Prof G Markets - Aswath Damodaran Says There’s No Place to Hide in Stocks

Episode Date: November 14, 2025

Ed Elson and Scott Galloway are joined by Professor Aswath Damodaran, the Kerschner Family Chair in Finance Education and Professor of Finance at NYU’s Stern School of Business, to unpack his growing concerns about the markets and how investors should position themselves. He also weighs in on our big tech stock pick of 2026 and offers practical advice for young people feeling anxious about their financial future. Check out our latest Prof G Markets newsletter Follow Prof G Markets on Instagram Follow Ed on Instagram and X Follow Scott on Instagram Learn more about your ad choices. Visit podcastchoices.com/adchoices

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Yep, it's the most powerful iPhone ever, plus more peace of mind with your bill over five years. This is big. Get the new iPhone 17 Pro at TELUS.com slash iPhone 17 Pro on select plans. Conditions and exclusions apply. Today's number 60. That's the percentage of Americans who say they've had. a paranormal experience. I was invited to go see a porn horror film, but Ed, I was too scared to come. Listen to me. Markets are bigger than I.

What you have here is a structural change in the world distribution. Cash is trash. Stocks look pretty attractive. Something's going to break. Forget about it. Oh, Ed, Ed. You don't use ED drugs yet, do you? Not yet. Oh, my gosh. You got a lot of that in your future. Just a heads up. Just a heads up. It's coming, my friend. I can't wait. You were about to hit me with a by the way. Was that your by the way? Speaking of erectile dysfunction drugs, here it is. Do you hear that Governor Newsom gave me a name-checked me

and said that I was a rock star when speaking to Jake Tapper? Did he? Wow. I know he's named-checked you before. That has happened. But I didn't know he called you a rock star. What was the context? He said that I'm his fashion and aesthetics and fitness role model. Did he actually say that? Dude, have you met me? Have you met me? No, we're going to have.

The whole young man thing. I'm squeezing that lemon like there's no tomorrow. Well, that's pretty good because I think he's going to be president. Why do you say that? He's the rock star. As we discussed with Bradley Tusk, there are three rock stars. Actually, four rock stars. There's Mandarney.

There's AOC. There's Bernie Sand. and there's Gavin Newsom. Gavin Newsom is the only one who could be president. He means the only one that's not fucking crazy. Actually, I don't think Bernie's crazy. I love AOC too. I got so angry at this shutdown.

I committed on stage last night to giving $100,000 to the AOC for Senate campaign if she announced she was primarying Schumer in the next seven days. I am so, I'm not supposed to talk about politics. Advertisers hate politics. Tell us about the live tour. You're on tour for the show, for the other show.

The show that shall not be named. Pivot Live. Started in Toronto on Saturday. Then we did Boston on Sunday, and we did New York last night. And after this, I'm about to bomb on the train to D.C., do D.C. tonight. Then after the show, head to Chicago, where we do a show tomorrow. It's a lot of shows. Are you switching up the content for each show?

I mean, every day. That's pretty intense. Trying. Trying. Different lesbian marriage jokes. So straight people get married for kids. gays for aesthetics, and lesbians for that mid-century couch on Pinterest, and then when they get divorced, there's an argument over who gets the couch and the Subaru, and the way they decide is whoever's

name is on the REI loyalty card. I told that last night. I told that last night. Yeah. You got a good response? You know. People look at each other, like, is it okay to laugh? And then Kara laughs. One of the things I love about doing a podcast with Kara is that she gives everyone permission a laugh. I also saw that a 10-year-old was there and asked you a question about dating. I thought that was kind of sweet. I didn't realize that there were 10-year-old fans of pivot. Okay, hold on. Boston so far is taking the crown.

In Q&A, and we don't prepare for this, we don't plant the questions. People just line up with the mic. This one dude comes up and goes, I have a question for Kara. And he goes, actually, I mean Sarah. And he turns around and gets on his knee and he proposed merit. Wow. Yeah. So my love language is money, so I just reached into my pocket and took out all my money and gave it to them.

