Aswath Damodaran Says There’s No Place to Hide in Stocks

26:03It just feels like one of those two things has to happen. Your thoughts? The weakest link in the argument is the product and service market. The architecture, people have spent immense amounts on. Even the open AI, the other players in the middle of the game, you know, who are going to provide the software, that's been built up. There is very little evidence right now that you're able to, even the companies that are talking about cost cutting, you look at the actual amount of costs that have been cut, you look at the expenses across periods, you don't see a massive drop off in expenses. So right now, the product and service market is all talk.

26:40And my belief is the consumer side of that market is not going to be particularly lucrative. I look at the kinds of things I get as a consumer from AI, and I say, that's neat. But I'm not paying$10 a month for that. The business-to-business AI, there are segments, but only in the high-powered segments, where the coming together of large data and computing power is going to make a difference. I don't think open AI is going to make equity research better or portfolio managers perform better. So in those areas, I don't see the net plus that comes out of it. I can see the minus of people being laid off.

27:17But right now, it's still more talk than actual action. So I believe it when I see Fidelity layoff after analysts saying, we replaced them with AI. Either way, it's not good news because they replace them with AI. Those are people who will not have jobs. they don't replace them with AI. All this investment in AI has no real easy way to pay off. So I agree with your broader thesis. I'm not sure though it'll happen in the next 12 months. This is the problem with these open-ended, it's still developing, is we cut so much slack to companies and they find a way to explain away why it didn't happen in 12 months.

27:54And there will be enough people who buy into that explanation. So I think something else has to come in in addition to the numbers not coming in for that recognition saying, hey, guys, we've overshot. But I think you're right. I don't see, I'll give you a rough estimate, given even what's already been spent on the AI architecture. The AI products and services market has to generate about$4 trillion in revenues, either in saved costs or additional revenues. $4 trillion. $4 trillion. So basically, take the architecture investment and multiply it back. Even with the high margins, you need to get$4 trillion.

28:35And from that, because remember, you've got to pay for that investment to earn a reasonable return, so you back into it. And right now, it's in the tens of billions. And you're looking at a$4 trillion target. And I'm looking at how do we make up that difference. And I don't see a way we get there. You know, I don't see how you increase revenues by that much with just AI products and services or cut costs by that much. You're right, something has to give. I'm just not sure when that moment of recognition will be when you start to adjust numbers down. And it's not all of the Mag 7, right? I mean, let's face it, it's Meta, Microsoft, those are big players, perhaps Alphabet.

29:18Amazon is still much less of its values coming from AI. Apple, I think, you know, much less. So I think it's going to be a kind of a disjointed effect, even across the Mag 7. But I do think that there will be an adjustment. I'm just not sure when. And that's why I can't be on Michael Burry's bandwagon saying let's sell short, because there your time horizon is set by somebody else. And that's not a place I want to be. So I agree it's overvalued, but I'm not comfortable enough to make the judgment that it's overpriced enough to go out and make a bet on the price correcting in the next six months or the next 12 months.

29:54So across the magnificent 10, and it's grown to 10 now because the numbers get more dramatic when you bake in three more, not overvalued, but fully valued companies. But let's list them out. NVIDIA, Apple, Amazon, Alphabet, Microsoft, Meta, Tesla, Advanced Micro Devices, Broadcom, and Palantir, which now make up 40 % of the S &P by total market cap. So you got the S &P 490 or 60 % of the value and the S &P 10, if you will, or the Magnificent 10 of 40%. Amongst those 10, have you done any analysis and are you comfortable saying which you think are most overvalued or most fairly valued? I'm going to go out on a limb here and say there aren't that, it'd be difficult to find one that's undervalued.

30:37There's nothing cheap, yeah. Nothing cheap. What looks most irrational, if you will? I think Nvidia. I mean,$5 trillion, as I said, it's an amazing company, but at$5 trillion, you're looking at the greatest company ever, or delivering 80 % gross margins in perpetuity on revenues that are going to be a trillion dollars or more. And none of those things hold up to any kind of scrutiny. So from a pure over... Tesla, I would put into that same grouping for a different reason. I'm not even sure what Tesla is as a company anymore. I've reached a point of I can't tell you what the story is because I'm not sure Tesla knows what the story is going forward.

