Expert: Aswath Damodaran – Valuation 101: Every number tells a story

Bryce: [00:00:14] Welcome to Equity Mates Investing, a podcast where we explore what's possible in the world of investing. If you've just joined us for the first time, a massive welcome. My name is Bryce and as always, I'm joined by my equity buddy, Ren. How are you?

Alec: [00:00:26] I'm very good, Bryce. I'm very excited for this episode. We are about to speak to the dean of valuation. Yeah, it is something that we all are trying to get our heads around. I think conceptually is probably the hardest part of investing, you know, trying to put precise values on an imprecise future for a lot of these companies. Certainly something that I am trying to work on to become better at valuing companies. And there is no one in the world, literally no one in the world, better to speak to about valuation than this expert. 

Bryce: [00:01:01] That's right. Today we are very excited to be joined by Aswath Damodaran. He's a professor of finance at the Stern School of Business at New York University, and is known in the finance industry as the dean of valuation. 

Alec: [00:01:13] Yeah, I'm pumped for this one. We're going to talk about, I guess, how he introduces his students to valuation. Some of the key concepts that he has, popularised or introduced and written about. And then we're going to talk about markets today. And of course, we're going to ask about the valuations of the Magnificent Seven, the big US tech stocks. So I'm looking forward to hearing which one of those is still cheap. Now before we get to it, we do need to remind everyone. 

Speaker 4: [00:01:43] This is not no, this is not.

Speaker 2: [00:01:46] Financial advice.

Alec: [00:01:51] And that's right. This podcast is for education and entertainment purposes only. Whilst we are licensed, we're not aware of your personal financial circumstances. Any advice is general. With that said, let's get to our conversation with Aswath Damodaran.

Bryce: [00:02:06] Aswath, welcome to Equity Mates. 

Aswath: [00:02:07] Thank you for having me.

Bryce: [00:02:08] So when you have a new cohort of students at NYU, where do you start conceptually when you're teaching them about valuation? 

Aswath: [00:02:16] You start with the basics. I try to explain to them that they already understand the basics. All I can do is provide a structure to what common sense would give them. I mean, if you strip it down, there is no theory in valuation. It's a simplest of all exercises. To put a number on something. You could do one of two things. You can estimate the cash flows you would get from owning the business. Or you can look at what other people are paying for similar businesses. That's it. Now we can add layers of detail to it, but I start there and then I say, look, I know for the moment you're saying, how do I come up with these cash flows and how do I adjust for risk and time? But those are details. It's really that big picture perspective that guides us all the way through the class. So start with basics and then build up. 

Alec: [00:03:03] You make it sound so simple, but it is. It's certainly the hardest part of investing, I think. 

Aswath: [00:03:10] No, no I think you're mistaking life for investing. Life is hard. Forecasting the future is hard. Right now. What I'm trying to say is the mechanics of investing are easy. What people run into is predicting, forecasting the future, and they assume that that's because they don't know valuation. This is the undervalued Nvidia. Your biggest challenge is not that you don't know how to estimate cash flows or discount rates. It's easy enough to do. None of us knows how AI will play out and what it would show up as Nvidia selling more AI chips. So we need to separate out how much of this is you're not understanding valuation and how much of this is you not wanting to grapple with the fact that the future is uncertain and more uncertain in some businesses than others, and that's going to show up in your valuation? 

Alec: [00:03:57] Yeah, I like that. That might be the title of the episode. Investing is easy, life is hard. So when it comes to this valuation work, there's a few concepts that have become synonymous with your work and that you've, you've written books on and spent a lot of time on and would love you to explain them and help us understand them. And, when we were preparing for this interview, we thought the right starting point for this was understanding the difference between price and value. 

