In 2019, I completed the graduate course in Advanced Valuation at the New York University Stern School of Business under world leading valuation expert Aswath Damodoran.
Damodoran is brilliant. His course should be mandatory for anyone who claims to be a Chartered Business Valuator or a Chartered Financial Analyst. Valuation is a key factor in assessing “performance” of any investment, in public markets or otherwise.
There is a debate about what “value” means. In Canadian Court proceedings, “value” is often defined to be an amount, expressed in money, that a willing buyer would pay a willing seller for a given item in an arms length transaction in an unrestricted market”. In corporate finance, “value” is frequently defined to the the present value of future cash flows discounted to the present at a required rate of return. In real estate, “value” is most often defined as the relative price of a real property compared to similar properties in the same locale. In fine art, “value” is what someone paid for a painting at an auction.
What should be obvious is that “value” is subjective much of the time. But in securities markets, value is a simple concept - it is what you get in cash for holding an investment for a period of time, either in the form of dividends or other distributions or from the ultimate sale of the holding, all discounted to the present at a rate of return equal to the rate of return on market averages.
Why the “market averages”? Valuation is not absolute, it is relative and the market average rate of return is the best comparison. The conundrum is that what investors get from their ownership of interests in a corporation is typically less than what the corporation earns on the money it has invested on behalf of those owners, and over long periods of time has always been less.
The average return on stocks over the past century has been about 10% using the S&P average as a proxy for the market. The average return on equity of the industrials making up the S&P 500 has been somewhat higher, averaging 13.7% for the 1993-2019 period according to Yardeni Research, during which period the S&P index returned 9.87%. The Nobel Prize winning work of the laureates I listed in Chapter 1 never addressed why corporations produce higher returns than their investors receive. I will in Chapter 3 and the corollary, begin to explain how relatively easy it is for an investor to “outperform” the market averages. But first I will digress into a discussion of why the owners of public corporations earn less on their investment that the public corporations earn on the amounts invested. It is that difference that is the foundation for a different approach to investment theory.
The next few chapters will explore that difference, trace its origins to the errors in modern portfolio theory and in ill-conceived government policies regarding securities markets, pensions, taxation and securities regulation.
Mr. Blair, how do you do it to keep such a briliant and sharp mind at the age of 80? I can't keep with your pace being several decades younger. Hats off.