← The Master Investor Podcast with Wilfred Frost
The Master Investor Podcast with Wilfred Frost
Aswath Damodaran: I Am More Cautious Than Ever
00:54:02
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- [00:00]
A
Institutional trust has been cracking since 2008. We no longer trust institutions, whether they be central banks, governments, any institution the way we used to. And that's not a good place for financial markets to be when you lose trust in the institutions that are supposed to keep your currency afloat. I think we're at a juncture here because an economic world order that was built after the Second World War is basically coming apart. We have nothing to replace it with yet. So there is this big risk hanging out there, and the market seems to be pretty blase about it. So from that perspective, I do think the market is too richly priced. I probably have more cash as a person of my portfolio now than I've had perhaps at any time in history.
- [00:47]
B
So that gauges that you are. While you invest in companies, you're as cautious as you've been for your entire career.
- [00:54]
A
Yeah.
- [00:56]
B
Wow.
- [00:56]
A
Because. And here's the reason. I think one of the things in investing we need is perspective. I look at my portfolio today, I look at it five years ago, 10 years ago, and I have to remind myself not to get greedy. There's a lot of profits built into my portfolio now that maybe it's a time to harvest, as opposed to sowing more crops that there's a time to harvest. And to me, this is a harvesting time. I think if you look back at human history, some of the greatest discoveries came from people having idle minds trying to make connections. What makes humans different from machines and in many ways better than machines is its capacity to connect disconnected things and come up with something whole. And I think we're not giving ourselves enough room to have idle minds. So I think that I would encourage people to leave their smartphones at home and not listen to a podcast on their next walk. Right after they listen to this one, of course, and let their minds wander. Because I think we can, you know, we need to give ourselves the time and the space to think for ourselves.
- [02:14]
B
Welcome to the Master Investor Podcast with me, Wilfred Frost, where we celebrate and learn from the success of the greatest investors, business leaders and politicians in the world, giving you, our listeners, the edge. The Master Investor Podcast is sponsored by BNY Investments, Elseg and Interactive Brokers. Please do remember the views expressed in this podcast are for general information purposes only. Nothing in the podcast constitutes a financial promotion, investment advice, or a personal recommendation. More on that in the show notes. My guest today is Aswath Damodaram, the Kirchner family Chair in Finance Education and the professor of Finance at Stern School of Business at nyu. He is one of the world's greatest experts in corporate finance and stock market valuation and always brilliantly marries the textbook valuation theories to the real world market dynamics. It is great to see you, Aswa. Thank you so much for joining us and welcome to the Master Investor Podcast.
- [03:18]
A
Thank you for having me. I'm not a master or an investor, but I'm glad to be on.
- [03:23]
B
Well, we have all sorts on the podcast, so you're definitely more than qualified, I assure you that. And you know, I thought, you know, to kick things off a bit of your kind of background thesis before we get to the real world. And I was really struck by something I heard you say recently, that the most important point when you come to buy something to you is not the outlook for the company, the management, the growth outlook, the products they're developing, the innovation. It is quite simply the price.
- [03:57]
A
I've long argued that at the right price I will buy any company. And at the wrong price, I don't care how great a company is. Investing is about getting things at the right price. And I think we sometimes forget this because we're so caught up in discussing what makes for a great company and an amazing management that we never stop and ask the question, what am I paying for that?
- [04:17]
B
And in terms of the key ways you assess price, I think it's right to say you're a value investor in the sort of purest sense and that comes back to sort of discounted cash flow valuations. I want to get into all of the factors in that and I know you like assessing individual companies, but I guess key to that is the risk free rate. What do you use for the risk free rate?
- [04:43]
A
Now let's back up here. I mean, as long as investors have been around, one of the things that you always want to ask before you start to invest is what can I make on an investment that's absolutely safe? I mean, we can dress it up, we can call it a risk free rate. It used to be what you'd make on a bank deposit 50 years ago. But over the last few decades, we've used government bond rates as our estimates of risk free rates. And that process is getting messier because governments themselves default. So risk free rate is just the base from which you build, build off. So rather than make it a theoretical construct, think of it as, this is what I would make if I made an absolutely safe investment, or as close to that as I can get. What do I need over and above that for investing in something risky?
- [05:29]
B
And I guess that probably would for many people still come back to their country's 10 year bond yield, but I guess slightly each to their own. The reason I bring it up though is I've heard you say that when it comes to individual company selection, you like to avoid those that have significant government risk attached to them. But I guess one of the key inputs into how you'd value the companies you do like to assess does carry that government nation state risk factor. If we are looking at those bond yields.
- [06:03]
A
I mean, let's face it, currencies are built on trust. If you don't trust a government issuing occurrence, it's just a piece of paper. And I think that all financial assets are built on trust. Earlier this year one of the posts I wrote was about trust, how that trust is cracking. And as the trust cracks, it's not just stocks or bonds that are at risk. Any financial asset is at risk because you're basically trusting the currency to not debase. So trust is always at the heart of currencies. And whether you like it or not, if you buy a financial asset, you're at least putting a collective trust in the long term capacity of a government to keep your currency's buying power intact.
