Aswath Damodaran: When Someone Tells You The Market’s Expensive, Check Out Their Age

In this interview with Nirmal Bang, Aswath Damodaran recommends that when someone tells you the market’s expensive, you should check out their age. Here’s an excerpt from the interview:

Damodaran: The one thing though I’d caution you is when people tell you that the market is expensive check out their age. Here’s what you’re going to see. The older someone is the more expensive markets look like to them and here’s the reality, when most of these people, even market experts, tell you the market is expensive they’re not basing it on value or valuing stocks they’re basing it on what they think is a normal pricing.

Now there’s actually a lot of research in behavioral finance that suggests that what we view as normal in our lives happens between the ages of 30 and 35. So what you see between the ages of 30 and 35 gets cemented in your mind of hey that’s what’s normal.

If you’re 65 years old in the Indian market right now everything looks incredibly expensive. Why? Because 30 years ago think of what P/E ratios looked like in the Indian equity market, it’s was like 12.

When you look at paying 25 times earnings or paying for companies that don’t make money you’re saying this is crazy but maybe that’s more a reflection of your age and how disconnected you’ve become with markets than it is of markets themselves.

You can watch the entire interview here:

Nirmal Bang: Equity Valuations with Professor Aswath Damodaran