31:14So I think if I were to build a portfolio around it, Those would be the two companies that take out the first. And I'd probably leave Alphabet and Amazon in there as my two mag-7 companies that are least overvalued because, you know, Alphabet has had to struggle more during this year. It doesn't have that AI boom to it that the other stocks have. And Amazon, I think, will find ways to make money which don't require AI at all. So I think they might be one of those companies which actually is able to convert the promise of AI into lower costs. It'll be brutal in terms of the people hired at Amazon, but there will be ways I think they can convert to profit.

31:54But I think that to the extent that there's going to be a correction, there's no place to hide in stocks. I can't see a way because if the MAG-10 go down by 40%, it's not like the industrials are going to hold their value while this happens. The panic that that's going to create is going to ripple through stocks. And I think there's a good reason why gold is hitting all-time highs at the same time, that's unusual because usually when gold goes up, it's in the context of a crisis where markets are collapsing or with hyperinflation. I think I describe gold as a niche market, which in good times, when times are solid, that niche market is composed of paranoid people and doomsday fanatics.

32:38But in other times, it expands to bring in people who normally invest in stocks and bonds, I think the gold market is attracting people who historically would have been financial asset investors, but are scared enough now of a bubble, not just in AI, but across stocks and across financial assets that they're willing to leave their money in something that doesn't pay a coupon or cash flows. That's the only way I can explain a gold price rising in a year when stocks are up 15, 20 percent and, you know, financial assets seem to be doing well. Interest rates are not going up. Inflation, at least in posted numbers, doesn't look like it's taking off.

33:16There's enough of a subset of the market that's saying, I don't believe these numbers, something bad is coming. And that's pushing up the price of gold. So there's a message there for investors. And if you're an investor, primarily invest in stocks and bonds. My advice is, even though historically you might never have invested in non-financial asset categories, This might be a time where you think about, you know, kind of at least moving a portion of your portfolio. Bigger chunk than ever into cash or something close to cash or maybe even collectibles. Things that I've never owned collectibles.

33:51But, you know, for the first time in my investing history, I'm saying maybe I should hold something that is not going to be effective. Inflation goes to 10%. There's a market and economic crisis that is potentially catastrophic. Because that's not being priced in by markets right now. And, you know, the chance of it happening is perhaps greater than it's been in any time in the last 20 years. I was shocked that at the top of your list of companies most valued in those 10 wasn't Palantir at 120 times sales. I was counting them at the Mag 7. You know, obviously, when you add Palantir to the mix, you know, you add.

34:30Now, I haven't done a recent. My last valuation of Palantir was almost a year ago when the market cap was much smaller. Obviously, the story has changed. Companies' market cap has changed. I haven't valued Palantir recently. So it might very well be competing with NVIDIA at the top. And maybe that's the reason Michael Burry has picked Palantir as the other choice, is, you know, where's the number coming from? But I apologize. I was focusing on the Mag 7, but you were talking about the Mag 10 there. So just asking for a friend, if someone is thinking that not collectibles, but something that might be more inflation resistant, how do you feel about real estate right now as an investment?

35:10Rental property is more than traditional real estate. I think that that's income stream. So, you know, again, it depends on where you buy the real estate. I live in San Diego. That bubble you see in stocks and bonds is playing out in housing, right? Because people are feeling wealthy because their portfolio is up 30%. they're going out and buying a house, reflecting that portfolio. This bubble, or let's put quotes around the bubble, in AI or stocks is spilling over into the consumption and buying habits of the people who have a lot of money in the market, which is one reason if you look at the economy, it's the top 10, 20 % in terms of wealth that's driving a lot of the energy of the economy is they're feeling rich because their portfolios look bad, right?

35:55and that's determining what house they buy. But if you're in real estate, I think you've got to be selective. It might not be buying a house in the city you live in. It might be buying a rental property in some other part of the country that's not hot. Or you get enough rental income that it covers what you'd have made investing in a T-Ball, but you have something physical, real you've invested in. So again, something I've never invested in the past, but something I'm more likely to look at now than I would have five years ago, 10 years ago, 20 years ago. I'm kind of amazed by almost how bearish you sound.