Aswath: [00:04:25] I ask people to think about how much they pay for an apartment or a house they've bought recently, and for many Americans, that's getting out of reach. But when you think about how much you pay for a house or apartment, you don't do an intrinsic valuation. You basically decide how much to pay based on what other people are paying for similar houses, that's pricing. You're essentially looking at what other people are paying. And in a way, most of our lives are spent by looking at what crowds do. I mean, I don't know about you, but I decide what to watch on Netflix by checking out Rotten Tomatoes. You know, I decide where to eat by checking out Yelp. Thinking of markets is essentially the crowd judgement and what companies are what. And you try to use that crowd judgement and that's what pricing does. You're trusting the crowd. And. Average to get it right. You saying individually crowds might make mistakes on companies, but collectively they are usually right. In valuation, you approach it differently. Don't think about buying something because everybody else is buying it. You buy it because you're interested in it as a business, you're buying it as a business. And when you buy it as a business, I think about what other people think about your business that it's glorious or awful. Ultimately, it's cash in, cash out. You can't get away from that. So when you think about an asset as a business, you got to understand the business. You have to understand what drives its growth and its profitability and its risk, and bring them all into an assessment of value. Now, we might call this a discounted cash flow valuation. But remember valuation predates this kind of cash flow valuation. This cash flow valuation is a tool that has been developed primarily in the last 87 years, 1937 John Williams because the first one that describes the mechanics of this kind of cash flow valuation. But I think of intrinsic valuation as predating discounted cash flow valuation. The Venetian glassmaker in the 1500s, who decided how much to pay for a business based on cash flows, growth and risk. It's as old as time, but it is more work because you have to understand the business to be able to value it. So given a choice between valuing something and pricing something, most people, including most people who claim the valuation, are really doing pricing. 

Alec: [00:06:38] And you know, I've read some of your writings about how people will claim they're doing valuation work when they do, you know, look at price to earnings or look at price to earnings relative to other peers in their field. But that's not really valuation work. That's a pricing exercise. 

Aswath: [00:06:54] But do you know why they do it because we train people to believe that pricing is shallow and valuation is deep, that we all want to be Warren Buffett. We don't want to be somebody who picks stocks based on what the people are paying. So they get that message, which is even if you're doing pricing, you got to masquerade as if you're doing valuation. And this is especially true if you're a professional money manager, right? You have to create that facade of, I think about cash flows growth and risk when all you're thinking about is momentum, mood and what's everybody else buying. Now I tell people, look, if we have more, we could all be better investors. We were all more honest with ourselves about what we're doing. There is nothing worse in investing than to trade and act like you're an investor vice versa, invest and adopt trading trading is what prices do, Investing is what people use value to. There's nothing better or worse about one versus the other. But most people who claim to be investors are really trading. They buy low, sell high, and there's nothing wrong with it. That's effectively just as a, you know, as good a way to make money as investing is just a different way. 

Alec: [00:08:07] Now, related to this concept of price and value is numbers and narrative. And you literally wrote the book on this. So I guess, can you talk us through numbers and narrative and I guess how they fit together? When you're doing a valuation exercise. 

Aswath: [00:08:22] I can tell you where that book was born. It was born from looking at a couple of things out there that seem to be in direct contradiction of each other, is the first. We have far more data today than we did 40 years ago. When we sit down to value companies, I'm old enough to remember using an annual report, a physical annual report, and doing a valuation with a pencil on a ledger sheet. Right. Minimal tools, very little data. We have far more data than we ever did. And we have far more powerful models than we ever did. And here is the contradiction. I was noticing that the quality of valuations was actually getting worse rather than better, because, you know, you'd think that with all this data, all these tools, you'd be getting more sophisticated, better valuations. So I start to think about why is that happening? And the more I thought about it, the more I realised that people are not valuing companies anymore. They're doing financial modelling. To them, valuation is an Excel spreadsheet. You change the numbers, you project the numbers out, you do some neat little functions, you build some macros, maybe even bring Python into the mix. It's become the mechanics of the process, and people have lost sight of the fact that the numbers are essentially a reflection of a story you're telling about a business. And because it's so easy to grind out the numbers, for years we had no choice but to tell the story because your numbers were limited yet to tell people. This is why I think Coca-Cola is a great company going into the 1980s. It's a US company that's poised to go globally, and therefore I think it is going to grow faster. And because it spun off its bottlers, it doesn't make the actual product. Its margins can be high. And then you put the numbers on paper because I wanted that many numbers. Today, what do you have? You have a 20 year projection of growth in margins. And people have forgotten that those numbers don't come out of nowhere. Every number tells a story whether you want to or not. One of the exercise I do in my class, I give them an Excel spreadsheet, a banking valuation. Banking valuations are not valuation. This is financial models. I give them the spreadsheets. They tell me what the implicit story is in these numbers. And tell me whether you think a company like the one described in this model can actually exist. So the narrative in numbers is really but filling in that space where people at lost connection to the numbers, the models were running analysts rather than the other way round. 

