An investor sits in front of an electrical board showing stock information at a brokerage house in Taiyuan, Shanxi province, on June 4, 2012.STRINGER/Reuters
New York University finance professor Aswath Damodaran has learned some sophisticated tools for valuing stocks. But as Max Nisen at Business Insider reports, fancy formulas don't top common sense.
The most dangerous sentence in finance according to Professor Damodaran, is "They Must Know Something That I Don't."
Business Insider quotes him telling an executive MBA class:
"Remember those seven words, they're the seven most deadly words in investing and valuation. They Must Know Something That I Don't. When the stock is at $640, [but] you come up with a value of $200. What's your rational side saying? Don't buy that stock, right? Then you hear this voice… they must know something that you don't.... And when you hear that voice, magical things start happening to your valuation. Your cash flows start to go up, your discount rates start to go down, your growth rates start to expand. $200 becomes $300 becomes $400. You will not stop until you get to $640."