- [06:44]
B
And what is your current assessment or your current level of trust in the US currency? The US bond yield?
- [06:53]
A
It's not. The US institutional trust has been cracking since 2008. We no longer trust institutions, whether they be central banks, governments, any institution, the way we used to. And that's not a good place for financial markets to be when you lose trust in the institutions that are supposed to keep your currency afloat. I think we're at a juncture here because an economic world order that was built after the Second World War is basically coming apart. We have nothing to replace it with yet. That economic order was built around the US being the center of the global economy and the US Dollar standing in for what used to be the gold as the base for all curr. So I think that we're at a point where there's going to be a transition. I think there will be a different economic order going forward, but that transition is not going to be as painless and as easy as some people make it out to be.
- [07:50]
B
And as we kind of weigh up how distrustful you might be and whether that's rising or falling in the very short term, the Supreme Court decision late last week on Friday to overrule some of Trump's tariffs and the immediate reaction to try and impose them in a different way, is that the sort of factor that makes you suddenly more concerned about all of this in many ways
- [08:16]
A
that actually restores some trust because there's some check and balance here that you can't do whatever you want. So the Supreme Court decision in many ways is a good thing for the trust issue, not a bad thing because it effectively says that there is some restraint, you can't do whatever you want. But I think that Trump might be the easy person to blame you for the loss of trust. But I think the loss of trust goes well, well beyond him. It reaches back, as I said, to 2008 and what's happened since. And I think we need to kind of look at institutions and what's causing us to lose trust in them. Because unless we fix that, that's going to constantly eat away at financial markets.
- [09:02]
B
What is the core reason for losing the trust then, in your eyes?
- [09:06]
A
I think part of it is that, I mean, I remember the 1980s and the 1990s. The divide between developed and emerging markets was a very clear one. In developed markets, central banks were mostly independent. Governments did not act in a cavalier way. There was some rhyme or reason for what they did. And there was a sense that developed markets and economic discipline because they cared about the long term, emerging markets were more driven by short term considerations. And I think that divide is no longer clear. We have shades of gray over in any given day, developed markets behave like emerging markets used to and some emerging markets behave like developed markets used to. So I think that this is a seepage of trust coming from the fact that governments are doing things that you wouldn't have expected them to do 30 or 40 or 50 years ago in what we call developed markets. And I think that is at the heart of much of what we see out there is there's no sense of norms holding back governments. You don't do that because that's not usually done. So I think whether it's the COVID bailouts that you saw with tens of billions of dollars, trillions of dollars was sent out. I mean, that is something that cuts at the heart of is this the way a government is supposed to behave? And how do you restore discipline when you lo core sense of norms and staying with the norms?
- [10:40]
B
This episode is sponsored by Interactive Brokers. Building wealth starts with the right broker and Interactive Brokers helps you reach your goals with powerful tools, global market access, low costs and unmatched financial strength. That's why the best informed investors choose IBKR. Learn more at ibkr.com masterinvestor. When you're trying to assess what stocks to have in your portfolio, what discount rate do you use?
- [11:16]
A
I think in many ways it's not up to me to pick a discount rate. When you enter financial markets, you're essentially a price taker when it comes to what you can earn on stocks. Now, one of the things I do on my webpage at the start of every month is I compute an implied expected return for the s and P500. Sounds fancy, but here's what I do. I take the level of the index, I take expected cash flows from holding stocks in the index, from dividends and buybacks, and I just solve for what rate of return is implied by the price I'm paying. So collectively, at the start of this month, for instance, start of February, that number was 8.4%. You're saying, what does that tell me? Collectively, US stocks are price to earn about 8.4%. Now, as an individual investor, I can say, I don't like that, that's too low. But if I do that, I'm making an asset allocation decision. I'm deciding not to be invested in equities. So once you decide you're going to be in equity, you can't just pick a number out of the out of your head and say, I want 15% returns because that's not yours to set. You can basically be a price taker when it comes to returns and then make your own judgments on cash flows and revenue growth and margins in valuing individual companies.
- [12:30]
B
You said something absolutely key in the middle of that. When we think of the cash flow part of this that one might want to discount, which is you've got to think about buybacks as much as dividends these days, which isn't a cash flow back into your pocket in the purest sense. But do you think that it is equally valuable as a dividend and should we all be weighting it in the same way?