Alec: [00:10:49] Yeah, I love that. And, we certainly say, you know, I think you use the example in your book about, a company like Uber, which, you know, was reaching billions of dollars in valuation without, you know, making a making a profit, and you sort of say how valuation is often driven by narrative. And I guess, you know, the AI boom that we're living for. 

Aswath: [00:11:10] I mean, let me back that up. It's not that valuations are driven by narrative. It depends where you catch a company. Uber in 2013 there was not much history. There was really a company. It was all potential. Your entire value comes from the story. There are no numbers. So you're going to look at historical numbers and try to project them. God help you. There aren't any. In contrast, if you ask me to value Coca-Cola today, I could do a valuation entirely with the numbers. The way I describe it is, whenever I think a young company, it's like being called in to finish a book with the authors died, and they want you to complete the book. So the young company you're called into chapter two of the book saying, you know what, 33 more chapters in the book. Can you complete the book? And guess what? The range of stories you can tell is huge because the story is still getting formed. In contrast, if I call you 30 chapter 33 of a 35 chapter book, you don't have much room to run. So when you value Coca-Cola, there aren't that many divergent stories you can tell about where Coca-Cola is going. Its story has been pretty much taught in contrast with Beverly Palantir. Think of the range of stories, or even in Nvidia, which is a little further, and Palantir. But still, it's all about the future. The more value comes from what you will do in the future, the more stories matter, the more you can just grind out old numbers. You can get away with doing it. I mean, and let's face true Australian Canadian companies. I don't value very many because most of them are incredibly boring. The stories you write, you take BHP, where are you going to go with the story? If we can talk about how climate change can be an existential crisis to your story, and that actually is something interesting, because you can't just project that. The way people used to value commodity companies was to take the pricing cycle, average it out, and normalise the price. Right? Oil price will always return to $51 a barrel value on that basis. That works if your cycle reverts back to the way it used to be. And the way I think about valuing oil companies today is with climate change and the threat, you know, that the potential that fossil fuels will become a smaller part of our energy requirements. When I value no oil company, I can't just assume a reversion to the past normalisation. That has to now become part of my story. Which means the more you think fossil fuels will be curtailed, the less likely you will be to buy ExxonMobil. That's the way stories go. The story is going to drive your valuation, and I think we need to make it more explicit. 

Alec: [00:13:42] Yeah. So, now I guess we want to get to some of the different levers of valuation. You write about the four levers of valuation being revenue growth, operating margins, reinvestment and then risk. So can you talk us through how those four elements come together? 

