What this covers
Aswath Damodaran, Professor of Finance at NYU Stern School of Business, joins Wilf to reveal that he is more cautious of the equity market today than at any point in his career.
Because of this he has “more cash in my portfolio now than at any time in history”, and says this is a time to harvest profits gained in recent years as opposed to sowing more crops. He has recently sold his position in Nvidia accordingly.
Aswath shares his core reason for market concern, including the erosion of trust in economic institutions, and the move from a post WWII economic world order to an as yet unknown future, which he argues the market is too relaxed about.
He is sceptical of both the companies making AI who have overspent on CapEx, AND the companies due to use AI, arguing that rather than deliver greater efficiencies they will erode profitability – “if everybody has it, nobody has it”.
However – he does not believe in trying to time the market, and he reveals his cash balance is 15% not 50%, and that he still holds 5 of the Magnificent 7, his favourites being Apple, Amazon and Alphabet.
Aswath shares many of his core investing principles including how you know when to sell a stock as well as when to buy it; why buybacks have done more good than bad; why we should listen to what the gold surge is telling us even if gold cannot be valued, only priced; and why you must view investing as a way to preserve and growth wealth not to get rich.
There is also some life advice too - the importance of idling, and finding space to dream.
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Damodaran argues that institutional trust has eroded since 2008, creating systemic financial risk that markets are pricing too optimistically, while individual investors should focus on valuation discipline, margin of safety, and treating investing as wealth preservation rather than wealth creation.
- Institutional trust in central banks and governments has cracked since 2008, creating currency and financial asset risk that markets are not adequately pricing
- Current equity valuations are too rich given geopolitical transition risks and lack of disciplined spending norms in developed markets
- Individual investment success depends on price discipline and knowing when to sell, not on timing markets or chasing buzzwords like AI
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Government bond yields used as risk-free rate estimates are becoming problematic because governments themselves now default, making the assumption of a truly 'risk-free' government investment increasingly questionable.
“Over the last few decades, we use government bond rates as our estimates of risk-free rates, and that process is getting messier because governments themselves default.”
Active investing is inherently unprofitable for practitioners as a collective, like a 'plumbing business called Floods R Us' where you cause the problem you claim to solve; AI will make active investing harder, not easier, because all investors will have access to the same tools, eroding any information advantage.
“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. An analogy I would offer is 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.”
Currencies are fundamentally built on trust; if you lose trust in the government issuing a currency, it becomes just paper, and all financial assets are at risk because they depend on the issuer's long-term capacity to preserve currency buying power.
“Currencies are built on trust. If you don't trust a government issuing a currency, it's just a piece of paper. And I think that all financial assets are built on trust.”
Price is the most important factor in investment decisions, more important than company quality, management, growth outlook, or innovation; at the right price any company is worth buying, at the wrong price no company is.
“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.”
Investing should be viewed as wealth preservation and growth, not as getting rich; the healthiest investor mindset is to earn income through a profession, spend less than earned, and use investing as a secondary tool for wealth preservation rather than primary wealth creation.
“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 with the last 20 years the markets have done so well, we've sometimes sometimes forgotten that.”
Some of the greatest human discoveries came from people having idle minds making unexpected connections; modern life (smartphones, podcasts, constant information consumption) prevents idle thinking and should be replaced with unstructured time to let ideas marinate.
“Some of the greatest you know, discoveries you know, came from people having idle minds trying to make connections. Newton sitting under an apple tree, apple falls on his head, he comes up with the laws of gravity. Archimedes sitting in a bathtub discovering the water going out of the tub saying, 'Eureka.'”
AI will compress profit margins for companies deploying it, not expand them, because once everyone adopts the same technology, competition eliminates any competitive advantage, similar to how online retail cut margins industry-wide despite initial promises of higher profits.
“I've seen this movie before. I've seen it with PCs. I saw it with dot-com. The 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... That didn't work out well for them. Cuz 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... have decreased over the last 30 years.”
When assessing equity returns, the investor must be a price taker on what equities collectively will return; the market prices as a whole set the expected return, and individual investors cannot simply demand 15% if the market offers 8.4%.
“When you enter financial markets, you're essentially a price taker when it comes to what you can earn on stocks. Once you decide you're going to be in equities, you can't just pick a number out of the out of your head and say, 'I want 15% returns.' Cuz that's not yours to set.”
Investors often focus only on when to buy and neglect when to sell; failing to develop systematic sell discipline means winners held too long become losers, eroding overall portfolio returns.
“If 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.”
Market timing is futile even if one correctly calls the correction; most market-timers underperform buy-and-hold investors because they fail to re-enter the market after exiting, as shown by analyzing 2008 market-correction predictors' actual returns vs. buy-and-hold returns.
“Go back to 2008. Take people who called 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 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.”
Private credit is not banking, so a private credit unwinding would not cause the systemic ripple effects of a 2008-style banking crisis, though it would create significant pain for endowments and institutions directly exposed.