- [12:55]
A
Absolutely. And when you say it's not a cash flow into your pocket, it depends on whether you sell your shares back in a buyback or hold on, it's a choice you make. So if you look at, I mean, the experiment I ask people to run is let's assume you are the only owner of all stocks in the market. That's basically what we're doing when we do an implied equity risk premium. Well, guess what? Dividends and buybacks both go into your pocket because they're both cash flows to you as equity investors. Now, I'm just writing my eighth data update post posts for 2026, and it's about dividends and buybacks. And I've always described buybacks as flexible dividends. I'll be quite honest with you, I've never understood the place that dividends have in equity. Equity is supposed to be a residual cash flow. You get whatever's left over. And you look at conventional dividends, the exact opposite of residual cash flows. They're fixed, they're sticky. You get stuck with them once you start paying them. I think it goes back to the history of equity markets, starting after bond markets. And the way you got people to get into equ markets is you sold them something that looked like a bond. So you had to package stocks look like bonds. How do you do that? You replace coupons with dividends and you made them relatively sticky. And you say buy stocks, they're just like bonds. I think we need to let go. I think if there's one of these two things is going to disappear, I'd rather it be dividends and buybacks because I see companies kind of painting themselves into a corner trying to sustain dividends that they cannot. And in the 21st century, across the world, US of course, is leading. You're seeing a shift away from conventional dividends to these flexible dividends, which is what buybacks are.
- [14:36]
B
Yeah, it's interesting. I always, because I used to work on an income fund in my start of my career when I was in finance, I always thought the key thing you want to hear from management was a commitment to a certain payout ratio which reduces that rigidity of old school big lumpy dividends, but needs the investors to be aware that they might vary. So I completely hear your point. I guess my final question on this though is whether we'll look back on this very moment in time. We'll come to your views on current valuations in a moment and wonder whether buybacks were suddenly authorized and deployed at what turns out to be very high valuations, very high stock prices. But I guess the way you think about it is the management shouldn't be thinking about that either. It's a return of excess cash flow.
- [15:26]
A
Two things. One is buybacks have been building up for the last 40 years. This is. So you've had buybacks and bad times, buyback in good times. I will concede to you that there are companies that often buy their shares back at too high a price and people complain about it. When that happens, you have a wealth transfer. I mean, let's face it, dividends and buybacks cannot create value. They cannot destroy value transfer wealth. In what sense? If I buy back shares at too higher price, what I'm doing is transferring wealth from my loyal shareholders, people who stay on as shareholders, to the people who sell back. Which strikes me as not a good thing to do if you're a manager from a corporate governance standpoint, because the people are left behind are the people you're basically taking to the cleaners. If you buy back shares at too low a price, the wealth transfer happens in the opposite direction. So I concede to you that buybacks can sometimes create wealth transfers, but they don't take wealth out of the market. They just move wealth from one group of investors to another. Which is one reason we have buybacks. The money doesn't leave the market. There is. Last year there were $1.15 trillion in buybacks at U.S. companies. 1.415 trillion. And people act as if this just disappears into a black hole. That 1.15 trillion left the companies that bought back shares and went to other companies in the market. Almost none of it leaves the market. So I asked people to run again, another experiment. Think of one market where buybacks are banned and in other markets where buybacks are freely allowed. If you take the market where buybacks are banned, here's what you're doing. You're letting traditional, conventional, status quo companies hold on to cash even though they're in bad business and reinvest back in bad businesses. But you have no new businesses coming up because capital is not there. Whereas in the second market you can have companies and new businesses play out. I mean, if you look at what's happened to Europe and US as equity markets over the last 30 years and as economies over the last 30 years, Europe has shrunk as a percentage of GDP and as a percentage of global market cap pretty substantially. That shrinkage has gone to China and India. In terms of growth markets, the US has actually increased its market share over the last 30 years. Kind of astonishing if you think about a mature economy able to increase its market share. But I think a big reason for that is the flexibility for US Companies to return cash more easily than it is in the rest of the world. So while people have issues with buybacks, and I do agree that some companies that shouldn't be doing buybacks do buybacks, just like some companies that shouldn't pay dividends pay dividends. But collectively, I think buybacks have done more good than bad for the US Economy and US Markets.
- [18:08]
B
Well, I think we just got a great preview of your upcoming post, so thank you for sharing it ahead of time with us there. Foreign. This episode of the Master Investor Podcast is brought to you by lseg, the leading global financial markets infrastructure data and analytics provider. To learn more about how ELSEG connects businesses, investors and markets worldwide, visit elseg.com. Hi guys, it's Wilf. I hope you're enjoying this episode. Just a quick reminder to please hit, follow or subscribe on your podcast or video app so that you never miss an episode. And if you've got time, please do give us a five star rating and leave us a comment. It really helps other people find the podcast too. Now back to the episode. I want to get onto sort of current market dynamics and I've shifted up the agenda the topic of private credit. Given the moves in the market of the last couple of days, is that something that alters your perspective of how much risk you want to take? When you start to see a glimpse of a possible unwinding of a big risk in the market, do you compare it to pre 2008 or is that madness?
