Aswath Damodaran on Sugar Daddies, The Magnificent Seven & The Art of Selling Stocks | #558

Episode Summary

Executive Summary: Meb Faber interviews Aswath Damodaran on valuation, investing psychology, and corporate life cycles. They discuss why great companies can be bargains at times, how selling should be framed to reduce regret, why mature firms should “act their age,” and how cash returns, governance, ESG, AI, media disruption, and politics shape corporate outcomes and investor decisions.

Main Topics: Valuation, position sizing, and selling discipline (Priority: 5/5): Damodaran explains why even the Magnificent 7 were buyable at certain points, how he handles exits by selling half to manage regret, and why framing matters when judging gains and losses. Corporate life cycle and how firms age (Priority: 5/5): The conversation centers on Damodaran's book and the idea that companies evolve from startups to mature cash-generators, with different capital allocation, debt, and payout policies at each stage. Reincarnation and corporate turnaround (Priority: 4/5): They examine examples of mature firms that regained growth—especially Microsoft and Apple—and why successful reinvention is rare, organic, and dependent on luck plus existing strengths. U.S. market structure, buybacks, and global differences (Priority: 4/5): Damodaran contrasts the U.S. with Europe, China, India, Brazil, and other regions, arguing the U.S. uniquely rewards young firms and has normalized buybacks through activist pressure. ESG and governance criticism (Priority: 4/5): He distinguishes real shareholder governance from ESG's stakeholder model, arguing ESG scoring is fuzzy, gameable, and has not meaningfully improved outcomes like climate or inequality. AI, private markets, and startup dynamics (Priority: 4/5): Damodaran argues AI and late-stage private capital may fuel overvaluation and allow weak business models to scale too far before public markets discipline them. Media, sports, and political distortion in valuation (Priority: 3/5): He discusses broken business models in media, sports franchises as billionaire toys, and the difficulty of valuing firms where politics (China, India) or non-economic motives dominate.

Key Arguments: Many iconic stocks, including all seven Magnificent 7, were bargains at some point; investors should never assume a company is permanently too expensive to buy. Selling is as important as buying; holding losers is driven by ego, and holding winners too long is driven by attachment and regret. Selling half a position is a practical way to reduce regret and avoid binary all-in/all-out decisions. Companies should be valued and managed according to their life cycle; mature firms should return cash rather than chase bad reinvestment projects. Microsoft and Apple are examples of rare corporate reincarnation, but most companies cannot successfully reinvent themselves. Buybacks are more flexible than dividends and should increasingly replace them globally because residual cash flows are uncertain. Book value has become less useful for many modern firms, especially tech and companies with heavy buybacks, weakening traditional value metrics. ESG is criticized as a vague, gameable framework that reduces accountability by turning managers into answerable-to-everyone-and-no-one actors. Governance should mean shareholder power to replace management, not a checklist of board composition or ESG labels. Late-stage private capital can enable weak business models to scale without public-market scrutiny, creating future disappointments. Politics materially alters valuation in places like India and China, making some businesses difficult to underwrite with standard financial models. AI versions of experts and mechanized analysis threaten anyone whose work is mostly repetitive spreadsheet-based tasks.

Data Points: Magnificent 7 ownership: 7 of 7 - Damodaran says he owns all seven Magnificent 7 stocks, though bought at very different times. Microsoft purchase year: 2014 - He bought Microsoft when Satya Nadella became CEO and change seemed possible. NVIDIA purchase year: 2018 - He bought NVIDIA in 2018 and later sold about half the position. Tesla purchase price: 172 - He says he bought Tesla this year around 172 per share. Meta valuation after metaverse selloff: about 6x earnings - He notes Meta traded at roughly six times earnings from its advertising business after the Metaverse collapse. Selling frame reference price for NVIDIA: $5.40/share - He says that was his original NVIDIA purchase price, used as the anchor for framing gains. U.S. startups: about 75,000 - He references a chart showing the U.S. had roughly 75,000 startups a couple of years ago. Two-thirds startup mortality: 2/3 fail by year two - He notes that two-thirds of startups do not make it to year two. Meta/Alphabet dividend initiation: both began paying dividends in 2024 - He interprets this as a signal that the companies see themselves as mature. Microsoft cloud revenue mix: more revenues and profits from cloud than Windows + Office combined - Used as evidence of reincarnation and successful reinvention. Facebook voting control example: 13% ownership with 57% voting rights - He uses this to show how dual-class shares weaken governance. ESG age: 16 years - He says ESG has been around 16 years and has not improved the major problems it claims to address. Publicly traded green energy companies screened: 313 - He says he downloaded every publicly traded green energy company to find a healthy one. Healthy green energy companies found: 1 of 313 - He claims only one passed his test for being healthy and making money with an established business model. Sovereign wealth funds: 100+ funds; trillions of dollars - He argues they are increasingly important but often underperform and fail to create governance change. Power of cash at Apple: about $180 billion cash balance - He cites Apple as a firm he trusts to hold huge cash because of its discipline. Chinese tech crackdown example: Tencent, Alibaba, JD - He uses these firms to illustrate how Beijing can unexpectedly change the investment case. Sports franchise purchase example: $10 billion for the Cowboys - He argues franchise prices now reflect status and ego more than business cash flow.

Pivotal Quotes: "never say never, never look at a stock. I would never be able to buy the stock because the right price, every one of these companies would have been a bargain." — Aswath Damodaran: On the Magnificent 7 and why expensive companies can become attractive at the right valuation. "just act your age." — Aswath Damodaran: His advice to mature companies that keep behaving like growth startups instead of returning capital. "If you do your homework and find good investments, do so on the expectation of rewards, but don't feel entitled to those rewards." — Aswath Damodaran: On humility, process, and avoiding righteousness in investing.

Implications: Listeners should focus less on forecasting and more on process, valuation, and psychology. For companies, age-appropriate capital allocation and accountable governance matter more than slogans. For markets, AI, private capital, and politics will keep reshaping what “value” means.