‘Luck’s everything in investing’

Aswath Damodaran, who teaches corporate finance and valuation at the Stern School of Business, New York University, demystifies equity investing in an interaction with Vivek Kaul. Edited excerpts:

Are equities indeed for the long term?
The longer your time horizon, the more you can invest in risky assets, and equity is a risky asset class. Will equity always win in the long term? Not necessary. Say if you invested in the Nikkei in 1989, you are not going to get back your money in this lifetime or the next one because the Nikkei is not going to go back to 40000. So if I have a long-term horizon, I’m going to put more of my money in equity, but I’m going to set aside some in a safe investment because you’re going to need that money for something or the other.

How long is the long term?
Say 20-30 years. If you are 25 years old and say can I invest in equity for my retirement, of course you can. So we are not talking about two or three years, we’re talking about decades rather than years. But if you are 61 and say I plan to retire at 65, and say can I invest in equity, I’m going to say be careful because in a four-year period, historically, the market has gone under 50% and can you afford to lose 50% of your pension fund savings?

I met one of India’s foremost fund managers sometime back and he told me that equity is a short-term investment and anybody who tells you otherwise is lying...
Depends. If you are investing to get rich, then you have to pick equity as a short-term investment. But if you are looking to protect the wealth you have accumulated, whether you are a doctor or a lawyer or an engineer, then it’s not a short-term investment. I put money with a portfolio manager because I think he can deliver 50% return in two years. So for him it is a short-term investment because his client’s a short-term player and if he can’t make money in the short term, he’s not going to have a job in future. But what’s good for him needn’t be good for me...

What has been your best investment till date?
Apple. I bought it at $5 and sold it at $600, and I got lucky both when I bought it and when I sold it. Most of the time, it has nothing to do with great research, it’s being at the right place at the right time... if you are not lucky, you can do everything right and have nothing to show for it.

Do you invest in Indian stocks?
Not so much. My biggest investments are actually American.

Which is your best Indian investment?
I don’t even remember.. I never had a big one.

What’s the worst investment you ever made?
Xerox... The lesson I got from that was that some of the most valuable brands of the world, at some point of time, disappear. Since then, I’ve always held back from buying big name companies.

What’s better – time in the market or timing the market?
I won’t try timing the market. It’s an impossible game... a bad idea, because you could get whipsawed. Pick your investment, find a good company to invest in... but market timing’s always been one of the most difficult activities.

So why do people do it?
It’s so lucrative, right? If you can time the market, who cares? If you get whipsawed, you’re going to get rich, right?

You have been in academics and research for a long time. Hasn’t any hedge fund ever approached you with a job?
Absolutely, but I haven’t had the time or the inclination to do it. I’m completely comfortable taking great decisions with my own money, so that if I make a mistake, I know it’s my money that’s lost... I don’t think I could do that with other people’s money.

In the stock market, there’s hardly any sell recommendation, they’re almost all buys...
I don’t blame the brokerages. They’re going to stay in the industry and they need to maintain good relations.

How strong is the link between economic growth and stock markets?
It’s getting weaker and weaker every year.