- [19:33]
A
Well, luckily for us, private credit is not banking. So in many ways when banks go down, the ripple effects are much more dramatic because depositors were unintentionally part of a game they didn't want to play. Private credit. The people playing that game, endowment funds, institutions, et cetera, for the most part, are going to be the immediate are going to see the immediate hits, but they're going to drag in some institutional pain. So it's not of the magnitude that the banking Crisis was of 2008. But here's my point, my problem, and I've always had this with private credit. Even during the glory days. When I look at the US market and I list the top 10 problems that companies have, not being able to borrow money when you should be able to borrow money doesn't make that list. This is not a market where people have had trouble borrowing money that the capacity to borrow money. So I've always wondered what does private credit bring to the game that wasn't there before they became as big as they are? They've always been around. But the question is, how do you become a multi trillion dollar business? What is the need you're filling? And I'm still unable to get an answer from private credit and what the niche is that they're filling. I mean, they give me three I've heard three responses. One is that they're somehow better at assessing default risk than banks and corporate bond markets are because they have access to advanced and new types of information that traditional institute. I am skeptical if you're reading Twitter posts to decide whether you're Going to lend money to a company or you're using some kind of diffuse information. I'm not sure you have that much of an advantage over anybody else. The second rationale I've heard is that they can lend based on cash flows as opposed to physical assets. Now, I agree that bankers are much too attached to lending based on physical assets. I mean, let's face it, real estate, that's what drives the borrowing is the banker can drive around a building, say, I can see what I'm lending on. They're much more reluctant to lend on intangibles that might produce cash flows that might give you an opening. But the corporate bond market also lends based on cash flow is not an asset. So I don't see the advantage there. The third rationale is, the one I hear most often is they can respond much more quickly to a borrower's needs, so they can okay a loan in two weeks rather than two months, and they can provide flexibility and adaptability on loan terms. I can see that's a point, but that's a rationale for a couple of hundred billion dollars of private credit, not trillions of private credit. My concern with private credit is when you get this big this fast, there's a lot of sloppy loan approval going on. You're lending money to people far too quickly and on terms that no prudent lender should accept. That's a recipe for eventually blowing up. And I think that's something we've kind of allowed to get big because the selling of private credit as an alternative investing class took over Good sense. So I think a cleanup is coming for private credit. I don't think it is potentially catastrophic. It the cleanup is going to create pain, but it's not the kind of pain you saw in 2008 when banks suffered significant hits to their balance sheets.
- [23:00]
B
That's really interesting. If it's inevitable there will be some kind of cleanup, do you think we're starting to see the start of that in the last couple of days?
- [23:09]
A
I think we've seen it for the last few months, actually. It's not just the last couple of days you've seen. The market's pretty much where it was in September of 2020. We haven't done much overall in the markets for the six months we've been treading water, which is actually amazing given the fact that the MAG7, which have led the market so much, have kind of gone into the background. I've actually been impressed with how well the market has handled the loss of those seven companies, the trillions of dollars of market cap that we're bringing in. But you're starting to see skepticism. I call this the bar mitzvah moment. When you have big disruptions, there's a point in time where markets stop buying into the buzzwords. The buzzword was dot com in the 90s, PC in the early 80s. They say, show me the money, show me that you can make. And I think you're starting to see people say, okay, you're spending 150 billion in capex. What are your earnings going to be? What's the business model? And I think that's starting to show up increasingly across both equity and bond markets. And that's again, part of that adjustment of buzzwords to reality, of saying, maybe we oversold this and we've got to adjust numbers back to reality.
- [24:22]
B
And the buzzword today, obviously, is AI. Let's talk about that. And firstly, which I think you're alluding to already, the companies actually building AI. And then maybe we'll come to those that will use it in a moment, the ones that are building it, you're implying the market is now, and I think you are questioning whether they'll ever get a positive return on their investment.
- [24:44]
A
The analogy I would offer is if you look at AI architecture, which includes chips, the data centers, the power, all of that, we're building an insanely huge factory. So if you want to use manufacturing, we're building an incredibly huge factory. And then I come and ask you, what do you plan to make at this factory? And you say, well, we haven't decided yet. We're going to put the machines in and we're going to build the factory. And trust us, there is this huge market for whatever we decide to make in the future. That's where we are in the AI space. And my concern is that at some point in time, I need some basis for why I've allowed you to take my money as a shareholder and build these factories. It doesn't give me a whole lot of confidence. When Sam Altman was asked about the hundreds of billions of dollars that OpenAI is being priced at, when he was asked, what exactly is your business model? What's your storyline? How do you justify it? And he said, if you don't like the pricing, don't buy the shares. There are other people ready. That's not the answer I want to hear when I have hundreds, perhaps even trillions of dollars going into AI architecture. I think we've run a little ahead of the buzzword here. I think we need to see far more evidence of AI products and services that we delivered from this factory before we start attaching value to the factory.
- [26:11]
B
What I think so interesting aswath is that clearly more in the marketplace are coming around to the idea that those building AI may be making unprofitable investments at these levels. But most people then conclude that the companies that are going to deploy AI will see huge productivity gains and cost cuts, et cetera. You have a slightly different view that in fact we'll see profit compression from companies when they deploy AI.
