What an eye-opener! Thank you, professor. I'm on sick leave now for a couple of days and the best thing I have decided to do is keep on my lecture of "Investment Valuation". Btw, I love your sense of humour.
Hello Professor, starting at 12:30, in the chart you are showing for the implied premiums, I think the row header "Expected growth" should have been "Payout Ratio". Thank you for the video, this is the 4th year in a row that I am watching your start of the year data updates and I plan to do it for a decade more :)
Thanks for the content Prof. Damodaran. Just curious, around 3 months back, when the S&P was at 3,750 I recall (not 100% sure though) hearing a video from you saying that the market was fairly valued, which is not aligned with this video with the S&P being at ~4,000. Also, I am curious to understand why would the markets be fairly valued even at that 3,750 level? SP&500 EV/EBITDA from 2004 to 2007 averaged 11x and from 2009 to 2012 averaged 8.3x.... vis-a-vis 13.8x as of 3 months back... to me, it is still overvalued by 15-20%.. curious to hear your thoughts
Professor Damodaran, thank you so much for sharing this video with us. For Morgan Stanely (Mike Wilson) S&P 500 forecast is 3900 but EPS estiamte is $314. is this typo? should it be $214? Mahavir Patel
The analyst earnings estimates are always optimistic and there should be a correction for that built into the models to get more accurate numbers. Research has shown that analysts are always 10-55% higher on earnings than actual (and not even once lower) over the past 20 years. Hence taking a 20-30% haircut on their earnings numbers seems quite reasonable to do.
Dear Prof. Damodaran, I have been following you for a few weeks now and I cannot thank you enough. I would like to ask two questions related to this video: 1) where does your 89% expected growth in slide 9 come from? 2) could you please give me an explanation why a lower equity premium is related to overvaluation and vice versa (I try to see it as a trade-off in the expected return/risk ratio, but I am not sure about my intuition). PS: I have a physics background and am currently hesitating between a PhD in quantum technology or an MBA, I would like to know your views on this!
Let me try: Lower equity premium simply means you are assigning too little added returns for the risk you are taking in equities, compared to what is considered normal/average/correct - hence overvaluation.
@@manubhatt3 Hi Abhay, thanks for your answer! I think I got your idea and it seems to make sense now, what I still don't quite understand is the following, if we associate the hurdle rate to the cost of equity, the lower the better right? So if the equity premium is lower, there is overpricing, but there is also ease of growth. Am I missing something?
@@cdossantosr Yes, any company or existing investor would want their company to be overvalued. It is a signal for more growth and reinvestment. It is only bad for those investors/owners who join in after overvaluation. And anyways, if you are a company, you would rather grow and invest capital when cost of equity is lower rather than when it's higher, considering all other things equal. And I see the point you are trying to make which is a pretty interesting one. Yes, I do agree that overvaluation, by way of easing growth, might cancel some of it's own. Consider two companies with the same fundamentals and valuation - one becomes overvalued and one becomes undervalued over a period of time. The overvalued company by having access to easy capital and hence more growth might increase it's valuation by some bit and become less overvalued and vice-versa will happen to the undervalued company. But I am not an expert and not entirely sure about this. I wish the avatar of Lord Brihaspati on Earth - The Great Madrasi Valuation Anna help and enlighten us regarding this.
Simple way to think about is PV=CF/Risk premium. If your "risk premium" get smaller then your PV gets bigger and vice versa. Given the current environment, your risk premium should be high because there is more risk in the economy (the cost of capital has increased because of inflation). This means that if equities have a lower risk premium than the market, then they are being over valued because you're saying that such equities have a lower risk than the market. The higher PV is saying that there is more certainty that they will return the expected return. This does not make much sense in the current economic environment. You'll think there should be more uncertainty. Therefore higher risk premium or lower CF to reflect the economic environment.
@@manubhatt3 Yes, the situation you present in the second paragraph is what I was thinking about. Our exchange was fruitful anyway and I'm glad for that, I laughed a lot at how you referred to Prof. Damodaran hahaha
When you calculated the historical implied equity risk premiums did you use forward estimates at the time? (e.g. what analysts in 1974 thought the S&P would earn for the next 4 years). It seems like - almost everything else in valuation - the key point comes down to your ability to project earnings growth.
