https://elmfunds.com/aswath-damodaran-interview/ One of the better interviews, I have read. Victor Haghani: Going back 30 years to when you were starting out as a professor, do you feel that there has been a change in the makeup of market participants? I mean, have we seen a change towards people being much better trained in thinking about value? Do you feel like it’s tougher to beat the market today than it was 30 or 40 years ago? Aswath Damodaran: Well, let’s start with the easy one: it is definitely more difficult to create a competitive advantage in this market, simply because areas of competitive advantage are slipping away. I’ll give you a simple example: thirty-five years ago, if you were an investor, you had an advantage just being in New York City over being in Des Moines, Iowa. Why? Because the SEC offices were here, and if you wanted to look up a filing by a company, you could physically go to the SEC offices and check out that filing. You had a competitive advantage based on location. And if you worked at a major investment bank, you had access to a computer. Most people in the world did not – so if you had access to computing power and you had access to data, it gave you a leg up. ... VH: A lot of people are worried about the rise of indexing. Do you think that indexing has gone so far as to make markets less efficient? Robert Shiller has said that indexing is un-American, that we’re losing the ability to value and to price assets. Others have compared indexing to Marxism, arguing that indexing is worse. What do you think? AD: Well, let’s start out by noting that many of these people who critique indexing have a very selfish reason for doing so – it’s taking away their living. And that’s for a very good reason, which is they’ve not been very good at what they do for a living and indexing has exposed that. .. They take an adjusted EBITDA, they slap a pricing multiple on it, they call it research. That’s not digging up anything about a company, so nothing is lost by those equity research analysts being pushed out of the business. .. And let’s face it, most active investing is built on mean-reversion. It’s very lazy investing, there is no research that goes in. You just buy stocks with low PE ratios and high growth. Again, we have this vision of analysts as being people who dig for the truth – and that is still there. In fact, I would argue the payoff to doing research is probably greater with indexing than without it. .. That said, there is a potentially dark side to indexing. It has made momentum much stronger, because the nature of indexing is you pile on to whatever’s going up. .. VH: Gene Fama has said that momentum is the “premier anomaly.” Do you agree with him, and why do you think momentum has historically worked so well across so many asset classes, both cross-sectionally and in time series? AD: Because it reflects the reality of pricing, in that the biggest factor in pricing is what other people are doing. Investing has always been a momentum game, at least on the pricing side, and it’s about momentum and momentum shifts. Pretty much all of trading can be summarized into those two groups: you can either be a momentum player or a player who detects shifts in momentum and tries to go against momentum just before it changes. So, all of trading is built around momentum or anti-momentum. When Gene calls it an anomaly, what he means is we cannot explain it using fundamentals. It’s an anomaly – .. VH: Right. So is that to say that there’s not a good risk argument behind it? AD: No, there’s not a risk argument – but that raises a broader question of how the pricing process can be very different than the value process. The pricing process is all about mood and momentum. On any given day, it is the biggest explanatory variable for why price is moving. It’s not that cash flows change, or growth rates change, or the price of risk changes – it’s just momentum shifts. VH: It does feel like if you were going to base a trading strategy on any one thing… AD: It’s got to be momentum. In fact, you cannot devise a trading strategy which ignores momentum. It’s impossible. You can create an investing strategy that’s momentum-free – but that basically means you value something and then you sit there and pray and hope that, eventually, momentum fixes the gap for you. Even those people who believe they’re value players are far more dependent on momentum than they realize, because ultimately, for them to make money, the price has to move to its value. And that may require a momentum shift, which is what we call the catalyst, something that changes the momentum of the game. VH: Do you think there’s a distinction between momentum – which has a clear definition and has been found to be very helpful in investing – versus return chasing, which has a really bad name and is often put forward as the reason that investor returns are so much lower than fund returns. VH: Do you think there’s a distinction between momentum – which has a clear definition and has been found to be very helpful in investing – versus return chasing, which has a really bad name and is often put forward as the reason that investor returns are so much lower than fund returns. Return chasers are more delusional. They’re delusional because, while they’re playing the momentum game, they keep telling everybody that they’re not playing the momentum game, that they’re really investors. So what they do is they chase returns and they dress it up as a value strategy, that they’re doing it because of X, Y and Z, because these companies are going to be the forefront of future growth, etc. If you’re going to chase momentum, just chase it. Be open about it. If you’re going to chase momentum, you’ve got to get the timing right, and the problem with return chasers is they don’t realize that. .. Much more at the link
His comments on factor investing is very interesting. I didn't know factor investing and smart beta are the same. Do you have any comments on smart beta? Are they similar to levered investing, volatility pumping, which you mention in a couple of posts before?
That was an amazing interview. Really enjoyed reading thoughts of Mr. Damodar. I like what he is saying here - If you’re going to chase momentum, just chase it. Be open about it. If you’re going to chase momentum, you’ve got to get the timing right, and the problem with return chasers is they don’t realize that.