36:29Let's just go over what you said here. So one, there is a bubble, an AI bubble. Two, there is no place to hide in the stock market. And three, for the first time you said ever, you are looking at parking your money into one cash and two collectibles or physical assets which pay income that to me is a very striking statement i actually didn't expect that um from you uh what is different right now than say 20 years ago 10 years ago five years ago the fact that this is the first time you're considering it in your time as an investor and as a legendary investor and educator. What's different right now?

37:19We live in a world where everything seems to be correlated, right? I mean, it used to be even 10, 20 years ago, I said, I'm going to put my money in European stocks or Asian stocks or Latin American stocks, you know, if I thought US stocks were overvalued, or I'm going to move my money out of this sector into this one because utilities tend not to go down as much during the crisis than technology companies. You know, one of the problems, and maybe you can lay passive investing for this in the flow of money, is the correlations across asset classes, across sectors, across geographies has risen to the point where, you know, that classic rule of if you spread your money across multiple geographies, multiple sectors, you're going to be more protected.

38:03that advice is not holding up anymore because the markets seem to be moving so much more. So you almost have to struggle to find something that doesn't move with markets, where you didn't have to do that 10 or 20 years ago. Now, part of this might be globalization. Part of it might be the way in which people invest through funds and through large index funds that move their money to wherever the largest market cap is. But it does make investing a lot more dangerous because, you know, I can't tell you, as I said, people call me on the same day, I feel worried, where should I put my money? 20 years ago, the kind of advice I had given them, you can stay in the stock market, but try to shift your money out of this sector into this one, you're going to be more protected.

38:51I don't feel as inclined to give that advice anymore because I don't see that protection playing out as much. So you're assuming that there's going to be some very, very large, I assume, correction in the stock market? It could be a large correction or a long and painful correction, right? You could have a 35 % drop in the market over a couple of weeks, or you could have a market that stretches out doing nothing down 6 % or 7 % a year for three or four or five years, right? This is 1970s, so either way you're hurt, the second is an easier way for you to kind of at least manage the decline. The first is a shock.

39:36I'm not sure which one's better as an investor, to be quite honest with it. Get it out of the way and say, okay, now my portfolio is now down. Let me start building up again. Because long stretches of flat or down markets are incredibly difficult to deal with as an investor. They suck all the energy out of you, right? Which is one reason by the time you got to the late 70s, people had stopped investing in stocks. There were some people who said, I will never invest in stocks again. Because that's what long stretches do. And that's what we don't know yet, how this will play out. Will it be this climactic moment where everybody wakes up and says, this is terrible.

40:13What have we done? And have this massive correction. Or is it going to be something that's going to be a drip, drip, drip correction that occurs over time? And, you know, we're going to find out at least, we won't know to hindsight, but, you know, that's what I'm watching for is where, you know, how will that play out? For those who would say to you, I've heard investors get concerned before, the people who say, you know, economists have predicted eight out of the last three recessions or whatever the phrase is. And I'm sure some people would listen to this, and that's running through their head right now.

40:50This guy's saying he's very worried. There could be a very large correction or a very long correction. Either way, it's going to be very painful. And so you kind of want to trim your position out of the markets and into something else, something that isn't correlated. What would you say to those people who have that skepticism of like, you know, I've heard doomsday predictions before. I'm not saying it's a doomsday prediction, but it's a negative prediction. And, you know, some people get burned when they're negative or if they're bearish. I tell them exactly what I'm doing. I'm not selling all the stocks in my portfolio.

41:24I'm not running for the hills. I'm not buying, putting all my money in gold or Bitcoin, because I think that's the kind of action where even if you're right, you end up losing in the long term. Because once you get out of stocks entirely, it becomes very difficult to get back in. You stay out of markets too long. I know people who sold in 2008, they got the timing right, but they stayed out for the next decade. And in hindsight, I'm saying, I wish I hadn't done that. I'm not selling everything, but I'm mopping and lopping portfolio positions. And it's nice to be in a position where you're taking a stock that's up 20, 200 percent or 2 ,000 percent in your portfolio.

