The Corporate Lifecycle + The Market’s Fallen Heroes — ft. Aswath Damodaran
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Today's number 100. That's how many times the word fuck is said in Deadpool vs. Wolverine. True story, Ed. My favorite male escort, Patrick, has a side hustle as a magician. He calls himself Hocus Pocus.

Oh, that makes me happy. That makes me happy. That was it? That took you 20 minutes to get out of your system. Ed, how are you? How are you? Any magic tricks? By the way, I heard you had a girlfriend. If you want a loser, just start talking about your magic a lot. And also pay with a Discover card and show up with a Hyundai. Those are my go-tos, Ed. Oh, God.

God. You don't need, you will not need to practice safe sex. That's practicing safe sex. I think every episode is going to start off with some girlfriend advice from you at this point. I'm very excited. I, you know, if you're talking to a guy that's, that's been married and divorced a couple of times and, uh, and, uh, it should be rich, but it's paying a ton of alimony. Um,

I have somewhere between two and 400 children because I was a sperm donor in college. Do you know the number, by the way? No. So true story. You can actually, I paid for my junior year in college, you know, leaving the best part of me behind four times a week at a clinic. And I literally paid for my junior year. And get this, this is a true story. So I went in to the sperm clinic with two friends of mine that were world-class water polo players. And they were these blonde gods and

And they were also much smarter than me. And they give you an IQ test. They take pictures of you. You do a personality survey. And I thought, I am never going to get called compared to these guys. I remember the Monty and Jeff. And I started getting called three or four times a week, and they didn't get called very much. And this is a critical thinking test. There's no joke here. This is true.

So I said, why am I getting called in so much? And they said, you have the chocolate and peanut butter of sperm donation. This isn't a joke. What do you think that chocolate and peanut butter of sperm donation is? And I'll give you a hint. It was in West Los Angeles.

I would have said not drinking, but I know that you drank a ton. Oh, no, no, no, no, no, no. I lied about that. Oh, you lied about the substance abuse. I lied about the substance abuse. So I don't think you'll be able to figure this out, but I was tall. That's the number one requirement, tall. And I was Jewish. And I guess there was a lot of Jewish parents who liked the idea of having Jewish swimmers. Interesting. Also, this is probably more detailed than you wanted. I had my first...

test for venereal disease, which I had not had before. And Ed, let me just say it is not pleasant. And this little weird guy gave me the VD test and I passed out. And I woke up to a semicircle of people from the clinic and I thought to myself, they're not going to want my feinty sperm now. But anyways...

How did we get here, Ed? I'm pretty sure you brought it up independently. And by the way, the question was, how many kids do you know how many kids you really have? And you didn't answer it. Do you know? That's it. Again, more truth here. My mom made me stop because she said, you realize your son could end up marrying his sister accidentally. You don't know how many kids you have in West LA. And I hadn't thought of that. And I'm like, okay, I'll stop. But there is a website now. It was a totally unregulated industry. Now there's, I guess, a website. And if you go to it, you type in your name, they find the clinic there.

you donate it at, and they'll send you certified mail, and you sign it. And if you sign it, an email goes out to all of the children, your biological children, with your contact information. And I would do it, but here's the problem. You really don't know if it's two people or 400 people that are going through premature hair loss. So I'm scared to do it, but I think if I were to

I think finally when the ass cancer shows up, I might do it because I think it might be interesting to throw a big party for everybody. But at one point, every athlete or every male athlete at UCLA was making money as a sperm donor. Did you make good money? I started at $30, and when I started getting called a lot, I left him a note saying, $40 a shot or I take the gift of life somewhere else. That was one of my first big negotiations.

And so I used to make $40 in 1985 or whatever it was, three times a week, $120 a week. That was real. No, that's serious. That was real catfish for me. So it was good. And that's why my right forearm is the size of my thigh. Today we're speaking with Aswath Damoda. Tell us about the markets, Ed. Tell us about the markets. You have to transition us somehow into an introduction to our extremely...