“Private credit is not banking. So, in many ways when banks go down, the ripple effects are much more dramatic because the depositors were unintentionally part of a game they didn't want to play. Private credit, the people playing that game, endowment funds, institutions, etc., for the most part are going to see the immediate hits, but they're going to drag in some institutional pain. So, it's not at the magnitude that the banking crisis was of 2008.”
Three rationales for private credit's existence are insufficient: superior default risk assessment (via Twitter analysis or other sources), lending on cash flows instead of assets (corporate bond market does this), and speed of loan approval (justifies only hundreds of billions, not trillions).
“One is that they're somehow better at assessing default risk than banks and corporate bond markets are because they have access to, you know, new types of information... I am skeptical.”
Portfolio concentration by super-winners is a natural and healthy feature of equity markets; the top 10% of stocks are responsible for the excess returns of equities over bonds, and avoiding concentration-heavy stocks will prevent an investor from capturing market returns.
“Hendrik Bessembinder did a 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 that.”
Dividends and buybacks are equivalent sources of cash flow to equity investors; both should be counted equally in valuation because whether dividends or buybacks reach your pocket depends on whether you sell shares or hold, making the choice between them a matter of corporate governance preference, not fundamental cash flow value.
“If you're the only owner of all stocks in the market, dividends and buybacks both go into your pocket because they're both cash flows to you as equity investors.”
Interest rates inversely affect gold opportunity cost: when rates are 1.5%, holding gold has low opportunity cost; when rates are 5-7%, opportunity cost of holding gold rises significantly, reducing its attractiveness.
“The cost of holding gold becomes much less a problem. When interest rates got to 1 1/2% in the last decade, you could hold gold and really not face any real opportunity cost. Whereas if interest rates are 5, 6, or 7%, you're giving up more by holding on to gold.”
The same group of large companies (Mag 7) staying at the top for an unusually long time reflects a structural shift toward 'winner-take-all' markets, driven by technological disruption making advertising, cloud, and other businesses increasingly concentrated.
“It's the 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 and business after business, and this is partly the result of technological entrants into old businesses.”
Institutional trust has been cracking since 2008 because governments in developed markets no longer maintain the economic discipline and adherence to norms that characterized the post-WWII order, evidenced by massive COVID bailouts and cavalier policy actions that would have been unthinkable 30-50 years ago.
“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.”
Private credit has grown to multi-trillion-dollar scale despite never clearly answering what unique need or niche it fills beyond what banks and corporate bond markets already provide; this lack of clear value proposition makes large-scale growth dangerous.
“Now 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. 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? And I'm still unable to get an answer from private credit on what the niche is that they're filling.”
Companies building AI infrastructure (chips, data centers, power) are essentially constructing a massive factory without knowing what they will manufacture, trusting that a huge market will exist for some undetermined future product—a dangerous justification for hundreds of billions in investment.
“If you look at AI architecture which includes chips, the data centers, the power, I mean all of that, we're building an insanely huge factory. So you want to use manufacturing now, been building a 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 a 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.”
The risk-free rate is the foundation of valuation; it represents what you can safely earn and is the base from which you build required returns for risky assets, making it essential to understand what constitutes truly safe investment.
“As long as investors have been around, one of the things that you always want to ask before you start investing is what can I make on an investment that's absolutely safe? Risk-free rate is just the base from which you build off.”
Gold cannot be valued (only priced) because it has no cash flows; gold pricing is driven by three factors: inflation hedging, crisis hedging, and opportunity cost (interest rates), making it a demand/supply-driven asset class.
“Gold doesn't have value, it's priced. The reason I distinguish between the two is investments without cash flows can only be priced based on demand and supply... What drives the pricing? It could be fundamentals. With gold it's three fundamentals. One is inflation.”
Gold's 70% surge in 2024 was unusual because it occurred without hyperinflation, market crisis, or low interest rates—the traditional drivers; instead, it reflects a subset of investors (gold bugs plus institutional players like Ray Dalio and Jamie Dimon) having lost trust in financial assets and expecting catastrophe.
“It's actually a very unusual rise in gold. You look at past gold surge surges. 1970s, you could say inflation popped up. In during big crises, gold prices got there was a crisis. Last year, inflation actually came down... 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, you didn't see any real crises play out in markets.”
$1.15 trillion in US company buybacks occurred last year, and nearly all of this capital remains in the market by flowing to other companies; buybacks do not remove money from the market and should not be treated as value-destructive black holes.
“Last year, there were $1.15 trillion in buybacks at US companies. 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.”
Conventional dividends are not true residual cash flows (which equity is supposed to represent) but rather fixed, sticky commitments that resemble bond coupons; historically, dividends were used to market stocks as bond-like instruments, but buybacks are more aligned with true equity residual cash flow logic.
“Equity is supposed to be a residual cash flow. You get whatever's left over. And you look at conventional dividends, they're the exact opposite of residual cash flows. They're fixed, they're sticky, you get stuck with them once you start paying them.”
A 'bar mitzvah moment' occurs when markets stop buying into a buzzword and demand 'show me the money'—proof of earnings and business model, not just narrative; AI is entering this moment as investors demand evidence of profitability from companies spending $150B in capex.