42:02You're selling 25 percent of it. I'm not even selling all, you know, even my Nvidia has staggered out over four different. And I still hold on to a quarter of the Nvidia that I tended to hold. So I'm not suggesting drastic selling everything, but I'm suggesting taking your profits. Don't get greedy. and taking those profits. And rather than putting in the next hot stock, holding it in cash. So my portfolio allocation has adjusted only gradually over the last 10 years. And Michael Burry would look at my portfolio and say, you're overinvesting stocks. And he's probably right. I will probably feel more pain in a correction than somebody who steps out of stocks entirely now.

42:45But I also feel more comfortable in the long term I'm doing this gradually and kind of doing this adjustment because I'm never completely, I will never completely be out of stocks and bonds. It's not my nature. It doesn't work with my risk aversion. But I have less of my portfolio invested in long-term bonds and stocks. I don't own much bonds to begin with stocks than probably any time in the last. But that's not come from just selling off everything, but for selling off my most profitable, my biggest winners, and bring them back in line. Now, I have this upper limit of no stock should be more than 15 % of my portfolio.

43:24And that served me well to get a lot of cash on the side because I've had a lot of positions on my biggest winners to get there. So I would say don't do anything rash. I'm not suggesting you sell everything. I'm not suggesting buying puts on the index. I mean, those are the kinds of things that get people into trouble. But at least gradually start thinking about how much, at least in terms of cash needs for the next two or three years, see if you can get a portion of your portfolio where you don't have to sell things because you need to pay for your kid's tuition, college tuition, because who knows what price you might be selling at.

44:00So think ahead. Think ahead of what your cash needs are going to be and start thinking about what in your portfolio you might want to take your profits on. You mentioned maybe you want to put it in cash, maybe you want to put it in physical assets, real estate, maybe rental properties, collectibles. Could you just describe what collectibles are, what fits into that category? Gold is the classic one, right? Now, basically, collectibles is entirely driven by scarcity and enduring demand. Now, would I put my money in Pokemon cards? No, that's not the collectible I would go with. I would look for collectibles that have survived the test of time.

44:39It's one reason I would pick gold over Bitcoin. Because much as Bitcoin has been a better moneymaker for you in the last 15 years, I'm not sure it survives that shakeout that comes when people say, oh my God. So you want to steer your money to collectibles. And if it's a collectible which you truly enjoy, you get emotional dividends. So you love paintings, you know, and this is what you work with. If that's where you want to put some of your money into is baseball cards, because you've truly done your work on baseball cards, where am I to step in and say, that's not a great place to put your money?

45:13Now, so I think collectibles, it has to depend on where you get your emotional dividends, what makes you happy. Because a collectible is not going to give you any dividends while it's sitting in your portfolio. You might as well look at it and enjoy it while you have it. So maybe you enjoy looking at gold. Maybe you like wearing jewelry. Maybe you like art on the wall. But, you know, collectibles, I think there is no one size fits all. It really depends on your makeup as a person and what you think your collectible class is. And yet it does seem to fly in the face of the principles of value investing a little bit where you're investing in cash flows.

45:52Oh, absolutely. For the value investors who would say, you know, if you're trying to invest in downturns, you want assets that produce cash flows, that can pay dividends. And put your money in cash, right? Put your money in tables. It's as simple as that. So if you don't feel comfortable with collectibles, I completely understand. I mean, I'm not comfortable with collectibles. So it's not my first instinct. But I think one of the problems is if your worry is not about market and economic crisis, but hyperinflation, all those temporary things we started after COVID have become permanent things.

46:30And we're not willing to raise the revenues to cover those expenses. We're setting ourselves up for double-digit inflation. Then even cash is not going to protect you because your currency is going to devalue. So it depends on what scares you. If it's economic or market crisis, then holding your money in cash works. If it's inflation, then I think you've got to almost leave the financial asset domain, and that includes cash even in short-term investments, and think about what do I put my money in. And it's not easy to find something. It's not a healthy place to be as a marketer in economy where that's what we're looking for.

