Faith and Feedback in Investing

NYU Professor Aswath Damodaran is a well known expert in valuation, but he is also an investor in many of the companies he values.  His investment style is to look for companies in the market that are currently trading at a discount to what his valuation analysis shows is its intrinsic value.

He is kind enough to post these valuations and importantly the narrative and assumptions used in valuing the subjects in detailed posts and videos on his blog.  He is the ultimate teacher, who loves to instruct and puts all of his intellectual property online for free for anyone who wants learn.

In his recent post on his valuation and investment in Valeant Pharmaceuticals, he highlights an important and much overlooked part of investing.

Faith and Feedback

In both my valuation and investments classes, I spend a significant amount of time talking about faith and feedback and how they affect investing.

Faith: As an investor, you are acting on faith when you invest, faith in your assessment of value and faith that the market price will move towards that value. If you have no faith in your value, you will find yourself constantly revisiting your valuation, if the market moves in the wrong direction (the one that you did not predict) and tweaking your numbers until your value converges on the price. If you have no faith in markets, you will not have the stomach to stay with your position if the market moves against you.

Feedback: As an investor, you have to be open to feedback, i.e., accept that your story (and valuation) are wrong and that market movements in the wrong direction are a signal that you should be revisiting your valuation.

Source: Musings on Markets

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