wise and important scholar who's coming on. Okay, so anyways, welcome to Profiteer Markets. We're probably half our listeners I'm related to. Today we're speaking with Aswath Damodaran, the Kirshner Family Chair and Finance Education Professor of Finance at NYU Stern School of Business, where he teaches corporate finance evaluation. He's also known as the Dean of Evaluation, and in his latest book, The Corporate Life Cycle, is out this week. Most of you do not need an introduction from Professor Damodaran. He is

considered probably one of the 10 most iconic, famous, best teachers in the world of graduate education. Aswath is asked every year to go to this gathering of other profs and teach them how to teach. And he's won best professor amongst the 190 faculty about seven times. You know how many times I've won that award, Ed? How many? Blessed and won. I've won it zero. I've won it zero times. Anyways, let's get to the markets. ♪

Professor Aswath Damodaran, thank you for joining us. Thank you for having me. So let's start with your book, The Corporate Life Cycle. What is The Corporate Life Cycle and why is it something investors should understand? Well, for the same reason that we all wrestle with the question of aging. I'm old enough that I see my kids wrestling with middle age and aging.

As human beings, aging is something that we can't stop, but we constantly try to reverse. And companies, I think, go through the same process. Companies don't like to age. They want to be young growth companies for the rest of their lives. But like human beings, they age and they fight aging. And they're aided by an ecosystem telling them that they can be young again. Bankers, consultants selling them stuff saying they can be young again.

I think more money is wasted by companies refusing to act their age than any other single action that companies take.

And part of the reason I wrote the book is to get companies comfortable with the fact that as they age, they've got to change how they run as companies and how we invest in them as companies. How do you tell what stage in the life cycle a company is at? The bludgeon is to actually just use corporate age. So you can say a 25-year company is a young company, but that kind of misses the point. Ultimately, the best indicators for aging is to look at your operating metrics.

your revenue growth, your margins. Young companies tend to have high revenue growth. They often have negative margins. They have a business model that's evolving. Mature companies tend to have more stable revenue growth, lower revenue growth. They tend to have more positive margins and more stable margins. So looking at revenue growth and margins can often give you an indication. So the stages that you've outlined, there's startup, young growth, high growth, mature growth, mature, stable, and then decline.

I think the assumption that I would make, and that it sounds like by the idea of companies wanting to be young again, is that it's bad to be old. Is that true? That's a message we send them, right? I mean, if you think about it, who do we glorify in business schools and in business stories? We glorify empire builders. We glorify growth companies. I mean, when was the last time you saw a movie about a CEO who made his company or her company smaller?

The nature of business is we glorify empire builders. We glorify growth for the sake of growth. And that can sometimes become a problem as you age as a company because people keep expecting you to deliver that growth you used to deliver as a younger company. And you often end up overreaching when you try to do that. Do you think there's any... We've been talking a lot about Intel today. Do you think that the corporate life cycle or...

Any of your views on this relate to Intel? Yeah, I think that's, I was going to bring up Intel because you think about semiconductor companies in general. 30 years ago, if I said semiconductor company, you'd automatically jump to the conclusion, young growth company, and you'd have been right. The semiconductor business has aged. It's a mature business. It's been a mature business now for more than a decade. But within the business, you can see the variance. You've got NVIDIA and Intel both in the same business, very different stages of the life cycle.

NVIDIA obviously is a mature growth company. And in fact, it's a mature growth company with an immense amount of growth because it found a new lease on life. Intel has made this transition where it's no longer even a middle-aged company. I think it's approaching old age and investors are treating it as such.

Now, is it reversible? Corporate life cycles can sometimes, you can reverse aging. At least you can stall aging. But the next year or two is going to be a big test of whether Intel can actually pull that off. But do you think at these levels, I mean, there's some amazing stats, right? Just in 2020, it was worth more than AMD and NVIDIA. And now NVIDIA is worth 29 times what Intel is worth. At some point, it feels like almost any company is a buy. I got to think Intel has very strong relationships with,

with corporate customers, the chipsack, it's going to get a multi-billion dollar sort of infusion of free money. Do you think at some point, and is that point now, it becomes a buy? I think it depends on, I mean, I need to dig in more in how much I trust the management team at Intel to be able to deliver on it. But I think they have the pieces for, if not a rebirth, a revamp.

I mean, they have an engineering and a technology team that is on par with any of the other companies. They have a history of customer relationships they can use. If they can build on their strengths and get some focus going, I think they can go back to at least being middle-aged, if not high growth. And that's all you need as an investor to make money on the company.

