NYU finance professor Aswath Damodaran, known as the “Dean of Valuation” recently spoke to CNBC about today’s markets and the balance of traders and value investors.
Here are takeaways from Damodaran’s comments:
“Markets have always had a mix of traders—investors who care about price and people who care about value…Value investors need traders to provide liquidity, traders need value investors to provide a sense of balance.” He added, however, that “markets get into trouble when one group gets much too large,” and traders represent that group today.
Today’s market, according to Damodaran, is driven by traders, and prices have more to do with “mood and momentum” than they do with fundamentals.
A market reality that we “cannot lose sight of,” says Damodaran, is that equities are “shares of businesses and ultimately, if the numbers are not there—the earnings and the cash flows—perception alone can’t keep the price at whatever you want it to be.”
Momentum investing “works until it doesn’t,” he said, adding that momentum investors can be extremely successful if they can sense when things are shifting—but that it is exceedingly difficult to do. And if you do it incorrectly, he said, “you’re going to get slaughtered.”
More trading activity “almost always hurts you,” Damodaran warns, adding that platforms like Robinhood can prove problematic for inexperienced investors: “It’s not a good idea to encourage people to trade constantly because there is no way you can win that game.” Unfortunately, he adds, “the only way people learn is through pain, and losing money.”