47:06But I'd weigh that there's a subset of the investing community which has reached that place. I'm not sure whether Ray Dalio or Jamie Dimon owned gold, but they talk a lot like they should be owning gold, right? You listen to them and say, what exactly are you owning? I know Ray has. Ray's big on gold right now. Yeah. That's uncommon, right? Because if you'd asked Ray Dalio 40 years ago, would he buy gold? My guess is he'd have looked at you like he had two heads. Are you crazy? Why would I buy gold? I'd go buy Chinese companies or buy undervalued companies in this economy. The very fact that Ray Dalio is holding gold tells you something about safe places and how difficult it's become to find them within the financial asset markets.

47:49We'll be right back. And for even more markets content, sign up for our newsletter at profgmarkets.com slash subscribe.

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49:49We're back with ProfG Markets. Well, each year at Swath, we do a predictions deck. And one of the things we do is we try and pick one of the big tech stocks or one of the Magnificent Ten that we think is going to outperform the others. And it's key that we say outperform the others because I don't think anything looks cheap right now. I'm not comfortable saying this is a good buy, but I think it will outperform, meaning it might go down less than the others. And this year we're thinking that it's going to be, our pick is going to be Amazon. Last year was Google. It just looked cheap relative to the rest of the S &P because of this existential overhang that we thought was overblown about the existential threat of AI relative to its search business.

50:31By the way, search business was up 14 % and the stock's up 63 % in the last 12 months. But the pick this year we're thinking, and I'd love to get your thoughts, is Amazon. And that is, it's not cheap, but it doesn't look historically expensive. It's trading at a P of about 34. They've announced that their retail unit, they may achieve double the revenues with the same number of people. It feels like the collision of AI and robotics and the early investments they made in robotics is really starting to pay off. And then some free gifts with purchase, an AI business or a cloud business that's the leader that hasn't gotten the valuation that some of the other cloud or attention players have gotten because it's seen as not the AI capable cloud.

51:13We think they will fix that. But Kuiper, you know, putting satellites, we think that it'd be interesting if they get any traction there. In sum, how do you feel about our pick of Amazon being on a risk-adjusted basis outperforming the rest of the Magnificent 10 over the next 12 months? I think I would pick Amazon and Apple as my picks. And the reason is they haven't gone crazy on their AI spending. I mean, to me, the caution, the natural caution that Tim Cook has in terms of throwing money at new businesses is going to be a plus, not a minus, right? So I know equity research analysts pick on Apple for not being aggressive.

51:49And I think that's going to be a good thing because when the correction comes, the people who have been most aggressive are the ones who are going to be most exposed. and Apple's lack of aggression, I think, might work in their favor because they haven't been throwing the 50, 60, 80 billion that you see some of the other big tech companies throwing at it. So Amazon's been in my portfolio now for a few years. And as I said, it's one of those companies that I would hold on to even through a correction and continuance. Because let's face it, it's become such a central part of so many people's lives.

52:25I don't see it kind of having a collapse of business, you know, even if with an economic contraction. In fact, it might benefit from that. Who knows? Target might get so cheap that Amazon could pick it up for pennies on the dollar. So who knows where it's going to go next. So, you know, I like your pick. I mean, Amazon would be my pick as well. Going back to what you're thinking about in terms of trimming your positions, I'm wondering if you have any if your thoughts differ depending on someone's risk profile risk appetite and perhaps their age as well so me as an example I'm a young person AI is the big hot new thing you know I want to get involved I want to be on the train somehow now, does your advice change depending on your age and what you're looking for?

53:23For someone like me, for example, I agree there's going to be a correction, but I've also got to tell you, I don't want to dump AI and get in cash. I don't want to do that. I think, you know, if I were advising, I'd say, do what you're doing, but do it with caution. So, no, you're not only have a portfolio, you're adding to that portfolio, presumably each year with savings and additional money, my advice is that additional money you're putting into your portfolio, don't all, I mean, if you're traditional practice, I'm going to buy the index fund every year, which is what I advise my kids to do.

53:57Take your savings, buy index funds, go back to doing your regular jobs because I don't want you spending evenings trying to pick stocks. It's not worth the effort. Now, this year, my advice to them is that the savings you got from your income this year, instead of putting it all into stocks, why don't you hold it as cash? So it's not advice about changing your existing portfolio. It's about additions to your portfolio, being more cautious in those additions, at least for the near term. Now, or if you're, you know, I'm not a great fan of doing things on a staggered basis, but maybe rather than putting it all at one goal, rather put it in four installments over the next four quarters.