The problem with inflation is that even if your stocks only go up at the rate of inflation after a few years it looks like you have made some nice gains but you have actually gained no buying power in yet you are taxed on the gain. The result you have lost.
Recession, lower earnings, lower T bond rate, lower fair value of the S&P.... Stocks are still expensive. If earnings increase in a slow down, the fed doesn't cut and inflation remains elevated- stocks look cheap. For sure.
professor i wish i could meet you in person have coffee and hear you talk about valuations. You have changed my life for so much good. I love coming up with my own assumptions and own valuations. Thank you so much professor!!
I wonder if every one heard your real message? Take responsibility for your investment decisions. Thanks for reinforcing what has been the only thing that has ever gotten me real beneficial results over the long term.
If I invest for dividends I wont be buying companies that do not pay dividends. Using an index where 20% is non paying companies is not the way I would go.
Hello Professor, I have been your followers from a long time since 2011-12 when I was in my college i read your book on portfolio management , sir it's a very big thing for me that i am indirectly connected to you via youtube as i respect you for what you have done in field of valuation and finance. I take you as my implied teacher also sir i always wanted to speak with you if we could connect over what's app or call i would be thankful and it will be a wish come true if i hear your voice and have your contact in my phone . You're sincerely
Thank you for bringing us intelligence and order to this complex and sometimes overwhelming process. You are a rock star in Finance.
The implied equity premiums, and the SP500 valuation for the possible recession scenarios cannot be explained better, thank you professor!
What a pleasure listening all the knowledge that you share for free. Thank you teacher.
What an eye-opener! Thank you, professor. I'm on sick leave now for a couple of days and the best thing I have decided to do is keep on my lecture of "Investment Valuation". Btw, I love your sense of humour.
I've been following you for about a decade; and during that time, my admiration for you and inspiration from you has only grown. Thank You!
This has absolutely nothing to do with my day job in software engineering, but this prof has top notch content
Great analysis prof. You are an inspiration.
Thank you for the great content!
Such wonderful insights. The index close on jan 20th $3,972.61, the precision, damn !!!
Hello Professor, starting at 12:30, in the chart you are showing for the implied premiums, I think the row header "Expected growth" should have been "Payout Ratio". Thank you for the video, this is the 4th year in a row that I am watching your start of the year data updates and I plan to do it for a decade more :)
Thank you professor for continued effort! Your work is incredible!
You're the best, Prof. Damodaran.
Thank you professor!
This is excellent, I’m not yet at the level to fact check all of this by making a spreadsheet myself but a good start
Professor you are the Micheal Jordan of valuation
I just love your analysis
Great content. My views are on your 2nd last slide: mild recession but sticky inflation - index value close to 36k
Thanks for the insights prof. 👍
Thank you! This video was really great.
AA - Always Awesome! :)
Thank you for this Prof. Damodaran. On the Implied ERP, should we account for leverage or perhaps you do? Thank you again.
awesome as always...well, let's hope for some blue birds (opposite of black swans)
Thanks for the content Prof. Damodaran. Just curious, around 3 months back, when the S&P was at 3,750 I recall (not 100% sure though) hearing a video from you saying that the market was fairly valued, which is not aligned with this video with the S&P being at ~4,000. Also, I am curious to understand why would the markets be fairly valued even at that 3,750 level? SP&500 EV/EBITDA from 2004 to 2007 averaged 11x and from 2009 to 2012 averaged 8.3x.... vis-a-vis 13.8x as of 3 months back... to me, it is still overvalued by 15-20%.. curious to hear your thoughts
Professor Damodaran, thank you so much for sharing this video with us. For Morgan Stanely (Mike Wilson) S&P 500 forecast is 3900 but EPS estiamte is $314. is this typo? should it be $214? Mahavir Patel
You are right. It is actually 195. I have fixed it in the slides but the market forecast is right.
Money supply is the driving force of everything.
Cool
The analyst earnings estimates are always optimistic and there should be a correction for that built into the models to get more accurate numbers. Research has shown that analysts are always 10-55% higher on earnings than actual (and not even once lower) over the past 20 years. Hence taking a 20-30% haircut on their earnings numbers seems quite reasonable to do.