But the one thing that worries me when you have companies that hit these stages is managers sometimes try to overreach. They'll try to do a big acquisition, a big shift in operations into a new business. And that's where I think we end up losing money as investors if you have a management team that overreaches. When you have companies like Intel, you're very much at the mercy of whether the management team can be trusted to do the right things to get it back on track.

So just to follow up on that, I love this notion of baby boomers wanting to be young again, so injecting themselves with fillers and Botox and becoming this sort of freak company and just refusing to age, if you will.

Yeah, when I've been on boards of public companies, there's more of a tendency to want to be bold and do a Hail Mary as opposed to what I think is usually, more often than not, the answer. And I want to include Nike in this analysis because I think it's going through a similar kind of midlife crisis.

But usually, unfortunately, the answer is much less aspirational, and that is cut costs and lay off people and recognize we're just no longer as useful as we used to be. Any thoughts about cost cutting versus sort of acquisitions or big, bold moves? And if at all, it relates to Nike as well as Intel? I don't think it has to be an either or. I think you've got to start with reducing costs because you've got to send a message to markets that you're still healthy, that you can find a way back.

But if you're aspiring to get some growth back, you've got to build on your strengths. I mean, I'll give you two examples, I think, of companies that were able to do it. In 2013, if you'd asked me about Microsoft as a company, my reaction is the two-hit wonder, right? Office and Windows, they haven't done anything since. And they found a way back.

And Scott, if you remember, I was pretty negative in the New York Times a few years ago. And I think the New York Times is a company that among the publishing companies has found a way back, if not to high growth, a state where they are healthy, they're able to deliver profits and growth. So I think that there is a way back, but it's got to, it requires patience. You can't be, you know, you can't try to do this overnight. It requires building on the strengths you have as a company.

And doing it organically. I think that, you know, when you try to grow through acquisitions, you're going to end up overpaying upfront to enter into new businesses.

So more organic, more patience, and built-around strengths if you're trying to find a way back to steady state. Where does the massive increase in AI investment among the big tech companies fit into this corporate lifecycle conversation, specifically Google, Microsoft, Meta, Amazon? One distinction I'd like to point out, earlier you mentioned this idea that NVIDIA has a new lease on life.

which is a lot more positive than saying that maybe NVIDIA is getting Botox or a facelift. But it's not totally clear what the distinction is until you're looking at it in hindsight. So yeah, what does the AI capex investment movement mean to you in terms of this conversation? I think NVIDIA is the only company that's earned its new lease on life already. And the reason I call it a new lease on life is they didn't jump into AI after everybody else recognized it was a big market.

They got in ahead of the fact. And that's something I think, you know, that you find in common among companies that find a new lease in life. They're not jumping into a space where there are other companies already kind of big and involved. They're jumping into a space ahead of the game. I think the problem I think the other big tech companies have is they're jumping into a space where everybody else is in that space.

I do think they have some advantages in AI, but I do think that they're going to have to fight it out. So there, I think we'll have to wait and see whether, in fact, this will give them the capacity to push their growth back up. I am skeptical. When I value the Mag 7 now, I give them growth rates in the high single digits. None of these companies are 30, 40, 50 percent other than NVIDIA, which I think still has that AI growth. The other six companies, I think of it.

as solid companies, good growth, closer to middle age than young growth. And I don't think AI is going to change that trajectory. And so that's why I think the market needs to discriminate between companies investing in AI, between those companies that were ahead of the game from those companies that are playing the Me Too game. So would it be fair to say that you believe that this massive AI investment from these companies will ultimately...

lose money for investors? Not necessarily, but it won't create, I mean, to create value, you got to earn well above your cost of capital. These are kind of, I mean, on these investments, I think that, you know, my gut is that they're going to end up earning their cost of capital, which is not a bad thing. It'll mean that they'll grow and they'll earn a reasonable return, but they're not going to earn the 30, 35, 40% returns they earn on the businesses they're in. I mean, let's take Alphabet, right?

The only business they're in where they earn substantially more than their cost of capital is that search box. Everything else they've done since, at best, they break even. And my guess is that's what AI is going to look like for them as well. So for these businesses, it's not going to necessarily be a bad business, but it might be closer to neutral than a good business. And I think the markets eventually will come to that recognition as well. So Aswath,

We're both old enough to remember the dot-com craze and how it unwinded. And it wasn't that it wasn't a seminal technology. It wasn't that it wasn't going to change the face of business. It just wasn't happening as fast as the valuations indicated. And because no one—clearly there was going to be a fallout. We got increasingly complex to pick between Amazon, Pets.com, and Overstock. It seems obvious now, but it wasn't obvious back then.

