Aswath Damodaran is a Professor of Finance. We cover the major sources of uncertainty in today's macro environment, how he developed an unconventional method of valuing businesses, and his take on the AI boom and Nvidia's meteoric growth.
Principles & Lessons:
1. The notion of “reverting to the old normal” after years of low interest rates might be misleading; as Aswath puts it, “maybe the last 18 months are the norm…we’ve seen much worse than this.” He explains that a decade of near-zero rates skewed many investors’ sense of reality, leading some to treat a 4.5% rate as unthinkable when it is not extraordinary in historical terms. This shift demands recalibrating everything from hurdle rates in corporate project assessments to the simple act of “being acutely aware of cash” as investors.
2. Central banks do not fully dictate markets, and overfixation on their actions can undermine good fundamental analysis; as Aswath says, “The Fed doesn’t set rates…turn the question back and say, ‘Where do you think inflation is going?’ because without answering the inflation question…there’s nothing to anchor it to.” He critiques the tendency of some fund managers to blame underperformance on the Fed, urging them instead to analyze company-specific issues and long-term economic drivers.
3. Risk capital can become “excessively accessible,” encouraging dubious startups and destroying viable businesses along the way; Aswath recalls “bike app companies” that temporarily overran cities, driving out established rental businesses, only to collapse themselves. This highlights the real economic damage that can arise when “borderline sociopaths” find funding too easily. The new environment of higher costs of capital will curb such excesses by forcing more rigorous scrutiny of business models.
4. Valuation should focus on the company’s fundamentals, with macro factors “canceling out” in most cases, but flexibility is vital for disruptive growth stories. Aswath values early-stage businesses by attempting to capture their potential expansion of an industry’s total market (as with Uber’s impact on the traditional taxi market), acknowledging that it was a “mistake” at first to peg Uber’s growth exclusively to existing car services. This underscores that one must adapt valuation models to the unique and evolving nature of each firm’s growth prospects.
5. AI is neither entirely hype nor a guaranteed societal blessing; Aswath views it as a continuation of a 20-year trajectory combining “big data” with “powerful computing,” but warns that “for every winner, there will be losers.” He notes that many grand technology promises (e.g., PCs freeing us to be more creative, social media cementing friendships) produced unintended downsides. While companies like NVIDIA offer a “tangible business in AI,” it is unwise to ignore that “AI also has a dark side,” and its overall net impact on society remains uncertain.
6. Developing a personal investment philosophy and staying consistent with it is crucial; Aswath observes that “there is no one pathway to greatness” and cites examples like Buffett (value investing) versus Soros (macro trading). What matters is having a “core philosophy” and ensuring your temperament and timeline match that approach. He states, “Spend less time reading about other successful investors…spend more time looking inward,” emphasizing that an investor’s strategy must align with their own psychological makeup and constraints.
7. The brand and intangible assets of a company must be recognized in valuation—often already reflected in projected cash flows—rather than separated and overvalued in isolation. For instance, Aswath discusses Birkenstock as a business that benefits from “celebrity brand carriers…and a Barbie buzz,” yet carefully preserves its core identity. He notes that a firm’s narrative and operational consistency are paramount: “What I’m looking for is companies that have a narrative about themselves…where their actions are consistent with the narrative.”
8. Industries in flux can obscure which companies have sustainable models; as Aswath explains when discussing media and entertainment, “We don’t know what the structure that provides content will look like” in the future. He points to streaming as a major disruptive force that caught legacy studios unprepared (leading them to mimic Netflix’s massive content spending). Without clear profitability models, many appear to be “in motion,” and no single entertainment entity has “it nailed down,” underscoring the importance of adaptability when investing in sectors undergoing dramatic technological change.
Transcript