Aswath Damodaran is called the “Dean of Valuation: among the people working on Wall Street.
He is a finance professor and widely respected as one of the foremost experts on corporate valuation.
In his latest article, Country Risk: A Midyear Update For 2018, he sheds light on the various aspects one needs to consider when owning international firms.
It also shares insights on why the S&P500 is trading at higher valuations than other markets, and why this isn’t a matter of overvaluation, but a matter of quality and safety.
I share this because Dividend Growth Investors often tend to highlight that the pipeline from most of our firms is global and very diversified. We often make the claim that that’s only a positive thing. A more humble attitude might be smarter.
And maybe we should also incorporate the country’s safety when we talk about cheap or expensive too.
There Are Pros And Cons With Diversification.
We also learn that equity risk throughout the world is very different. This might cause us to use multiples such as the P/E in the wrong way.
If you don’t do intrinsic valuation, but base your investment decisions on pricing metrics (multiples and comparable firms), you may think that you have dodged a bullet, but that relief is fleeting. If equity risk varies across countries, you should also expect to see it show up in P/E ratios or EV/EBITDA multiples, with companies in riskier markets trading at lower values. This can be viewed as an argument for finding comparable firms in markets of equivalent risk, but as we saw with Coca-Cola and Royal Dutch, that can be difficult to do
Go expand your mind by reading Aswath Damodaran’s article here.