So everyone digressed to the safe play, which was the infrastructure bet of Cisco. And people say there's big differences, that the earnings growth has accelerated almost as fast as the stock price with NVIDIA. But I can't help but draw the same analogy, that when you see $20 billion growth,

in front-end revenue that has inspired a $2 to $3 trillion increase in market capitalization. You look at 100 and 150 times revenues, and you're seeing the same sort of, we don't know how to pick the winners on the front end in AI, so let's digress to the infrastructure plays. I mean, it literally feels as if a similar bubble is inflating again. And then, you know, as we know, Cisco lost 90% of its value last

from the most valuable company in the world in two years. NVIDIA is Cisco 1.1. Your thoughts? And Cisco's never rediscovered its mojo, right? It became a mature business. It's a good business, but it's not a business that people get excited about. And I have a feeling that NVIDIA and the cloud business in general that supports AI is eventually going to become a boring, you know, kind of... And I think we are overreaching in terms of market cap on NVIDIA in particular.

because people are looking for something to put money on in AI. And this seems to be the most tangible thing to do because unlike the dot-com boom, where you actually had companies that whether you like them or not, were offering product and services, I cannot think of very many companies that are offering AI where in terms of getting ahead of the game, getting way ahead of the game in terms of betting on something where you haven't seen tangible evidence of a market being created for those products and services.

So I agree with you. I think we overreached. And I've argued all year that NVIDIA is overvalued, even though I own some NVIDIA still, but I bought it in 2018. I'm okay with that. But I think it is, you know, investors tend to be lazy. They want something that they can hang their hat on right now. And right now it's the big tech companies with their cloud businesses and NVIDIA with the chip business companies.

But I think at some stage, if you want to pick the real winner in this business, you're going to find a company that makes money on AI by selling products and services. And I can't think of any that come to mind now. And that's troublesome because we're investing hundreds of billions of dollars in an architecture with no idea of how that's going to play out for companies that use that architecture.

to try to make money. Yeah, it's almost like we're more excited to invest in AI than we are to actually use it. Same is true of crypto. But you mentioned there are no companies making the AI products. The one company I'd push back on with that statement is OpenAI. You know, they are supplying APIs for enterprises, a lot of startups, and a lot of big tech companies. But also, around half of their revenue is from their consumer product, ChatGPT.

That is true, but they're a strange creature. I'm not sure what they are, right? I mean, are they... That was going to be my question. What is it? Public, they're private, they're for-profit, non-profit. I mean, it's a corporate governance nightmare in many ways. If it's a business, then it's really not being... I mean, you saw that play out last year at the very top of OpenAI with Sam being pushed out and coming back in.

So this is the vanguard of the AI product services business. It's not exactly a play that you and I can make as investors because I'm not sure what it is, right? Microsoft is indirectly benefited from its connections to OpenAI.

But it's not quite a company in the same sense that Amazon was a company. So if OpenAI is the only company out there which actually has tangible evidence of we can sell products and services and make money on it, I'd like it to be a cleaner play where I can say, okay, let's see what your numbers actually look like, what your corporate governance looks like. And right now, I don't see it yet. If you had to place it somewhere in the lifecycle of OpenAI...

Could you place it? Right now, it's more option than anything else. You're buying a huge option that if it pays off, is going to get a lot of upside. So it's a young, young, young business if you think of it as a business. Even though it's making money, the business model is going to obviously shift over time. So it's very early in the life cycle. And given how it's structured, I'm not sure how you advance it across the life cycle without changing.

I don't see it continuing to do what it's doing now and become bigger because, you know, something's going to break. We'll be right back. Your business deploys AI pilots everywhere. But are they going anywhere? Or are they stuck in silos, exhausting resources, unable to scale? Maybe you don't need hundreds of AI pilots. You need a holistic strategy.

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Thank you.

We're back with Profiteer Markets. Aswath, we were on stage at Stern and I was busting into my, like, I hate MetaRap.