And then the most adorable 10-year-old kid, I mean, this kid's out of central casting, right? It's just such a, anyways, just this lovely young man asked, he said, so cute, he said, I really like this girl. And she's taller than me, and I don't know how to approach her. And Kara busted into the, you know, the whole like, be kind, da-da, da-da. And I'm like, have your parents throw a kick-ass party. That's how you increase social capital when you're in school. If you have the coolest party, you become... Actually, good advice.

You become the cool kid in school. Everyone wants to come to your party. And I said, also, learn how to dance, or more importantly, just always dance like no one's watching. I mean, the ladies love a man who can move. But even more, they love a man who can move and isn't self-conscious about it. I think that's true. Yeah. I think that's good advice.

I like that. Are you a good dancer, Ed? I think I get by. I think I don't look super awkward if I'm doing it, which I think is a win. I think that means I'm good enough. I love what Richard Reeves says. He says that you want a man who is invaluable in a shipwreck and acceptable at a dance. I am not a good dancer.

I'm not a good dancer. My dancing ability is entirely correlated to how much I've drank. Oh, yes, for sure. But what I try to do is I try to dance as if I'm, the people you think are good dancers, with women, they have to be good dancers. With men, they just have to look like they're enjoying it. Yes, that's right. And then people admire them. And I think a decent metaphor for how to live your life is occasionally if you're at some, one of those douchey, overpriced vacation spots that you, you go to, you'll see someone really hot get up on the table in the middle of lunch and start dancing and we're all just captivated by this person. And not only because they typically are, you know, a woman brought by some Russian oligarch who tends to be quite attractive, but because they look as if they don't care

that anyone's watching them. And we're so drawn to people who have the confidence to sort of just dance out loud that I think that it's a decent metaphor that the real winners in our society that we're just really drawn to kind of live out loud. And they don't really care. They risk embarrassment, they don't care.

They're just kind of willing to like dance on tables and live their lives out loud. This has nothing to do with today's episode, Ed. It's good. It's valuable philosophical advice. That's what people are here for. So, my final question, before we get into this conversation that I'm super excited about with Aswestamoder,

and what have been your takeaways from Pivot Live? Like, are you surprised or any takeaways from, like, who's coming to these events, what the energy is, what they're looking for, how it differs from, say, this show. Like, what are your... What are your half-time takeaways with this live tour? I have a tendency to just be down and see everything through, you know, kind of great colored glasses.

And it just, for me, the events have been so nice and the crowds have been. It just reinforces the notion I need to get out more because people in the real world are just so lovely and so much fun. And I am extremely online. and online is extremely fucking depressing and angry. And then you go to a theater in Brooklyn with people who've decided to take their, you know, their Tuesday night or their Monday night,

I don't even know where we are, and come out to Brooklyn and be with other people and laugh and clap and meet other people and everyone stayed after. It's just, again, it goes back to this basic notion. I wish there was a way to input into the code of AI that we need to extrapolate the data it's crawling to the real world

because the real world is actually really lovely or at least I find it is in America and I realize people face a lot of challenges but I find that human-to-human-to-mammal interactions are generally speaking just so much tangibly more kind, gentle, funny, interesting than the digit-to-digits interactions we have online.

So it's been lovely. I'm excited we're going to do a tour and I think my understanding is people are, we've decided that whatever cities get the most suggestions we're going to. We also need to go to London, because I need to go home. You need to go home? Do you consider that your home? Yeah, where I grew up, one of my family is.

So we need to do that. Okay, other than that. And it's all about me, really. It's about me getting home and having a nice time with my family. That's what this is, this life tour is going to be about. It's nice to have your parents there. True. Yeah, we'll do London.

So I think we started, I think we figured. out our first city. Our first or our last city is going to be London. All right. Should we get into our conversation with Aswath? Let's do it. Here's our conversation with Professor Aswath Demoder and the Kirshner family chair in finance education and professor of finance at NYU's Stern School of Business. Professor Demoder, and thank you very much for joining us again on Profty Markets. Thank you for having me.