54:37If nothing else, if there's a correction there, then you don't get it all up front. So it's just a little more caution about increments to your portfolio. But you have two things going for you. One is the fact that you have a longer time horizon. The other is you don't need your portfolio to supply you cash to meet needs. For people who don't need their portfolio to provide cash, you get an advantage. You get an advantage because you have a downturn. You don't need the portfolio. You don't need to sell it to get the cash. So people who are closer, so it's not as much age as how close are you to having to cash out your portfolio to do something, to buy a house, to go to college.

55:17The closer you are to that, the more cautious I would suggest you become or maybe convert more of your portfolio into cash. Because those are the people who will be most damaged by a correction that happened just before they were planning to take the cash out. Because then your lifestyle will have to change. Your choice of college might have to change. and that's not something you want coming out of your portfolio. So my advice would depend on your age, how much cash needs you have, what are you looking to do because those will all play out in what you should be doing. But I'm not a great fan of these drastic actions.

55:53You sell everything in your portfolio and you try to move it all into something else because often the long-term consequences of that, you end up worse off than somebody wrote through the correction and was able to kind of come back from it. I'm glad you bring it up because I think it gets to the heart of what the problem is with corrections, which is it is a timing problem. And you mentioned that with Michael Burry. It's like, yes, you can go short, but that's not the question. The question is the timing. It's like, are you going to time it right? And then the same thing is true of what does the timeline look like on your life?

56:30When will you need the cash? And what position will you need to be in on that timeframe? which I think is helpful. But I am struck by even for those who are not so worried about timing, for those who have a somewhat steady income and who are young and who are trying to build a portfolio, your view is still maybe don't keep dollar cost averaging into the market, maybe get into cash, which is striking to me, especially given inflation, which is high, appears to be going even higher. It doesn't look like we're going to be in a 2 % inflation world. What would you say to those people? Buy three-month tables, roll them over.

57:18If inflation actually turns out to be higher than expected, that table rate will rise. I mean, the best measure of protection against expected inflation has been buying short-term treasury. So I think that, you know, my advice is, if that is your concern, is that inflation should up, keep it short term. I mean, I buy my treasuries directly from the U.S. Treasury, so you're not going through intermediaries. You basically pick the expiration date, when the people's going to expire, three months, six months, whatever works for you. Have a preset rule as to when you plan to get that into stocks. So you might say, look, I'm going to put this into treasuries, but I won't be the one who pulls the trigger when it goes into stocks.

58:01This is what will happen. Once the cash sits there for six months or nine months, almost an autopilot moves into my index fund. So you're not changing your historical pattern of being invested in risky assets and looking for the higher return. You're just slowing the process down so you're not jumping in at a time just before a correction hits and then facing. So I think that's all you're doing is kind of giving yourself a little slack in this process. When we last chatted, it was in August, and we were talking about big tech valuations. We were talking about not that there was an AI bubble, but that there was a lot of momentum and perhaps a lot of hype.

58:43And you were somewhat bearish on AI or somewhat bearish on tech at the time. Now you are more bearish, it appears to me at least. I'm wondering if there was a moment or maybe a specific company or a specific valuation that sort of changed your tune on this I know that it wasn't a 180 but there's certainly been an acceleration in your views I think it's more incremental and part of it is watching these companies invest in each other right I mean it's it's it there's this almost incestuous relationship between the big AI players. And one of two things can be driving. One is that they want to dominate the AI space that's going to emerge five years from now, and they want to create these barriers to entry.

59:32The other is, this is almost like a Ponzi scheme where they have to keep investing in each other, making each other look more valuable because that's the only way they can get the rest of the market to go in. I'm not ready to make a decision that it's the latter, but watching that happen has made me more negative about AI. If you really feel, as in very open AI, that you're going to carry the game, why would you need these cross-investing in other players in the game? Because that seems like you're hedging your bets and protecting yourself and making sure that nobody in you is going to break in.