And you pointed out that distinctive, their kind of adventures in VR and the Oculus not working and Apple kind of attempting to kneecap them, that they still sat on this cash volcano. And you made sort of a bullish call on it. At that point, the stock was at 80. And I think now it's somewhere in the 600s. Can you think of any other company that...

is in a similar position that's been unfairly punished, that you look at and say, look, the fundamentals, there's a mismatch between perception and just the underlying fundamentals? You know, one reason I want to take a closer look at Intel is I think that the amount of punishment that has been meted out to Intel, and I'm glad we let off with Intel, seems disproportionate to what has happened already on the ground.

I mean, I think that's what we're looking for. And I think in this market, it's tough to find companies. We get disproportionately punished because the market's been doing so well for so long. So maybe it's healthy that we're having an overall market correction because you're going to get a chance to look at companies that you think have been beaten up and not given credit. And I think with Meta, it was particularly, I think, distinct because

It went from being a superstar company to a company where people looked at it and said, this company can't do anything right. It's amazing how much shifted. That was, I think, uncommon to see that much of a shift happen over such a short period. Usually it takes a much longer stretch to go from being a young growth or a high growth company that's viewed as a star to being a dog.

But for Meta, it happened over the course of a few months. And I think that's what made it so interesting. I think it, you know, it's, I can't think of another company right now where I can say, I mean, I could take companies like Zoom and Peloton, but I think a lot of the punishment there is well-deserved. I don't think it's punishment to look and say that's, I mean, Peloton is a company that essentially overreached, and I think it might have destroyed itself in the process.

So I think that, you know, I can't think of a name right now that would match up to Meta, but I would be looking at some of the more beaten up stocks, at least in the high growth sector, to see if any of them are worth saving. It's not high growth, but I would put it in the camp of potentially Intel and Nike, and that is, have you done any work on Starbucks? Yes.

And, you know, Starbucks is a company that's had, you know, four attempts at rebirth in the last, even the last two decades, right? It's a company that overreaches and somebody comes in and corrects it, overreaches again. And I think that, you know, right now, one of the challenges at Starbucks is they've created a business model that works really well, which is the online ordering, but it's wreaking havoc.

with what made them a successful company in a previous life form. I think they need to figure out a business model that's built more around the fact that a lot of people prefer to get their stuff online. I don't go into Starbucks, order and sit there to drink anymore. Almost every time I order at Starbucks, it's online.

But I think they might need to rethink whether they need these expensive Starbucks outlets with seating for 50 in 50 places in every city when half the people that are coming and picking up stuff. I mean, this seems like an investment with very little return.

But that's going to create a transition. And maybe we're again overreacting to the fact that right now things are not working the way they should. But they're under stress right now because the activists have clearly targeted them. They're going to be under pressure. And here the cutting costs is going to be the first phase of what they need to do to show that they can go back to profitability. But I think they need to shift business models. And if they can, I mean, it's still the dominant

company in this space and I don't see the dominance going away. But I think the key is can they shift the business model to reflect how people buy their products right now? I'm wondering what makes a good rebirth. You mentioned Starbucks has been trying. You've got Howard Schultz coming back in twice. He's been the CEO three separate times.

it's not really working. And then I look at Meta, which, as you mentioned, had this downfall, and it has had this rebirth. And even you look at Mark Zuckerberg, who has gone from wearing suits and being criticized for looking like a lizard at congressional hearings, and is now a cool surfer wearing baggy t-shirts and a necklace, and it appears to work. And his...

rebrand has coincided with the rebirth of the stock. And don't forget the UFC fights that he's promised to get into as well, right? Exactly. I think that what made Meta's return to grace so quick was the fact that you've got to give Mark Zuckerberg credit. When the market punished him, as it did after the big $100 billion we're going to spend in the metaverse, he listened. Notice that he doesn't have...

that talk about metaverse and spending. He doesn't lead with that we're going to spend $100 billion. He leads with the fact we see a productive business, we're going to try to make money. That's something he learned from his mistake. And very few CEOs learn that quickly. And I think part of the reason the market was so quick to give him grace was because if you look at the earnings calls after that horrendous call where the price collapsed,