- [26:41]
A
I've seen this movie before. I've seen it with PCs. I saw it with.com, that technology would somehow bring. Let's take brick and mortar retail firms in the late 90s. They were sold on the notion that online retailing was an incredibly easy way for them to increase their margins because they could offer online retail, not have the free physical infrastructure, be able to sell their excess inventory and make higher profits. That didn't work out well for them because eventually what happened was everybody adopted online retail. It brought down the cost structures for every company. But then they started pricing against each other and competition drove down prices, and the end result is margins. If you look at retail firms collectively, online and brick and mortar have decreased over the last 30 years because of online retail. If everybody has it, nobody has it. This is just pure econ 101. So unless you can show me a place for customized AI products where you have exclusivity, you're doing something, I'm not going to give you higher profits as an airline, as a grocery store, because you founded it. I'll tell you the place where I hear the most delusional thinking about how AI is going to bail them out. It's active investing. Active investing is a horrifically run business. It's the only business I can think of where collectively you actually do worse than doing nothing at all. I mean, analogy I would offer. It's like starting a plumbing business called Floods R Us. And here's what you do. Every time I have a leak in my house, you come in and leave a flood and you start to demand to get paid. Active investing has always been bad, and over the last 15 years, it's lost market share to index funds and ETFs and passive investors. But every year active investing wakes up again saying, this is going to save us. And right now the delusion is AI is going to save active investing. I will safely predict that if you think active investing is difficult now, it's going to become doubly difficult with AI, because everybody will have access to the tools and those small advantages you have, perhaps as an active investor or an active trader, it's just going to get more difficult to hold on to rather than less. And you're going to see this play out in business after business. Are there some companies that will employ AI successfully? Yes, but they have to be thinking ahead. It can't be just the lazy. We can just replace a worker with AI. It's got to be how do we customize AI in a way that we have something exclusive soon?
- [29:18]
B
Just to go off on a tangent quickly there on active investing, am I right that for your own investments you pick a portfolio of at any time between 30 to 40 stocks? Isn't that active investing?
- [29:30]
A
It is. And there are two things. One is, I follow the very basic precept of doing no harm. People ask, why 30 to 40? Why not five or six? It's precisely for that reason you pick five or six stocks. No matter how good you think you're at stock picking, you are exposed to risk you shouldn't be exposed to. So I've essentially. Once you get 30 or 40 stocks, you are essentially as diversified as most index funds are. So I spread my bets. And here's the other part is I don't invest actively because I want to beat the market or even expect to beat the market. If I do, it's icing on the cake. I actively invest because it's actually homework for me for my teaching. It makes me think about companies and whether I'd invest in them. And so for me, the active investing has never been about alpha and beating the market now, which would be a problem if I were trying to sell my wares to other investors and getting them to invest with me. But I'm investing my own money from that perspective, I do no harm and don't expect to beat the market. I'm not going to create much damage to myself with what I'm doing.
- [30:47]
B
This episode is sponsored by BNY Investments. BNY Investments is part of bny, a global financial services company supporting investors and institutions around the world. This sponsorship does not constitute investment advice. So let's explore a couple of those big positions that you have at the moment and bring it back to tech and AI, which we were touching on. What you were saying, including the trust points at the stop. It would make me think you're quite bearish. Yet I read that you own six of the Mag 10. Is that still accurate?
- [31:31]
A
Five now, but no. How did it become the Mag 10? I mean, what are the other three that you added on is it Oracle, Broadcom, the Mag 7?
- [31:41]
B
Ironically, I saw the Mag 10 or heard it I think in a podcast episode you featured in. So I googled it and the Mac 10 came up with Broadcom, AMD and Palantir being added. Okay, but I don't know. Either way, you own more than perhaps the sentiment you've espoused might suggest. Break that down for me.
- [32:03]
A
Okay, let's start with that sentiment about the market. I am concerned that the market is richly priced, that the market is not factoring enough the potential for big risk coming from the transition from the post second war. So there is this big risk hanging out there and the market seems to be pretty blase about it. So from that perspective, I do think the market is too richly priced. But here's the problem. I'm not a market timer for very simple reason. One is I'm not good at timing markets. Even if I'm right, if it takes two or three years for that cleaning up to happen, for that correction to it, I'd have been better off staying in the market rather than out of it. But even if I'm right and I call a market correction and I sell all my stocks now here's the problem. Getting back into equities becomes incredibly difficult to do. Go back to 2008. Take people who call that correction right, look at their overall portfolio return with that correction called right built into their portfolio. So in other words, compare somebody who stayed in the market since 2007 with somebody who basically sold their stocks before the 2008 crisis, and look at their overall returns. I will wager that most of those market gurus from the 2008 crisis are underperforming the market. Here's why. Many of them ended up not going back into the market because they essentially either decided that they were so smart they could call market corrections, or because getting back into the market gets really difficult to do if you're doing it all at one go. So my bearishness is about the overall market pricing. Not much I can do about it other than spread my bets and say if I get a hit, will my lifestyle be affected? So my asset allocation should reflect that. I probably have more cash as a person in my portfolio now than I've had perhaps at any time in history. But it's not 50 or 80%, it's more like 15%. I'm okay with that because that cash is sufficient to get me through whatever the years that I might need cash on on individual stocks, I've got to keep my market views to this side because if I mix the two, then I'm not sure whether I'm valuing meta, whether I'm valuing meta and the S&P 500 put together. I'm a great believer in say, if you have a market view, let it drive your asset allocation decision. So you don't like stocks have less than stocks 60% as opposed to 80%. But then if you ask me which stock should I buy with that 60%, I'm gonna put my market neutral hat on my market neutral hat. I'm going to act like the market is fairly priced. That's why I do the implied equity risk premium and expected return for the S&P 500. That allows me to be market neutral. And I'm going to say, given my, that I don't have a view on the market on this part of the analysis. This is what I think of Meta. This is what I think of Alphabet. This is what I think of Palantir. So that's how I reconcile my views on the market being richly priced and my remaining in the market and buying individual companies. Because you have to be able to play both games at the same time or you're going to be paralyzed.