Aswath: [00:14:00] I'm actually going to step back from the actual metrics okay. Growth is obviously the first one. Why am I looking at revenue growth as opposed to earnings growth? Because the only measure of growth that actually captures through growth is revenue growth. You can grow your earnings as a mature company by cutting costs. So I want to get a sense of how big your market is, how much are you growing. So revenue growth becomes my proxy for the growth in your business. My second measure is profitability. I'd like you to be in a profitable business. The way I'm going to measure profitability is with operating margins, not net margins, because again, you can take a profitable business to borrow enough money, making its net margin slow. So I would look at the operating profitability of your business. The third is the dark side of growth. Then if you ask companies, do you want to grow a lot or not grow at all? Every company is going to say, I want to grow a lot. You're an airline. You want to grow a lot. What do you have to do? You got to spend a ton of money. In fact, I don't think it makes sense for you to grow because by the time you're done with what you've spent, you're never going to get back. So reinvestment is really the sobering side of growth. It's what I use to tell managers, hey, you want to grow, but are you willing to reinvest this much? Because this might mean you never pay a dividend. You might have to issue fresh equity. They say, look, I don't want to do that. And I say, you got to go back. I can look at your growth story because you need reinvestment and growth to be consistent. The story you're saying has to be the same. As for risk, I think in finance we've made the mistake of making it a number, a metric, a beta, a question, ultimately risk. There's two components of research open evaluation. One is your operating risk as a company, and are the ups and downs that come from being a cyclical commodity company, a commodity company, a company that sells discretionary parts. That's what we capture in our discount rate operating risk. But there's another risk we don't even talk about, partly because it makes us uncomfortable, which is the risk you will not make. Two thirds of Start-Ups don't make it. If you ask me to value a Start-Up, I need to bring that in explicitly. You'd be surprised. Venture capitalists don't do this. I think that venture capitalists try to push this all into a target rate. I want to make a 50% return, when in fact, the bulk of the risk you're worrying about is will this business make it? So I'll divide risk into two components: an operating risk that shows up at the discount rate, and a truncation risk, which can come from, you know, it can come from distress that you may not make it. You ran out of cash. You know, just last week I wrote a piece on catastrophe risk, and it was precipitated by an email I got from a reader in Iceland who said, I'm looking at this company called Blue Lagoon. It's an Icelandic spa, a very profitable, established spa. And, but it's in the it's a, it's right below a volcano, a volcano that's erupting in Iceland right now. And the lava is moving down and there's a chance. A real chance, not just a tiny chance that this spa will not just be threatened, but wiped out, he said. How do I bring that into valuation? You can't do it by raising the discount rate. This is an existential risk. The way you have to bring it in is you have to assess the likelihood that the volcano will continue to rub, the likelihood that the lava will flow in the direction you're saying, how the heck am I going to do that? There's no way around it, right? Uncertain this uncertainty. This is part of what I said. People think that valuation can solve the problems of life. I can't build an Excel spreadsheet that removes the risk of a volcanic eruption. All I can do is be realistic about assessing it. So think about risk on both levels operating risk and truncation risk. And those are the components that drive value at discounted cash flow. Value is just a vehicle for bringing all of those things together, into one. So when I look at a discounted cash flow valuation, I don't see cash flows and discount rates. I see a story about growth in margins and reinvestment in risk. And the question I'm asking is, am I okay with the story? 

Alec: [00:18:05] So conceptually we're covering off a number of the building blocks here. Understanding the difference between price and value. Understand what you're doing and then understanding the roles that numbers and narratives play in the valuation. Then, some of the key levers of valuation that we've just covered off. And then finally, we thought an important concept to cover off is the probabilistic margin of safety. Now, Bryce and I are both big fans of Seth Klarman's book, Margin of Safety. It's probably one of my favourite investing books. And you've taken that concept and then added your own twist to that with the probabilistic margin of safety. So can you tell us about that? 