1:00:06So that suggests to me that much as they convey confidence to the market that they think they're going to rule the world of AI, that within these companies, there's still uncertainty about whether they will, in fact, rule the world of AI, and what they're creating is this preemptive barrier to other people entering. So that's the one thing that I think has changed for me is watching that cross-company investment and what it tells me about what's in their mindsets about the future of AI. Going back to the beginning of this episode where I asked about this conventional wisdom, the idea that a lot of people are saying that there is a bubble, And a lot of people are also pointing out what you just said, which is the circular investments, the incestuous relationships, and all the negative connotations that come about.

1:00:54And yet, we're looking at all-time highs. And yet, we're looking at 56 times earnings on NVIDIA. We are looking at very, very rich valuations while everyone says, yeah, it's a bubble. Even the people who run these companies, in some cases, are saying, maybe not it is a bubble, but it certainly could be a bubble. Is that unusual? Does that surprise you? Not at all, right? Because think of how portfolio managers get evaluated, right? They get evaluated against other portfolio managers. So if you did not own the Mag 7 over the last five years, all the money's left, your clients have left. If you do buy into NVIDIA now, Even if it's a high and there's a correction, guess who you get measured against?

1:01:42Are the portfolio managers who also own NVIDIA who also see the same correction? You're down 37%. But if everybody else is down 43%, you still say, look, I came out of this much better off. And because we let people create their own pathways, I'm a tech investor. They essentially have this argument. Look, I had no choice. I had to invest in this because this is what tech looked like. I think the way we reward and punish success in active money management doesn't reward people who leave the herd, right? So if I had a son or a daughter as a portfolio manager, I'd say, look, you know, pile in with the momentum.

1:02:26Because even if you're wrong, you'll have lots of company when you're wrong. And nobody gets fired when 90 % are wrong. But if you have a contrarian path and you decide to sell short on the Mag 7 and you turn out to be wrong, you lose your job. So I think the way we, and that's why it's only people like Michael Burry who can do this, I'm going to sell short, because they're not managing conventional money. They've got a subset of clients who bought into what they do. But you can't do this if you're a big portfolio manager, a big endowment fund. because the way you get judged, where you get rewarded and punished essentially keeps you on that stay with the crowd.

1:03:11Even if that crowd is wrong, it's better to be with the crowd and be wrong than to break away from it. For those who are listening to this and feeling perhaps anxious, I mean, there are a lot of concerns. There's the valuations that you're describing, the possibility of a correction. There's the fact that AI could have massive effects on the job market. Perhaps some people I know, many listeners feel that they are concerned about the security of their jobs. What would you say to those people? What would be your advice? You can control only what you can control. So my advice is take your job, take a look at what you do.

1:03:54If 99, 98, 97 % of what you do is mechanical, whether AI is here or not, you're asking to be replaced by a machine. So try to create a component of what you do that is going to be difficult for a machine to do. I mean, I gave a talk right after, you know, about AI bots, because I had an AI bot that was trying to replicate me. And I said, look, I'll make your job easier. Here are the things that I do that you can replicate. Those data sets that I upgrade every year. Hey, you can do that very simply yourself, you know. So I actually took out the 80 % of what I did. So you can do this. here's the part that I think I can do that you're going to have a much tougher time.

1:04:34I would say impossible because who knows how sophisticated. I think we all need to do a personal inventory of what we do at our jobs and whether it's something that a machine could do better. Now, I'll give you a very simple example. People keep sending me ways in which they think they can beat the market. If I do this and this, and I have a very simple response to them. Can ChatGPT do what you've just described is doing. So he said, I buy low PE stocks with high growth rates. Will I make money? And I said, how difficult do you think it is going to be to find low PE stocks with high growth, especially when you look at past growth?

1:05:10ChatGPT can do that. Why do you think you're going to be able to make money on something that a machine can do effortlessly? So my advice to people is act like AI is going to take your job because it's better to do that and not have AI measure up to its promise than the alternative, which is, think AI is never going to take off. You keep doing what you're doing. And one day you walk into your office and you've been fired and replaced by a bot that essentially does what you do. Can I just ask for you personally, when you eliminated all the 80 % of the things that you believe that AI could replicate in your work, what were you left over with?

