DAMODARAN: Here Are 5 Cautionary Notes For Every Value Investor

By admin on January 30, 2013

Value investors buy stocks that they consider to be trading at less than intrinsic value. Warren Buffett is a well-known value investor.

However, it can be very unpleasant being a value investor.

Value stocks don’t always recover their perceived value in a timely manner. In fact, more often than not, prices will sink further. And the investor inevitably questions whether he made a mistake. After all, it’s always possible that the stock will never recover its value.

In a recent blog post, legendary NYU finance professor Aswath Damodaran said that he believes there is now a 90 percent chance Apple is undervalued. He described himself as a “value optimist” on the stock.

But he doesn’t expect the stock to just go straight up from here.

For those courageous value investors who are have have decided to “take the leap” on Apple, Damodaran offers five cautionary notes. These notes apply for all value investors.

“Don’t bet the house”

“No matter how confident you are in your value assessment, don’t go overboard and invest a disproportionate amount of your portfolio in Apple. This is not just about you being right on the value but also about the market coming around to your point of view, and that is not in your control or mine; betting more than 10% of your portfolio on this stock strikes me as foolhardy.”

Source: Musing on Markets

“Don’t double down (Dollar averaging)”

“I have never been a fan of dollar averaging, which not only muddies the water about when/how much you invested in a stock but results in increasing your bets as the market goes against you. Take a stand against the market but do not make this an ego trip, where admitting that you are wrong becomes impossible to do. Thus, while I feel more confident now that the stock is under valued than I was a week ago when I bought the stock for $ 500, I don’t plan to buy more shares.”

Source: Musing on Markets

“Think of buying the business, not the stock”

“The old adage that you are buying a piece of a company, not a share of stock, is particularly relevant when you make a bet like this one. My intrinsic valuation is determined by Apple’s capacity to generate profits and cash flows and is not dependent upon whether portfolio managers are investing with me or analysts are lowering their price estimates. If I buy Apple at $ 440 today and I can hold the stock, I will get a share of a cash that is paid out and a share of ownership in the cash that is withheld. I have to keep reminding myself of that truth, even if the market moves against me.”

Source: Musing on Markets

See the rest of the story at Business Insider

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