- [35:15]
B
Which. Because we're not going to have time to go through all of them. Which is your favorite at the moment of the mag. I was going to say 10 again,
- [35:22]
A
Mag 7 of the Mag 7. I think Amazon and Alphabet have the most upside, but I like Apple in terms of doing the right thing. It's a company that's been overly cautious, reflecting Tim Cook's personality. But I think with AI, that might be the right posture to take is take it slowly, let others build the architecture. Let's see how this plays out. So I think that, you know, I, I mean as companies, I like all, you know, even in, even Tesla with all of its whims and fancies that come from the way it's run. I like all seven companies. They're great companies as investments. If you ask me, would I enter those investments at today's prices? Probably not. Which raises an interesting contradiction of how come they never. Because I got them at very different times. I bought Microsoft in 2014 Nvidia, which I recently sold off. So my advice to people is don't be in a hurry. Even if you like the Max 7 to jump in all at one go. That's a dangerous thing to do. Bide your time. Yeah.
- [36:31]
B
And the two that you don't own, you're saying there are Nvidia And Tesla. And Tesla, yeah.
- [36:39]
A
Tesla I sold in February of 2025 and Nvidia have been shedding portions of it over the last three years. I shed the last portion towards the end of last year.
- [36:50]
B
Well, it sounds like you did very well on it, so well played. Just to round off the broad point on the valuations and I totally take on board all that you said, so forgive me for this follow up. I think you said your cash value is the highest it's ever been at 15%. So that gauges that you are, while you invest in companies, you're as cautious as you've been for your entire career.
- [37:15]
A
Yeah, because, you know, and here's the reason. I think one of the things in investing we need is perspective. I look at my portfolio today, I look at it five years ago, 10 years ago, and I have to remind myself not to get greedy. There's a lot of profits built into my portfolio now that maybe it's a time to harvest as opposed to sowing more crops that there's a time to harvest. And to me this is a harvesting time I've tried and the Nvidia sales was part of that harvest. So I think investors sometimes forget that harvesting portfolios is as critical as reseeding them and the times for the two might actually vary. So right now for me, this is more harvesting time than reseeding time. Don't get me wrong, if a stock collapsed and I said this is, I mean, if it's down 50%, if Palantir went down another 50%, and I said, look, this is the time for me to buy, I will do it. But I'm more cautious on the reseeding side than on the harvesting side.
- [38:18]
B
Right now, what I wanted to come to next and. And you've spoken about this at length. So much of investing, the teaching around it is about what to buy, not when to sell. And given that you've just outlined how you've sold Nvidia recently, I just wonder if you can give us some clues as to how you reach that decision and whether or not, despite the purity of valuing companies and the approach you've taken as being critical, whether we as humans, because of the problems human nature creates, we actually have to. To create some arbitrary price targets, maybe that need to be updated year on year with the fundamentals so that you do harvest when you should. At least some of your position.