1:05:54What can AI not do that you do? Imagination and creative, the kinds of things where my family takes issue with me. I'm a daydreamer. I connect these unconnected things in my mind. And most of the time, it's used to, you know, people say I'm wasting time because I'm doing this. But some of my most productive thoughts have come from connecting. You know, I wrote a piece on this about catastrophic risk. And I don't know whether I ever mentioned this was about, started this year. I got an email from somebody in Iceland who read my blog and he said, look, I've been reading your blog, but I have a valuation challenge.

1:06:30I'm valuing this Icelandic spa called Blue Lagoon. It's a legendary spa. And I'm facing a problem I've never faced before. There's this volcano that's erupted and the lava is flowing in the general direction of the Blue Lagoon. And I don't know how to bring that into valuation. I've looked at all the books. There's no lava risk in any of the books. So I read the email. I'd never an answer to him, but I took my dog for a walk. And while I was in the walk, I was thinking about this. And I started thinking about the fact that fossil fuel companies, you know, you have COP30 and you talk about, you know, how come fossil fuel companies are trading at much higher multiples of earnings?

1:07:08And there isn't this catastrophic risk looming. And while I'm thinking about fossil fuel companies, I remember the house I own two blocks from the Pacific Ocean, one of the worst earthquake falls. And I said, what was I thinking when I paid the money that I paid for that house? Again, catastrophic risk, and I'm acting like it's not there. And while I'm still there, I'm thinking about the Mad Max movies. I'm thinking about how often in the Mad Max movies do people check their portfolios? Almost never. And the conclusion I came to was we as human beings take catastrophic risk, and we don't build it into our expectations.

1:07:43We set it to the sack. Because our view is if that happens, who cares what your portfolio looks like? we don't build a nuclear war into our expectations we don't build in the fact that the oceans could rise three feet because if that happens none of the other stuff matters and that all came from a 30 minute walk where i let my mind wander so i don't think a computer is going to do it because it's going to be too i mean it's not that's what makes us human beings the capacity to connect disconnected thoughts. An apple falling on your head and the law of gravity. How the heck do you go from one to the other?

1:08:22But Newton did this, right? Some of the greatest insights of mankind have come from people connecting disconnected things. So keep an idle mind. Read less. Think more. Daydream more. I mean, and I think, unfortunately, if you were a conspiracy theorist, you would argue that technology companies are setting us up to be replaced because they're taking every space of idle time we have and filling it up with something. I mean, you go to catch a flight, take a look around here. Every person is checking their iPhone, right? You're filling your space, reading Facebook posts, reading and looking at it.

1:08:59We are not giving ourselves that idle time to let our mind connect. And I know it's a strange thing to say, but that's an advantage I have over a machine that's going to be very difficult for the machine to replicate. So you know what I'm going to do? Read less, daydream more. And I've been doing that a lot because for the last three months, I've been looking after my granddaughter who had just done six months. And when you're with, and I'm the caregiver, so you don't have the luxury of reading. So basically, I'm spending all my time holding a baby, feeding it, putting it to sleep. And it's an amazing time to let your mind wander.

1:09:37And to me, I don't know what will come out of this. Maybe nothing will, but I'm glad I have that time. So if you have a vital time, cherish it, because that's when I think you can find your AI beater within you. Aswath Damodaran is the Kirshner Family Chair in Finance Education and Professor of Finance at NYU Stern School of Business, where he teaches corporate finance and valuation. You can also read his research on his blog, Musings on Markets. Professor Damodaran, always a pleasure. Thank you so much. Thank you for having me, Ed. Very much appreciate your time, Aswath. Take care, Scott. This episode was produced by Claire Miller and Alison Weiss and engineered by Benjamin Spencer.

1:10:18Our research team is Dash Lan, Isabella Kinsel, Chris O'Donoghue and Mia Silverio. Drew Burrows is our technical director and Catherine Dillon is our executive producer. Thank you for listening to Prof G Markets from Prof G Media. If you liked what you heard, give us a follow and join us for a fresh take on markets on Monday.

1:10:45you help me in kind reunion as the world turns and the dark flies in love Thank you.