Aswath: [00:18:44] So it to me doesn't show up as a margin of safety shows up as an expected value, let's say a value, the Blue Lagoon at $1 billion without the volcanic eruption. Let's say there's a 30% chance that the volcanic eruption would deliver lava in my way. And remember, it's too late to go out and try to buy insurance now, right? Maybe 20 years ago, you could have. But there's no insurance company in the world that's going to sell you insurance against an eruption that's already in place. So if this eruption happens at 30% a chance, lava coming down, the value of Blue Lagoon is going to be zero, right? It's not even that you could sell the land. What are you going to sell? The lava is going to have a life of several years before it cools down. You can do anything. So I've got a discounted cash flow valuation of. It's a going concern of a billion. The 70% chance of that happening and a value of zero. There's a 30% chance when I'm done. Over expected value of 700 MIL. There's no margin of safety needed on this. It's already incorporated. So when people talk about margin of safety I love Seth's work. Remember it's a post valuation component you bring in because you think you could be wrong on your assessment of value. This has nothing to do with risk. Cash flow is not. So this has nothing to do with the company. This has to do with you, which is if you're risk averse, you value the companies. That I don't know whether I got that right. One of the ways you try to deal with that is by saying, I could be wrong. So I'm going to need the value to be at least 30%. But be careful if you do that to nobody. Remember, in statistics there are two types of errors you could make type one errors and type two errors. So if you convert that to valuation by putting a large margin of safety, what are you doing? You're avoiding buying something that's overvalued simply because you screwed up in the value to avoid type one errors. But you're creating type two errors, which is you're also avoiding buying things that are undervalued because you put a margin of safety. Which is going to be greater. It depends, I would argue that in the world we live in, you can't afford to have a margin of safety. If you have a margin of safety, you're going to be all cash back. One of the points that I the big margin of safety is I ask them what percentage of your portfolio is in cash? And this is 60%. And my response is that your margin of safety is too high. If you have that much cash you essentially don't have the luxury to turn away investments. Maybe in Seth's time he had hundreds of potential investments that were cheap and you could pick only 20. You could afford to have a margin of safety. But beggars can't be choosers. We are in a world where it's tough to impose a large margin of safety and get away, and there is a flip side of that. I recently bought Tesla at the time that the price approached value and people were surprised. They said it's a risky company and if it is fairly valued, why would you buy it? Because I think there is the flip side of margin of safety, which is what I call optionality. What's the optionality with you? You do a valuation of a company. You base it on what you think the company can do with its existing assets and business model. What you're missing is whether that business model gives you a launching pad to do other things in the future. I bought Facebook when it was close to fairly valued. Again, the reason is you have a platform with 3 billion people. My valuation was built on advertising revenues, but you have 3 billion people spending an hour every day on your platform. Think of the other stuff you might be able to do with them. That's like icing on the cake. So when I buy at fair value, they can pull off any of that stuff. It's added value to me. So I would actually flip this on its head. There are some companies we actually should be buying as soon as the price hits a value, because there's so much good stuff you haven't built into your intrinsic valuation. 

Alec: [00:22:32] Yeah, I love that. 

Bryce: [00:22:34] So Aswath before we move on to getting your views on markets today, there are a lot of people in the Equity Mates community who have just started their investing journey. And Alec and I remember back when we first kicked off, there was this feeling that, you know, you wanted to be the next Warren Buffett. And the whole aim of the game was to find undervalued, hidden gems that, we really had no idea what we were doing. So for all of those, you know, people that are in the first month or a year of their investing journey and just looking to build a portfolio that grows wealth over a long period of time. Practically, how should they be thinking about valuation in their investing journey? 

Aswath: [00:23:14] I think first you need to be realistic. Investing is about preserving and growing wealth. It's not about getting rich. In fact, if you define investing as I want to get rich, you are going to crash and burn because you're going to overreach. You're going to concentrate your portfolios, you're going to make bigger bets, and you should. So here's the bad news in investing: to invest, you need wealth. To get wealth, you got to do something. So if you're a doctor, spend your time as a good doctor. Don't spend the middle of your day checking out the stock pages because you think you can get rich that way. Earn an income as a doctor and use investing as a way of preserving and growing wealth. So I tell people who are not in the investment community, there's nothing wrong with being interested in markets, but you need to earn to be able to invest. You have to make sure you're not putting your earning power at risk because you're so fascinated by that next big hit you can get. Second, think incrementally, right? I mean, Warren Buffett didn't sit down in 1956 and say, I want to be 40 billion. Now he built up and along the way he was good. But he also got lucky. Right. He's open about admitting the fact that he hit the market at a time where it's easy to find undervalued companies because people are not digging very deep. I'm not sure if we started in today's market in today's age. He would be able to pull it off. In fact, his advice to investors is to put your money in an index fund. Go back to living the rest of your life, which is actually awfully good advice for most people in investing. More time and energy and resources is wasted chasing. Beating the market more than any other activity. So if you enjoy it. So first don't invest if you don't enjoy the process of investing. Don't invest because you expect to get a reward. This is a game where you can do everything right and have nothing to show for it. I give people a very simple test. I say that you are an active investor. You go pick. Try to find these undervalued companies. You do this year after year. You read Ben Graham Security Analysis. You read every one of Warren Buffett's letters to his shareholders. You're immersed in value investing. And every year you go do your homework. You pick companies. Let's get let's say you're at the age of 85, you're lying on your deathbed. And I'm a very cool person. I show up at your deathbed with your investment track record for the last 60 years, with all the work you put in and a competing portfolio, what would have happened if you had just taken your money at the age of 25, put an index fund and left it there? The question I ask people is, would you be okay? If the index fund beat you. If the answer is no. Don't be an active investor because here's what happens. People are active investors because they think they're doing the right thing, and then they think they're entitled to earn a higher return than the neighbours who are picking stocks based on watching Jim Cramer on CNBC or reading the stars or whatever. And then they discover that their neighbour bought Nvidia by accident four years ago and is rich and they're not. And that's when bad things start to happen. Because you get frustrated, you get angry at markets and then you double down. The key to remember in investing is if things don't go against you, they don't. There are too many things you don't control. You have to be okay doing everything right and not getting a reward. But you're okay with it because you enjoy the process. So one of the questions that ask them is, while you're listening to these shows and reading all these, are you really enjoying yourself? And I enjoy looking at companies. I enjoy the business and this is part of my life I have to teach. But these companies. But I enjoy it as a person. So to me, even if I broke a broke even with the market, I'm okay with it because I enjoyed myself along the way. The advice that follows then is don't do things, then that can create serious damage. No. It's like the Hippocratic Oath. Do no harm. Like what? Don't put all your money in four stocks. Why? Because you think you can get rich with four. Because that is the pathway where you take an action. You spend all these resources, you can end up with half the wealth of your neighbour. And that's not a good place to be. So don't overdo it. Just take it a step at a time. Enjoy the process. And if you find yourself not enjoying the process, step away. There are far better ways to live your life than chasing after stocks and getting frustrated. Now because you know, it doesn't work for most people who claim to be professional investors. Why do you think it should work for you? 