- [39:02]
A
I have two rules. One is arbitrary and the other is valuation driven. My arbitrary rule is one that goes back to do no harm, that no investment in my portfolio can become more than 15% of my portfolio. And so I never entered more than 3 to 5%. So the way an investment becomes 15% is it does really well. So some of the shedding is almost automatic because this investment has become too big a part of my portfolio. Have I left profits on the table? Absolutely. Have I any regrets about doing that? Not at all. Because to me, the essence of investing is to be able to sleep at night. So that's arbitrary. Why 15? Why not 12? Why not 20? It's basically a. An almost externally imposed number because it's so easy to dilute ourselves. When you have an investment that has done well, you can talk yourself into saying, let's let it ride. It's done so well, let me let it ride another six months, another year. So that rule is completely arbitrary, but it keeps investments from getting too big. So there's selling that goes on to keep an investment from getting too big. The other part is valuation driven. When I value a company, I don't get a point estimate a single number. I use this statistical technique called simulation, which is a fancy way of bringing your uncertainties into your analysis. And what you end up with as output is not just a number, but a distribution. So I actually have a distribution of value. I have. You know, if you remember your statistic and you think about a distribution, there's a 30th percentile. In the 70th percentile, you're saying what's significant? This is my way of bringing margin of safety into my investing. So if you believe in a margin of safety in buying, you don't buy when something is undervalued. You buy when it's 10% undervalued. So I might buy the 30th percentile because I want to add something on. I said I'm cautious. Now that's one place it shows up, is I'm buying at the 30th percentile. But if you buy because something is undervalued, you have to be just as disciplined to sell when it's overvalued. And there again, I'm not going to sell when something becomes slightly overvalued. Overvalued for the same reason I'm not buying when it's slightly undervalued. There I could look at the 70th percentile, and there's got to be some buffer you build in partly because of uncertainty and partly because selling comes with a cost, especially if it's a stock that's done well because you got to pay Capital gains taxes. I live in California, and the reason that's relevant is I have to pay state taxes on top of my capital gains taxes, which very quickly climbs to 30, 35% of my overall gain is going to go into taxes, which means something has to be overvalued by at least 30% for me to even break even on a tax basis. So part of it is arbitrary, part of it is driven by the way I think about value. But you have to develop your own internal mechanisms for buying and selling, because all you think about is when do I buy? And you never think about when you sell. You're going to pick winners that become losers while sitting in your portfolio because you've let them sit in your portfolio too long.
- [42:20]
B
I think it's so important, and it's funny you said there that of course if something reaches 15% of your portfolio, it's because it's done really well. I guess all the rest of your portfolio has done really badly. But I think it's a great opportunity.
- [42:33]
A
It's not done as well. I mean, take Nvidia, right? Nvidia did well. The rest of the market did well. But you're going up 400%. It's going to very quickly hit 15%. So it doesn't necessarily mean the rest of your portfolio, they just didn't do as well. I mean, let's face it, portfolios are often carried forward by a few big super winners. And those super winners are the ones you worry about because they very quickly become an increasing percentage of the portfolio. And I look back over my 40 years of investing, I mean, those are the stocks that have saved me because they've pushed my portfolio returns above the market. But they're also the stocks that can get me into trouble if I let them ride too long in my portfolio.
- [43:16]
B
I know we've only got about five or 10 minutes left. A few topics I want to race through, if we can still one is gold. I mean, I know I've asked so many of my guests about gold and I was thinking just in preparation for this, whether your answer would sound similar to Howard Marks answer because you so care about valuing cash flows. Is gold something that you find very hard to value and ignore or is it got value that comes from something other than cash flows?
- [43:42]
A
Gold doesn't have value. It's priced. And I think the reason I distinguish between the two is investments without cash flows can only be priced based on demand and supply. A Picasso can't be valued, can be priced. Bitcoin cannot be valued can only be priced. That's not good or bad. It's just the nature of the process. What drives the pricing. It could be fundamentals. With gold is three fundamentals. One is inflation. Historically, you go to gold because you don't trust financial assets. We talked about the lack of trust in institutions. That's where you go. The second is crises. You go to gold again for the same reason you're afraid. And the third reason you go to gold is you look at real returns you can make in the market. They're really low. The cost of holding gold becomes much less a problem. When interest rates got to 1 1.5% in the last decade, you could hold gold and really not face any real opportunity costs. Whereas if interest rates are 5, 6 or 7%, you're giving up more by holding onto gold. So gold is driven by demand and supply. It doesn't mean it's irrational. It's just driven by forces that cause that demand and supply to shift. So that's my perspective on gold. And that's the lens through which I look at gold price movements across time.
- [45:01]
B
And the extraordinary surge that we've seen of late is the falling trust. Do you think it's priced the fall in trust?
- [45:11]
A
It's actually a very unusual rise in gold. And here's what makes it unusual. You look at past gold surges, 1970s, you could say inflation popped up during big crises. Gold prices got. There was a crisis last year, inflation actually came down. At least actual inflation observed inflation. And there was really no market crisis. The market was up 17.7% in the US and gold was up 70%. Silver is up 150%. So I've been wrestling with how do you explain the rise of gold in a year in which you didn't see hyperinflation and didn't see any real crises play out in market. And the answer, I think comes from the fact that that demand and supply for gold doesn't have to be across the board. It has to come from a subset of investors who've lost trust enough, who worry about crisis enough. The way I read 2025 is that subset which starts with gold bucks. These are people always hold gold. They're always in crisis. Catastrophe is always around the corner. That group has become much bigger and drawn in people who normally wouldn't be part of that group. Traditional financial market investors. When I listened to Ray Dalio, Jamie Dimon talk about gold in favorable terms, I never thought I would live to see that day. But that started happening in 2025. That suggests to me that even though the market in the aggregate might not be pricing in a crisis and a complete loss of trust, there's a subset of people, some with deep pockets who've lost trust, who see catastrophe and they're enough of a supply, they can create enough demand in gold to push up the price of gold. So to me it's a signal, signal that there are people out there who might be, who are far smarter than me, who've been markets a long time or worried. And even if I don't share their worries right now, it behooves me to listen to their worries. I mean, investing is about keeping the feedback loop open and the gold price surge is feedback that you as a financial market investor who might never be interested in gold, should be listening to.