“I call this the barmitzvah moment when you have big disruptions. There's a point in time where markets stop buying into the buzzword. 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 money.' 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?'”
Buybacks being freely allowed vs banned has major implications: banned markets see cash trapped in bad businesses with no new entrants; allowed markets see capital redeploy to new ventures, which helps explain why the US market share has grown while Europe's has shrunk relative to global GDP.
“In a market where buybacks are banned, 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.”
Separate market-level views from stock-level analysis by using market-neutral positioning: apply macro pessimism only to asset allocation (holding more cash, less equities), not to stock selection, which should assume market-fair pricing to avoid double-counting the macro view.
“I'm going to 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, expected return for the S&P 500 that allows me to be market neutral. And I'm going to say given my that that I don't have a view on the market on this part of the analysis, this is what I think of matter. 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. Cuz you have to be able to play both games at the same time or you're going to be paralyzed.”
The post-Second World War economic order built on US dominance and the dollar as global base currency is coming apart, and there is no clear replacement system, creating a painful transition period that markets are not adequately pricing in.
“an economic world order that was built after the Second World War is basically coming apart. We have nothing to replace it with yet.”
The concept of 'Fangam' was used to label top stocks in the last decade, then replaced by 'Mag 7' with Nvidia and Tesla additions, now expanding to 'Mag 10' with Broadcom, AMD, and Palantir; constantly redefining the grouping to include the most successful stocks makes concentration appear natural rather than problematic.
“One of the things we're going 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 def I mean, it used to be Fangam in the last decade and then it became the mag 7 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.”
Damodaran personally holds a portfolio of 30-40 stocks (active investing) but does not expect or aim to beat the market; this approach allows him to avoid concentration risk while using the exercise as homework for teaching, not as alpha generation.
“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.”
Even if Damodaran doesn't personally share institutional investors' catastrophic expectations reflected in gold prices, he should listen to their concern as a feedback signal; keeping the feedback loop open is essential to investment discipline.
“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 might never be interested in gold should be listening should be listening to.”
Portfolio position sizing should have a hard ceiling at 15% to prevent concentration risk and force disciplined harvesting; when a winning position reaches that limit, it indicates the investment has done exceptionally well, and selling some is appropriate even if future upside remains.
“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 bit no investment in my portfolio can 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 if it does really well. So, some of the shedding is almost automatic because a comp- 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.”
Damodaran uses statistical simulation (Monte Carlo-style valuation) to produce a distribution of intrinsic values rather than a point estimate; he buys at the 30th percentile (margin of safety) and sells at the 70th percentile (overvaluation buffer), incorporating uncertainty and capital gains tax drag into his thresholds.
“When I value a company, I don't get a point estimate, a single number. I 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.”
Sam Altman's response to criticism of OpenAI's $100B+ valuation ("if you don't like it, other investors will buy it") is not reassuring when trillions of dollars are flowing to AI architecture without clear business model justification.
“When Sam Altman was asked about the 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 to...' That's not the answer I want to hear when I have, you know, hundreds, perhaps even trillions of dollars going to AI architecture.”
The Supreme Court decision overruling Trump's tariff moves actually restores trust because it demonstrates checks and balances exist, showing restraint on executive power.
“In many ways, that actually restores some trust because it says 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 you say it effectively says that there is some restraint here.”
The market has been flat for the last 6 months (treading water since September 2020) despite the Mag 7 stepping back, which demonstrates surprising market resilience to the loss of those seven companies' trillion-dollar contribution.
“It's not just the last couple of days. You've you've seen the market's pretty much where it was in September of 2020. We haven't done much overall in the market for the last 6 months. We've been treading water. Which is actually amazing given the fact that the mag 7 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 they were bringing in.”
At the start of February 2025, the S&P 500 is collectively priced to earn approximately 8.4% annually based on expected dividends and buybacks relative to current market levels.
“So, collectively at the start of this month, for instance, the start of February, that my number was 8.4%. You're saying, 'What does that tell me?' Collectively, US stocks are priced to earn about 8.4%.”
Damodaran currently owns five of the Mag 7 stocks (down from six after selling Tesla in February 2025) and has been shedding Nvidia over three years, despite high overall skepticism about market valuations and AI profitability.
“Five now, but no... I mean, it used to be Fangam in the last decade and then it became the mag 7 with Nvidia and Tesla entering it.”
Damodaran holds approximately 15% cash in his portfolio, his highest level historically, reflecting his current caution about valuations and risk; however, this is still modest and primarily sized to fund his lifestyle needs.
“I probably have more cash as a percentage of 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's that cash is sufficient to get me through whatever the years that I might need cash on.”
Of the Mag 7, Damodaran likes Amazon and Alphabet for upside potential, Apple for its cautious posture on AI (letting others build infrastructure while waiting), and positively views all seven companies as quality investments, though he would not buy all of them at current prices given the timing at which he acquired them.
“Of the mag seven I I think you know, Amazon and Alphabet had 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 um personality. But I think with AI that might be the right posture to take is take it slowly.”