He very quickly, you know, he might still be doing exactly what he was doing before, but he's at least thought about the fact, what did the markets not like about it? What do I need to do differently? And that's just an adaptability to Mark Zuckerberg that I did not think he had. And I think that's what the market is rewarding. So that might be one of the things is you need adaptability. And that's why Howard Schultz might not be the person to try to

save Starbucks because you need somebody who's adaptable, who's willing to take what originally made Starbucks and say, that's not working anymore. Maybe we have to try things differently. A break from the past. And that break from the past might require a new person at the top. The way I see it is the markets, I'm curious if you buy the CSIS, they're bifurcating. And anything that's reasonably good in tech is fully valued, if not overvalued. And

And I wonder if on the other side, all of those capital flows into the Magnificent Seven has presented opportunities for kind of fallen heroes or orphaned iconic companies. We talked about Nike. We talked about Starbucks, Intel. Another one I've been looking at that was a high flyer for so long and the best performing stock in its category and has been cut in half is

is Lululemon. Do you have any thoughts on Lulu? - I think that that is an incredibly competitive business now. I mean, it's a business space where they own the business, but now it's kind of, you know, everybody's entering. I think they still have a market that's large. I wouldn't call it a niche market. It's too big to be a niche market.

But their growth in that market is fairly limited because that market itself, so if you look at the basic apparel market, they're trying to expand out of the market to get more growth, but that expansion has to be geographical to parts of the world where they're not as well-recognized, Asia, parts of Europe.

or into new product lines where they're not established yet. Footwear, maybe the mirror thing wasn't going very far. I think they tried that. But basically, they're trying both products and geography. I like them as a company.

But I think that if I were an investor, I would do it with realistic expectations of what they can deliver. Their margins are already pretty high, so it's not going to be easy to improve margins, especially because the pricing power is fairly restricted with the competition. But I don't think they're going to go back to being a 20% growth company. That's not happening. But they can at least have that solid growth, maintain margins part of it.

And for investors, leaving Nike might not be a bad place to go, because Nike's got its own share of issues. You might say, I don't want to deal with those. Lulu might be the fallback strategy if you want an apparel company in your mix. And another name we always love to talk about, Tesla. And I would almost describe it as half meme stock, half company, because whenever I want to talk about valuation with anyone, they claim it's an energy company or they talk about...

You know, autonomous driving. Don't forget the robot Tesla bots. Feels like it's sleight of hand. Look over here, weapons of mass distraction, because if we're going to have an honest conversation around what this company actually is, there's no way we can justify the valuation. And yet it'll explode up for what appears to me to be no reason at all.

Any thoughts on where Tesla is right now? I think the problem with Tesla is I think there's a core story that's a good story. I mean, this is the company that's brought electric cars from a side story, something that people thought would never be more than this tiny slice of the market to the center of the market. It's changed the conversation in the market.

I think if they played their cards right and had a narrative that was disciplined about what they are as a company, because I think there are strands of truth to all of these side stories, right? I mean, they are ahead of the game in terms of automated driving, and maybe there's a business there, or in terms of robots, right?

but they need some discipline in their storytelling. And one word that I would not use to describe Tesla over its entire lifetime is disciplined. I mean, this is a company that I call my corporate teenager because it absolutely lacks discipline. The story is all over the place, which gets played out in the market price. It's either boom or bust. It goes to $1,000, drops to $200. So I think that

We need some story discipline here. And for that story discipline to happen, maybe Elon needs to kind of concede that he has too many other things that he's interested in, that he needs somebody who becomes the Tesla narrative setter, who becomes the one who tells markets where the company is going. Because too many distractions. I mean, some of those distractions push up the price, but I think they also cause distractions within the company. What are we working on? What's our next phase?

And I think at this stage, when you're a half a trillion dollar company or a $700 billion company, you can't afford to have those distractions. You need some focus. And I think that would be my advice if anybody's willing to take advice in that company. Find some focus. Find a narrative that actually is well thought through that you stick with. You could learn from Bezos and Amazon because Jeff Bezos built that company because he had a narrative. He stuck with that narrative. He acted consistently consistently.

And he made Amazon one of the great companies in the world. And I think Tesla can do it, but it does need that focus. Stay with us.

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Learn more about smart business buying at AmazonBusiness.com. We're back with Profiteer Markets. Pulling back and looking at the markets more holistically, the U.S. market, which trades at a premium to almost every other market because of the liquidity, because of our culture, our agility, the fact that, you know, it wasn't an accident that the hottest thing is basically owned and operated by American companies, AI.