- [47:26]
B
I have a couple of questions left and one is on market concentration. Just because you obviously largely like a lot of the Mag 7, I guess their success is their success. Is the market concentration just a result of that? It is what it is or is it a risk?
- [47:45]
A
One of the things we've got to be wary of, and I think that's why I was kind of, I pushed back on the Mag 10 is we keep changing our, I mean it used to be Fangam in the last decade and it became the MAG7 with Nvidia and Tesla entering it. If we keep adding the most successful stocks of the last decade into this group, almost by definition the group is going to be a big chunk of the rise in equity prices. I mean you go back in time a century, the US equity market has always been a top heavy market. The biggest winners account for a big chunk of the returns on stocks. Hendrik Bessembind did this really famous study on what percentage of stocks in the US account for that extra premium that you earn on stocks over bonds. It's like the top 10% of stocks are really the reason you get them. The concentration by itself is not the issue. It's a fact that the same group of companies have stayed at the top for so long. So I think there's another message there about a changing global economy, a more winner take all economy where in business after business. And this is partly the result of technological entrance into old businesses. Meta and Alphabet entering the advertising business essentially made it a winner take all business. So part of what we're seeing I think is that winner take all ethos play out in market. So it's good to be concerned about concentration. But avoiding those big stocks because there's concentration is going to put you so far behind in terms of trying to catch up with the market that beating the market becomes almost impossible to do. So is there concentration? Yes. Is there reason to be worried? Yeah, there's always a reason to be worried, but I think it captures real changes in the global economy playing out in the marketplace.
- [49:44]
B
I have two final questions for you, Aswath, and as I flagged before, I ask everyone for sort of final bits of advice for our listeners, and I want to ask you that as it relates specifically to investment in a second but first, in terms of broad life advice. I heard you on the on the Prof. G podcast talk about giving yourself space to dream. I loved that phrase. Tell me what you mean by that.
- [50:10]
A
I think if you look back at human history, some of the greatest discoveries came from people having idle minds trying to make connections. Newton sitting under an apple tree, apple falls in his head, he comes up the laws of gravity. Archimede is sitting in a bathtub, discovering the water going out of the tub, saying, eureka. I think that what makes humans different from machines and in many ways better than machines is his capacity to connect disconnected things and come up with something whole. And I think we're not giving ourselves enough room to to have idle minds now. We're on a podcast now, and I love podcasts. I love reading, but I think we read too much, we listen to podcasts too much. We're so busy filling our idle time with what we think is useful stuff, informative stuff, that we're not giving ourselves a chance to kind of let things simmer, marinate in our minds, try to make connections ourselves. And I try to my best to give myself that space because that's when I find myself to be most productive, when I'm doing absolutely nothing. So I think that I would encourage people to leave their smartphones at home and not listen to a podcast on their next walk. Right after they listen to this one, of course, and let their minds wander. Because I think we need to give ourselves the time and the space to think for ourselves.
- [51:47]
B
I love that you've repeated that. When I heard you say something similar the first time, it really resonated with me. I think I used to give myself much more time to dream than I have the last five or so years. And I need to take that advice on board. And I will finally. Asvath, what is your overriding piece of investment advice for our listeners?
- [52:10]
A
My one piece of advice in investing is remember that investing is about preserving and growing wealth. It's not about getting rich. And I think that especially over the last 20 years, markets have done so well, we've sometimes sometimes forgotten that. So if you have a life to live and a profession in which you go out and earn an income, start there. Don't spend if you're a dentist, don't spend your lunchtime looking at stock prices and what to invest, Be a good dentist, earn a good income, and use investing as a way of preserving and growing wealth. It's a much healthier way of thinking about investing. It'll be much better for you in the long term as an investor to do that than to get hyper focused on investing. If that's not your job to do
- [52:52]
B
Aswath, it's always a pleasure to catch up. It's been too long, but it was worth the wait and it was a real treat to have so much of your time. Thank you so much for joining us.
- [53:02]
A
Thank you.
- [53:03]
B
That was, of course, Aswath Damodaran. Coming up next week on the Master Investor Podcast, we'll be speaking to Gregory Peters of pgi. Please do click Follow or subscribe if you haven't done so already. For now, thanks again to Aswath and thank you so much for listening. The Master Investor Podcast is sponsored by BMY Investments, Elseg and Interactive Brokers. Please do remember the views expressed in this podcast are for general information purposes only. Nothing in the podcast constitutes a financial promotion, investment advice, or a personal recommendation. More on that in the show notes. This podcast is produced by Paradine Productions and Master Investor limited In association with Birdline Media. If you've enjoyed the show, please do subscribe on YouTube or click follow on your podcast platform and you'll be automatically notified each time a new episode drops.