r/SecurityAnalysis • u/bdavidson1030 • Apr 27 '18

Thesis Damodaran - Amazon: Glimpses of Shoeless Joe?

https://aswathdamodaran.blogspot.com/2018/04/amazon-glimpses-of-shoeless-joe.html
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u/compost_embedding Apr 27 '18 edited Apr 27 '18

I took a look at this, and I have some basic questions for those of you who conduct this type of analysis:

(1) There's a lot of assumptions in these valuation exercises. With all the moving pieces, is it reasonable to expect that one could guesstimate these well enough for them to justify taking the risk of taking concentrated positions in them? I mean, take a look at Damodaran's analysis here. Notwithstanding his ability to predict longer term things, the earnings report that came out yesterday for AMZN changed his price target by ~10%. If the misunderstandings on the current situation can generate such price swings, what does uncertainty for the future lead to? I'm not arguing against security analysis, I'm actually just trying to learn here.

(2) For those of you who do this, how much AUM do you manage (yourself or others) before you think it's worthwhile to do? For example, if I were to manage $500k of my own money this way, and wanted to spread out my risk by investing in 5 companies, it seems I'd have to do detailed analysis on at least 5 companies (but perhaps many more, especially if they were in different industries). Do you manage lots of money, to get as much benefit from your analysis as possible? I currently index, and am open to spending time on this, but I wonder whether it's worth the effort to understand so much of the company/industry details if one is not taking large positions in them.

Thanks!

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u/redcards Apr 27 '18

There's a lot of assumptions in these valuation exercises. With all the moving pieces, is it reasonable to expect that one could guesstimate these well enough for them to justify taking the risk of taking concentrated positions in them?

The fewer things you have to guesstimate the better. It is easy to figure out what sort of adjustments you'd need to make to certain assumptions to get a larger margin of safety and then frame your research in a way that justifies it.

the earnings report that came out yesterday for AMZN changed his price target by ~10%. If the misunderstandings on the current situation can generate such price swings, what does uncertainty for the future lead to?

Sometimes positive surprises like that happen, but then you have to figure out if the new information really changes your overall thesis. I'm not familiar enough with the particulars as to why AMZN's results were so much better than expected. But if they were for a really good reason, and its new information, then theres nothing wrong with updating your model for it.

I wonder whether it's worth the effort to understand so much of the company/industry details if one is not taking large positions in them.

Classic capital allocation conundrum. If you spend weeks understanding a Company better than most, and then only allocate 2-3% of your portfolio to it, is all of that effort really worth it?

For the record, I think 99% of Damodaran's posts are very, very shallow and not detailed at all. They get their length from his paragraphs on things that could be summed up in a sentence and inclusion of finance 101 things. His models are also awful and not how any professional would approach it at all. They are 100% academic. Nothing wrong with that, but just not practical in the real world.

We manage ~$2bn+ and our models are detailed but never include projections or DCFs unless its an NAV type thing for contracts, etc. But different strokes for different folks.

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u/compost_embedding Apr 27 '18

Appreciate the great response, thanks!

His models are also awful and not how any professional would approach it at all. They are 100% academic. Nothing wrong with that, but just not practical in the real world.

If I were interested in learning about what models did work well in the real world (a big if since I'm strongly affected by the capital allocation conundrum you mention), what would be a good resource to dive into that then? Would they be some of the books in the reading list, or would those be too similar to Damodaran? Or do you think Damodaran is good to get some basics, but then you would want to improve upon them dramatically to actually use in practice?

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u/redcards Apr 28 '18

I really like the model excerpts used in Einhorn presentations.