🤝
Dear Prof. Damodaran, I have been following you for a few weeks now and I cannot thank you enough. I would like to ask two questions related to this video: 1) where does your 89% expected growth in slide 9 come from? 2) could you please give me an explanation why a lower equity premium is related to overvaluation and vice versa (I try to see it as a trade-off in the expected return/risk ratio, but I am not sure about my intuition). PS: I have a physics background and am currently hesitating between a PhD in quantum technology or an MBA, I would like to know your views on this!
Let me try: Lower equity premium simply means you are assigning too little added returns for the risk you are taking in equities, compared to what is considered normal/average/correct - hence overvaluation.
@@manubhatt3 Hi Abhay, thanks for your answer! I think I got your idea and it seems to make sense now, what I still don't quite understand is the following, if we associate the hurdle rate to the cost of equity, the lower the better right? So if the equity premium is lower, there is overpricing, but there is also ease of growth. Am I missing something?
@@cdossantosr
Yes, any company or existing investor would want their company to be overvalued. It is a signal for more growth and reinvestment. It is only bad for those investors/owners who join in after overvaluation.
And anyways, if you are a company, you would rather grow and invest capital when cost of equity is lower rather than when it's higher, considering all other things equal.
And I see the point you are trying to make which is a pretty interesting one. Yes, I do agree that overvaluation, by way of easing growth, might cancel some of it's own. Consider two companies with the same fundamentals and valuation - one becomes overvalued and one becomes undervalued over a period of time. The overvalued company by having access to easy capital and hence more growth might increase it's valuation by some bit and become less overvalued and vice-versa will happen to the undervalued company.
But I am not an expert and not entirely sure about this. I wish the avatar of Lord Brihaspati on Earth - The Great Madrasi Valuation Anna help and enlighten us regarding this.
Simple way to think about is PV=CF/Risk premium. If your "risk premium" get smaller then your PV gets bigger and vice versa. Given the current environment, your risk premium should be high because there is more risk in the economy (the cost of capital has increased because of inflation). This means that if equities have a lower risk premium than the market, then they are being over valued because you're saying that such equities have a lower risk than the market. The higher PV is saying that there is more certainty that they will return the expected return. This does not make much sense in the current economic environment. You'll think there should be more uncertainty. Therefore higher risk premium or lower CF to reflect the economic environment.
@@manubhatt3 Yes, the situation you present in the second paragraph is what I was thinking about. Our exchange was fruitful anyway and I'm glad for that, I laughed a lot at how you referred to Prof. Damodaran hahaha
When you calculated the historical implied equity risk premiums did you use forward estimates at the time? (e.g. what analysts in 1974 thought the S&P would earn for the next 4 years). It seems like - almost everything else in valuation - the key point comes down to your ability to project earnings growth.
The problem with inflation is that even if your stocks only go up at the rate of inflation after a few years it looks like you have made some nice gains but you have actually gained no buying power in yet you are taxed on the gain. The result you have lost.
Recession, lower earnings, lower T bond rate, lower fair value of the S&P.... Stocks are still expensive. If earnings increase in a slow down, the fed doesn't cut and inflation remains elevated- stocks look cheap. For sure.
professor i wish i could meet you in person have coffee and hear you talk about valuations. You have changed my life for so much good. I love coming up with my own assumptions and own valuations.
Thank you so much professor!!
Does anyone know where he gets all the data he uses to compute this? Even though I trust his analysis I would like to do it by myself as well.
I wonder if every one heard your real message? Take responsibility for your investment decisions. Thanks for reinforcing what has been the only thing that has ever gotten me real beneficial results over the long term.
Sir please make a video on currency.
@aswatdamadoran sir , please make a updated video on Paytm , it’s at 550 rs per share
If I invest for dividends I wont be buying companies that do not pay dividends. Using an index where 20% is non paying companies is not the way I would go.
Sir, can you please do a reevaluation on Tesla?
regarding the SP500 estimates I don't think Mike Wilson is predicting EPS of 314...he's one of the biggest bears on wall st so I think it's a misprint
How do you know?
Hello Professor, I have been your followers from a long time since 2011-12 when I was in my college i read your book on portfolio management , sir it's a very big thing for me that i am indirectly connected to you via youtube as i respect you for what you have done in field of valuation and finance.
I take you as my implied teacher also sir i always wanted to speak with you if we could connect over what's app or call i would be thankful and it will be a wish come true if i hear your voice and have your contact in my phone .
You're sincerely