How do you compare the U.S. market to other markets? I mean, U.S. equities now are almost 50% of all equities globally. It was, I think, 37% or 38% just a few years ago. The biggest loser has been China. China's dropped off. It's still the second largest market, but India's starting to move up the ranks. The most expensive market in the world right now in terms of multiples of earnings is actually India. More expensive than the U.S., but the U.S. is right below it.

In terms of performance this year, it's been a no-brainer. The U.S. has carried global equities. If you think about the total increase in market gap in equities, it's almost entirely come from the U.S., which is part of the reason when you see a drop in the market, it's going to be more in the U.S. than everywhere else because we have more to give up. I just want to stay on the U.S. for a moment. You wrote on your blog, Musings on Markets, about

this thing you describe as country risk and how country risk varies across different geographies. Could you give us a review of what country risk is and also where the U.S. stands right now from a risk perspective? Country risk basically reflects what you worry about as an investor, either as a company or as an individual investor, when you put your money in equity in a country, whether it's Brazil or whether it's China.

And I think that it's fundamental to thinking about investing. And the reason you have to do it is even if you're a purely U.S. investor, is U.S. companies get a significant amount of their revenues from outside the U.S. So if you're investing in NVIDIA, whether you like it or not, you got to worry about China risk. Why? Because those chips get made by TSMC, you know, and I don't want to go through worst case scenarios, but you can see how China risk can affect your value.

of the value of NVIDIA and as an investor indirectly your money. So I think we all need to be aware of the rest of the globe because we're all connected. I mean, you saw this already in the last few days, the sell-off in markets started in Japan.

and spilled over into the U.S., and you see this spreading. This is something we've seen with every crisis in the last few years, effectively this high correlation across markets. Country risk captures the fact that if bad things happen in the U.S., it gets multiplied in parts of the world which are more risky.

A 3% drop in the U.S. would play out as a 5% drop in Brazil. Again, it's that multiplication of risk. With my country, what I try to capture in that country risk effect is how much of a multiplier effect on risk am I going to have if I invest in a company that gets all its revenues in Brazil or all its revenues in China.

What goes into country risk is everything. It's economic risk. It's political risk. I mean, every aspect of risk plays out there. In fact, in that post, I also looked at war and violence around the world, corruption around the world, because those are all things that affect you as an investor. And by affecting you as an investor, affect the value of your investments.

So it's a snapshot in time. Things change, you know. Every time I put that country risk profile out, there are people who push back and say, I disagree with you. And I said, of course you do, you know, because things change. Even, you know, even as I print that, I have to worry about, hey, how much can happen the next week that could change those country risk premiums? It's kind of paradoxical what you just described, which is...

You know, if the U.S. has sort of embedded itself in every country and every market around the world, you would think that if you're investing in Brazil, you're protecting yourself from the U.S. But what you're describing is that actually, because they're so connected, issues in the U.S. can amplify in Brazil. And I guess my question is,

My follow-up question would be, so then what's the takeaway? If the answer is that, you know, we're all connected, then what even is the benefit in trying to protect yourself from country risk? The takeaway is that there's no safe place to be. I mean, you know, if you go back 40 years, if you're an Indian investor or a Brazilian investor, you know how you protected yourself? You moved your money into the U.S. If you're a U.S. investor, you were asked to invest in other countries to get geographical diversification.

That doesn't work anymore. You take every crisis in the last 20 years, 2020, COVID crisis, the 2008. What tends to happen is when markets go into crisis, they all seem to go into crisis at the same time. Being geographically diversified doesn't protect you from risk because it ripples through your entire portfolio. So I think we sold people really well on globalization.

But this is one of the downsides of globalization. Everyone's problem becomes everybody else's problem. It's going to play out as crises that roll through on a regular basis. It's part of investing now. You've got to incorporate into your investment philosophy that this is the way the world is, that you're going to have every two or three or four years a crisis that originates somewhere else in the world that spills over into your global portfolio. I used to think that

the only downside of the U.S. stock market is that you're missing out on the rest of the world, and it's not really much of a downside. But from what you're saying, it sounds like actually the U.S. stock market is the world stock market. There is no downside. The S&P 500 is not a U.S. equity index anymore, right? At least if you think about U.S. equity index as companies that make their money operating in the U.S., the S&P 500 is a global equity index. I mean, the only thing is the accident of history.

