a lot of optionality (what I prefer to call convexity) on the company as they could find a way to monetize its user base. That's a very Silicon Valley way of thinking, yet he is a NY academic, thats quite usual to see. I might have a different assesment on the convexity (or "optionality") of TWTR but the point is, he is not a linear thinker, at least not completly. He shows signs of being able to think more nonlinearly even if he overly relies on statistics, backtests, models and theories (which most Wall Streeters/NYrs do)
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Global Macro Trading Journal
- Thread starter Daal
- Start date
Here is an email I exchanged with Damodaran
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Aswath,
The mean reversion that I'm referring to is a little different.
I'm talking more about the idea of averaging 10y earnings instead of using current conditions as a guide to the future.
For instance, your implied risk premium uses current conditions as a rough guide to the future, Shiller uses average past conditions. I think your method is more robust because it will not be blind to situations where there is a profit boom, whereas the Shiller method there is an implicit bearish bias that 'fades' profit booms (so its a mean reversion like mindset) because it weights current conditions very little as compared to past conditions. At profit boom turning points, it will keep flashing a red signal for a long-time (because usually, stock prices will soar but the 10y average profit will change little), until the profit boom becomes a significant part of the 10y sample, then all of the sudden it will change and start to say that the market is 'rational' again. When it was the indicator that was being blinded because it was looking at the past when analyzing a forward looking market
I think this bias against profit booms is a understated flaw in the Shiller PE, dont you think?
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response:
The Shiller PE has lots of problems and this is just one of them.
Stern School of Business Aswath Damodaran
a: 44 West 4th Street, 9-69, NY, NY 10012 t: 212 998-0340
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Aswath,
The mean reversion that I'm referring to is a little different.
I'm talking more about the idea of averaging 10y earnings instead of using current conditions as a guide to the future.
For instance, your implied risk premium uses current conditions as a rough guide to the future, Shiller uses average past conditions. I think your method is more robust because it will not be blind to situations where there is a profit boom, whereas the Shiller method there is an implicit bearish bias that 'fades' profit booms (so its a mean reversion like mindset) because it weights current conditions very little as compared to past conditions. At profit boom turning points, it will keep flashing a red signal for a long-time (because usually, stock prices will soar but the 10y average profit will change little), until the profit boom becomes a significant part of the 10y sample, then all of the sudden it will change and start to say that the market is 'rational' again. When it was the indicator that was being blinded because it was looking at the past when analyzing a forward looking market
I think this bias against profit booms is a understated flaw in the Shiller PE, dont you think?
-----------------
response:
The Shiller PE has lots of problems and this is just one of them.
Stern School of Business Aswath Damodaran
a: 44 West 4th Street, 9-69, NY, NY 10012 t: 212 998-0340
I think that great traders and investors are really good at exploiting convexity in their decisions. They are not great because they understand reality well. IMO Reality is too difficult to understand, the world is too complex, there are too many moving parts, hidden risks.
Soros is a great example, the guy has been wrong all his life with all his bearishness, and belief that there will be a depression, imment collapses, etc etc (just last year he said at the early year lows 'its not time to buy the market yet' or something like that). Yet he has not allowed that to affect his risk decisions, at least not grealy. And when he did allow it to affect his risk decisions, he usually was wrong and lost some, but when he was semi-right, he made a bundle. His behaviors were well aligned in a way that detected and exploited convexity and he did great as a result. The things that came out of his mouth, his biases, etc are not the key to his sucesses (even though they are part of it) but rather, his good calibration to the markets. He would cover his shorts (a bullish behavior) when things didn't work out, even though he might grumble in the media about a immiment collapse, he will still be there, covering and protecting himself. He also hired a bunch of people to get long assets during bull years (another bullish decision).
So what enabled him to perform was his good calibration of when to be bullish (cover shorts and throw towel) and when to be bearish NOT what comes out of his mouth or even his 'analysis' (as the twitter guy says, reality is too abundant, there will ALWAYS be 'facts' to support pretty much anything). His real analysis is done with real money and frequently we dont see the details of that but rather 5 minute clips that don't mean anything
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One way to know that the crypto bears are full of shit and are too dumb to realize their silliness, is to consider that if there is a 1% chance the ETH goes to $5,000, that is worth $50. But if there is a 4% chance, that is worth $200. That's almost the price one is paying today. Little changes in the probability have massive consequences to the expected value. The bears are claming to know these % probabilities (its implicit in their behavior). When you consider the uncertainty around the payoff (it might not stop at $5,000), then it seems clear to me that I will take convexity over 'analysis' or 'thinking'. I will let the bears fall in love with their IQs and then watch as they say 'wow' when its at some absurd price.
I'm more optimistic now because looking at bitcoin, it seems that whatever 'overbought' condition that existed before, has been dealt with. That thing is up huge and it still did an clean all-time high break and soared from that. ETH might do that too, if it doesn't, I will keep it as a long-term option
I'm more optimistic now because looking at bitcoin, it seems that whatever 'overbought' condition that existed before, has been dealt with. That thing is up huge and it still did an clean all-time high break and soared from that. ETH might do that too, if it doesn't, I will keep it as a long-term option
"Any comparison to past overheated markets are ridiculous," he told CNBC's Scott Wapner in a telephone interview Tuesday. "Look at where multiples and rates were in 1999. I'm not saying stocks are screaming cheap, but you're nowhere near an overheated market."
Tepper's comments come the same day as the latest Bank of America Merrill Lynch Fund Manager Survey shows belief that the market is overvalued at historic highs. The S&P 500 currently trades around 17.4 times expected earnings over the next 12 months, well ahead of the 15.4 average over the past five years and the 10-year average of 14, according to FactSet.
While the market looks expensive by that conventional measure, Tepper believes the state of the global economy supports a higher multiple.
"Because world growth will continue to be good, earnings will be better and stocks are relatively cheap to interest rates," he said.
https://www.cnbc.com/2017/08/15/dav...es-stocks-nowhere-near-overheated-market.html
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Tepper's comments come the same day as the latest Bank of America Merrill Lynch Fund Manager Survey shows belief that the market is overvalued at historic highs. The S&P 500 currently trades around 17.4 times expected earnings over the next 12 months, well ahead of the 15.4 average over the past five years and the 10-year average of 14, according to FactSet.
While the market looks expensive by that conventional measure, Tepper believes the state of the global economy supports a higher multiple.
"Because world growth will continue to be good, earnings will be better and stocks are relatively cheap to interest rates," he said.
https://www.cnbc.com/2017/08/15/dav...es-stocks-nowhere-near-overheated-market.html
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People have an aversion to forward PEs because they got this contrarian itch that makes them have a huge bias against stock analysts (they will overplay stuff like 2008 and under play all the years analysts have been right in calling the market cheap/fairly valued since 2009) . But then they rely on people like Robert Shiller to tell them when the market is expensive. I dont agree with that at all