Bryce: [00:28:03] Love that. Well, Aswath we're going to turn to markets today. But before we do, we're just going to take a very quick break. We'll be right back. Welcome back to Equity Mates Investing. We're joined by the dean of valuation Aswath Damodaran. Now Aswath, let's move to today's market. And I want to chat about The Magnificent Seven because they're certainly capturing investors' attention capturing headlines. But the question always turns to valuation for these ultra mega caps. So how are you thinking about the current valuations of some of these big tech stocks? And I guess the follow on. Are you actually saying any opportunity based on valuation in The Magnificent Seven? 

Aswath: [00:28:43] We started the bad news. I wouldn't buy any of the seven at today's stock prices that fully valued. But at the same time, that doesn't mean much, right? I mean, then people then extrapolate from that. I've lost my chance. I'll never be able to own these seven companies. That's not the case. I own all seven, but didn't buy them last year. How about Nvidia 2018, I bought Microsoft for its catastrophic metaverse meltdown? I bought Apple after an iPhone upgrade didn't work out. I bought Microsoft when a new CEO came in. Looked like they were heading to the creeks in terms of the office and windows, nothing else. And so what the point I'm making is these are great companies. They're amazing business machines. And they're a reflection of what I call the winner take all economics of the 21st century, which is we, you know, every business we look at, you know, you're going to see 1 or 2 companies dominating because the way we're delivering that business, I give the example of advertising. If you went back 20 or 30 years and you looked at advertising market shares, you know, you'd see companies like The New York Times big market share, 3%, 4%. That was a big market share. Why? Because you were localise your newspaper. You could do only so much. You could not sell the bulk of India because they didn't even read English. Today, if you look at advertising, 60% of advertising is online advertising. And if you look at online advertising as a business, two companies dominate Google and Facebook. Everybody else is a bystander. 70% of the growth in online advertising over the last decade is gone to these two companies. And it's not because they are breaking the rules of violating antitrust laws. It's the economics of the business. When you advertise online, you want to go over everybody else's. You don't want to go to some niche platform, you want to go where hundreds of millions of people gather. So guess what? Google search and Facebook are where you go. So as businesses become more and more. Winner take all, you're going to see more of this phenomenon. A few companies are gaining at the expense of the vast majority of smaller and midsize companies. Does this mean you should just buy big companies? No, that's not going to work either. If you pick the winners, of course it's going to pay off. But ahead of the fact you don't know who the winners will be. So I would keep a list of companies that are dominating their businesses and wait for the right time. And there will be a right time, because the nature of these companies is expectation. I mean, think of Nvidia. People think that Jensen Huang walks on air. I mean he is the at this moment Nvidia is considered the greatest company of all time. That's a dangerous place to be a management at the company. Right. Because the expectations are you're a genius. You'll figure out how to deliver 50% growth from now to eternity with 60% margins. You can't do that. There will be disappointments. Have you lost the Nvidia bandwagon? You never got on it. And you say, oh my God, that was an opportunity gone by. By the time. It will be cheap again, but it will mean that you go to track the company. You go to value the company, you go to understand the company, and it can't be based on what other people are doing. You'll actually be buying when they're selling, when everybody's panicked. I mean, when I remember when I bought plane of Facebook, I still call it Facebook Metaverse after that. The fiasco, people said, what are you doing? Nobody likes the company. I said, but it's got an advertising juggernaut that's going to deliver tens of billions of dollars in cash flows. Why do I care that people don't understand now or don't like the company? I'm going to get the cash flows and you can tell me whatever you want about privacy or whatever other issues you have with fate. But as long as people show up on the platform and the advertising is there, I get my value. And so I think that part of being an investor, as opposed to a trader, is having a sense of what you'd like to do and biding your time. Time is your ally here? I mean, I remember Buffett saying, like, it's like he used the baseball analogy. He said, it's like being a hitter in baseball, but you can never strike out. You know, in baseball, three strikes, you're out. So basically hitters have to swing with two strikes, otherwise they strike out. But if you can never strike hard, you just stand there and stand there and stand there and wait for your pitch to come home. But that takes patience. 