These are companies that are incorporated in the U.S. I mean, multinationals are basically the dominant force of the world. They're global companies. And the fact that they're, you know, that you have, you know, Vale Incorporated and traded in Brazil doesn't take away from the fact that it's a global iron ore mining company. So I think that that's basically what you see as an investor. So you can be in the S&P 500. You've got a global portfolio there, right there.

and you just have to recognize that it is going to be affected by global movements, not just by the US economy. Last time we spoke, you said the number one thing you would be watching for this year in terms of markets impact was the presidential election.

So I'm going to switch us to our favorite topic, U.S. politics. Any thoughts on the race so far and how it has impacted the markets? I think part of the volatility you're seeing in markets reflects the fact that we're getting closer to November and closer to the election. I think you are going to see—and here's the potential downside of heading into an election is everything is going to be politics, right? You know, right now,

I can't even imagine how much pressure Jerome Powell is in to do something eight weeks ahead of the election. In fact, I heard people throw out that the Fed should lower the Fed funds rate by 1.5%. I think that would be insane. To do that would be a signal of complete panic. It would be the worst thing for markets.

But unfortunately, when you get this close to an election, the things that governments and central banks do will be driven by the fact that you have an election coming up. So my concern is not so much the uncertainty about who will win the election, but what it creates in terms of bad policy choices in the weeks leading up.

because people feel under so much pressure to do something or the other. So, you know, I would hope that the Fed doesn't act

you know, suddenly to do something because they're being forced to do it. And if they do act, that it's driven by information they have or economics. But, you know, I'm a realist. I think that this is the season of politics, and politics is going to drive a lot of decisions, you see. And just as we wrap up here, Aswath, you've been in and around higher ed. You're obviously considered one of the premier teachers in higher ed globally.

I've been waiting and calling for disruption in higher ed for a decade, and I've been wrong for a decade. I still can't get over the fact that kids have to pay $7,000 to take my class. I can understand them paying $7,000 for your class, but 300 kids, $7,000, $2.1 million, $170,000 a night, that to me just reeked of disruption.

And yet it hasn't happened. I'd just love to get your thoughts on the state of higher ed right now. I think two reasons. One is inertia, which is we've spent a century telling people that an education requires a four-year university degree. And that basically means that a 19-year-old goes to his parents and says, look, I don't want to go to university. I think I can get an equivalent education.

By taking online classes, many parents are going to say, no way, you're going to go to college because that's what we've been saving money for. So that's the inertia part is I think there are 45 to 50-year-olds to whom an education is a college education that takes four years.

The second, I think, is we have a financing system for higher ed that I think encourages this madness. You know, you've got student loans and you've got, you know, aid systems basically saying, look, we'll put off the day of reckoning. And that's a dangerous thing because you're saying, you know, you're telling somebody you're going to a four-year college. Look, you'll make a lot of money in the future with a college degree. What does it matter? We loan you the money right now.

And that's a bomb waiting to go off in terms of student loans, you know, accumulating over time. So I think that we're delaying this adjustment that needs to happen. It's not healthy because that bubble is only going to get bigger.

And like you, I've been not just calling for the disruption of higher education. I've been actively trying to act like a disruptor of higher education. But at the margin, I'm just nibbling. I'm not just taking bites out of the substance. But I think it will happen. But I think what might cause it to happen is a financial bubble blowing, those student loans ultimately blowing.

becoming so large that they just blow up on you. And that's a terrible thing to happen, to have to have a financial crisis be the reason why higher education gets disrupted. But maybe that's the only way it'll happen.

Professor 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. His latest book, which he told us he's not trying to sell, that he doesn't want us to plug, but we're going to plug it anyway. His latest book, The Corporate Life Cycle, is available right now. Aswath, thank you so much for joining us once again. Thank you.

This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our associate producer is Alison Weiss. Our executive producer is Catherine Dillon. Mia Silverio is our research lead and Drew Burrows is our technical director. Thank you for listening to Profit View Markets from the Vox Media Podcast Network. If you like what you heard, give us a follow and join us for a fresh take on markets on Monday.

Support for this show comes from Amazon Business. We could all use more time. Amazon Business offers smart business buying solutions so you can spend more time growing your business and less time doing the admin. I can see why they call it smart. Learn more about smart business buying at amazonbusiness.com.

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