Valuation expert warns dip buyers
NYU finance professor Aswath Damodaran, one of the best-known academics on the art of asset valuation, had an interesting post over the weekend warning on the dangers of knee-jerk dip-buying. He also said that he’s locked and loaded limit orders on stocks like Palantir, BYD, and Mercado Libre should a market crash push arguably insane valuations of these promising companies toward sensible levels. He wrote:
“The biggest danger in knee-jerk contrarian investing at the market level is that buying the dip in the market is akin to catching a falling knife, since that initial market drop can be a prelude to a much larger sell off, and to the extent that there was an economic or fundamental reason for the sell off (a banking crisis, a severe recession), there may be no near term bounceback. With individual stocks, that danger gets multiplied, with investors buying stocks that are being sold off to for legitimate reasons (a broken business model, dysfunctional management, financial distress) and waiting for a market correction that never comes.”
All that said, sell-offs can present clear opportunities for buyers who get shares at sensible prices, which is why Damodaran has set up limit orders to snap up shares of some companies he’s had his eye on for a while but hasn’t bought because of high valuations. He continued:
“The limit buy kicked in on BYD on April 7, when it briefly dipped below $80, my limit price, and while Palantir and Mercado Libre have a way to go before they hit my price limits, the crisis is young and the order is good until canceled!”
“The biggest danger in knee-jerk contrarian investing at the market level is that buying the dip in the market is akin to catching a falling knife, since that initial market drop can be a prelude to a much larger sell off, and to the extent that there was an economic or fundamental reason for the sell off (a banking crisis, a severe recession), there may be no near term bounceback. With individual stocks, that danger gets multiplied, with investors buying stocks that are being sold off to for legitimate reasons (a broken business model, dysfunctional management, financial distress) and waiting for a market correction that never comes.”
All that said, sell-offs can present clear opportunities for buyers who get shares at sensible prices, which is why Damodaran has set up limit orders to snap up shares of some companies he’s had his eye on for a while but hasn’t bought because of high valuations. He continued:
“The limit buy kicked in on BYD on April 7, when it briefly dipped below $80, my limit price, and while Palantir and Mercado Libre have a way to go before they hit my price limits, the crisis is young and the order is good until canceled!”
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