Alec: [00:33:15] One thing that I've certainly learned, so we've been this is our seventh year of doing the podcast, and we weren't really investing before that. So and when, when I would read an answer like that or hear an answer like that, I would often think patience requires me to wait, you know, decades, perhaps for the right time to buy a company. But even in the just the seven years we've been doing this podcast, some of those big tech companies have had multiple points where they've been good buying opportunities. You know, Facebook, to take an example, there was I fell out of love after the 2016 election because of all the political stuff and then 2020, the Covid dip and then 2022, 2023, the, metaverse stuff, like there's been multiple instances even in the last 5 or 6 years. So it's a reminder that you've got to be patient, but sometimes there's more opportunities than you might think. Hearing that answer. 

Aswath: [00:34:08] Frank, I generalise on that. There isn't a single stock that stayed overvalued through its entire life ever. No, I can't think of a single one. High value diamonds every year since 1997. And what? Picking the very top end of stocks now, right? You pick the Amazons. You think the Googles. You think Facebook is the big winner. And each of those stocks has had multiple points, not just one point, multiple points at which you could have gotten in by buying those stocks. I mean, I bought Amazon five times in the last 26 years. I've sold it four times in the last 26 years. Why will one last? Because I'm owning it right now. But that's because I track the company. I have my story for the company. my investment and valuation for the company, and the market does whatever it does. It's not in my control. And that's why I tell people, don't get frustrated with what the market is doing. It's going to do what it does. And it's in fact, because the market is so volatile and predictable that you're going to get your chances. So while you complain about it doing crazy things and Nvidia and the upside prepare for it to do crazy things in the downside. And there's your chance. So I know it's difficult to be patient. And that's why I said you got to start by accepting that investing is about preserving and growing your wealth. Because the minute you say it's about getting rich, you can tell me as much as you want that you're going to be patient, but you will not be right because you need to get there. You need to pick the next winner. You put the, the, the weight of the world on your shoulders. And when you do that, you're going to make some bad choices because you're you're essentially treating the market as the equivalent of a casino. You got to hit that number or it's not going to pay off.

Alec: [00:35:53] So we've we've just spoken about The Magnificent Seven which is capturing everyone's attention at the moment. It's saying, so let's turn away from that. Is there any part of the market that you believe people aren't paying enough attention to that perhaps you're looking at and getting excited about? But you think the rest of the market hasn't caught up with you? 

Aswath: [00:36:15] I think every part of the market has a clientele. People are paid and and I look at you 30s, you say nobody pays. There are actually people who live in that space. That's all they do. In fact, the problem here is people get tunnel vision because it get so focussed on a segment of the market and then they, you know, come to believe that the rest of the world is unfair to that segment, whether it's real estate or utilities or energy. And I think that's dangerous. I think one of the things we need to do is step back and gain perspective, look at the broad market. And right now the broad market is priced well. It's not overly, you know, rich. In fact, I compete an equity risk free for the entire market. But much of that pricing is coming from this top tier of companies. We remove them from the mix. The market actually looks much more modestly priced. The big companies and because of the market cap, they have a disproportionate way of carrying the market to heights. But I think the rest of the market, if you break down, is reflecting very much what you'd expect to see in a world with 4% interest rates and growth. That looks reasonably good. Now that people are not as worried about recession. 

Alec: [00:37:30] On the macro side of things, you can't make a finance podcast in 2024 without talking about inflation and interest rates. So, we'll ask that customary question. And I guess, in particular for the context of our conversation around valuation, how do you factor, in the conversation around inflation, interest rates and I guess monetary policy into your thinking around valuation? 

Aswath: [00:37:56] I try not to, because in a sense, there's nothing I can do about it. And I think, again, investing in valuation, we spend so much time worrying about things. I call it the karmic push. There are things you don't control and investing worrying about them is not going to make them go away. It is true inflation has been a clear and present player in this game for the last three years, and the reason it's so shocking for people is we spent a decade with low and stable inflation. If you look at the history of inflation in the last 200 years, the last ten years with the aberration. So rather than think about these as being abnormal times, maybe we need to recognise the last decade leading in what the abnormal times were reverting back to a more normal time. But since we're spoilt, we're lazy. We're sloppy because of that decade, it's taken us a while to catch up, so we're in better shape with inflation than we were a year ago. But the problem with inflation is it's incredibly stubborn. It's very difficult. I called it a genie in the bottle in 2021. When I wrote about it, I said, look, there's a genie in the bottle. It wants to get out. Even if you think inflation is transitory, treat it as permanent. Fix it quickly, because once you let it out of the bottle, getting it back in is going to be difficult. But at that time, the fed didn't want to do anything. They talked about this being supply chains and Covid and then it was too late. Inflation was out of the bottle. I think at this stage it's still out of the bottle yet. You know, it's maybe halfway squeezed in but it can change its mind.

Bryce: [00:39:30] Well that's why that's been a really enjoyable conversation. before we close out, if there's one company that's really exciting you from a valuation point of view at the moment or the story that's unfolding. What would that be? 

Aswath: [00:39:47] I mean, how can it not be Nvidia, right? Because it's become a microcosm for how the world will change over the next decade, right? I think people are overreacting in terms of giving it almost all of the pluses that come out of the ad business. The fact that, I mean, it makes it the way to think about Nvidia is the way I thought about Cisco during the.com boom. It provided the architecture that allowed us all to connect on land. Now this happened in the background, right? None of us went on cisco.com view, aeo.com or Amazon.com. But all those sites rested on an architecture that was built with Cisco networking equipment. If you think about Nvidia, none of us is going to use it. I mean, very few of us are going to use Nvidia products directly. It might be an Nvidia chip in your Mac or your or your computer. But the reality is you're not even aware of it, but it is providing the architecture for everybody else to do that stuff. So in a sense, it is going to be the entree into how big is this going to get? Who's going to use it? And while I don't like the way people are pushing up the pricing and assuming that all of the spoils are going to go to Nvidia, I think as a company, it's going to become this just as Amazon.com became the poster child for the.com market. Nvidia could very well become the poster child for how big is this business getting? How well are they doing? Who's using these chips? 

Bryce: [00:41:13] Love it. Yeah.

Alec: [00:41:14] Well it's we'll be watching. 

Bryce: [00:41:15] Yes we're watching. Well that's about thank you so much for your time this morning. Truly have really enjoyed this conversation. I'm sure many people in the Equity Mates community have taken a lot of value from this as well. So yeah we really appreciate you taking the time. 

Aswath: [00:41:28] You're welcome.