I've been very excited to talk with you, especially right now. and I want to start with AI and this AI bubble that everyone's talking about. It is kind of conventional wisdom at this point, or it appears to be conventional wisdom, that we are in some form of a bubble. I'm just going to read you some of the headlines that I read today. Quote, Bill Gates says we're in an AI bubble similar to the dot-com bubble. Quote, Michael Burry doubles down on AI bubble claims. This was a great one.

in vogue, quote, is fashion ready for the AI bubble to burst? So what is fascinating to me, we've been talking a lot about, are we in a bubble, are we not in a bubble? What is fascinating to me is that everyone seems to believe we are in a bubble. People in tech, people in media, even people in the fashion world know what's happening here. I'll put the question to you. Are we in a bubble?

Other than Michael Burry, the rest of the talk is just talking. right? I mean, it's easy to talk about bubbles when there's no money behind it. At least Michael's putting his money behind what he's saying. Now, but let's play the loyally game, which is, you know how you can stipulate something and then let's stipulate this a bubble. So what? Why we so? I mean, why all this hand-wringing? Why, I mean, what exactly are we accomplishing by spending so much time talking about this bubble? So what if there's a bubble? Markets are cyclical, right? And they get oversold and overbought. That's just a natural part of the cycle. And it creates opportunities and we learn lessons from it. So yeah, it's not a Greek tragedy. The fear I think with this is that

now that you have 40% resting in 10 companies. And then when DSMP represents 20% of total global market cap, that our market has become unhealthy and fragile. And that at this bubble bursts, it's going to be a pop hurt around the world, that it could take. take down the entire global economy is I think the strongman argument for why are we perhaps why is it more justified to be a little bit more worried about this pop? Even if this is, whether or not this is worse or the same as previous bubbles, the reality is I've got my money in my retirement account. I don't want the number to go down.

That's another reason. I'll tell you who's going to be hurt. Two groups of people. One are the people who joined the market in the last year, the last couple of years. Basically, you're getting in to the bubble as it's peaking. The others, people who chase bubbles after they've happened, right? People who move their money out of industrials into invidia and palliator in the last year or two. There are two groups of people are going to burden, and I think it's worth focusing on that.

Because investors who've been in the market for the long term have benefited from the upside. And even if there's a correction, I think many of them will look at what they have, and relative to what they had in 2015, said, look, I'm still better off. I'm still, I've still earned a 7% return. I think the economic effects that Scott is talking about are much more of an issue. Much of the growth in the real economy this year has come from the CAPEX going into these data centers in AI and taking it out will effectively mean, then we've actually been in a recession. And without it, we would have been in a recession.

And that might be much more of an issue with this bubble than it even was with the dot-com bubble. Because so much more of the real economy, the dot-com bubble, if you think about it, the infrastructure spending for the dot-com bubble, was a fraction of the infrastructure spending that has gone into the AI phenomenon. Let's not call it a bubble yet because we don't know it. So there is that question. What happens in those hundreds of billions of dollars? And that I think is that there will be clearly an economic effect.

I don't think it will show up in terms of jobs lost because it's not as if these investments have created a lot of new jobs. That's the other thing about this AI infrastructure investment is it's a money that's been spent in physical stuff and chips rather than hiring tens of thousands of people. So that's worth thinking about it. Really economic damage, but not with hundreds, tens of thousands of jobs lost, but in terms of people looking at their portfolio saying, I feel worse off than I did a year ago. I might be better off than seven years ago, but I've lost a lot of what I thought I did. So I'm not underestimating the effect of this happening, but I would argue that this is a feature, not a bug, of any big change in economy.

I've talked before about what I call the big market delusion. If I have it, here's how it plays up. You have a big change coming to markets. it creates essentially pods of people who think that they can essentially benefit from it. So think about a thousand AI pods where I say, this is going to be big, I'm going to take advantage of it. And because these pods are created by overconfident people who are fed by overconfident venture capitalists, it's almost by definition there's going to be a bubble every time you have

a big structural change in markets. It happened with PCs, it happened with dot com, obviously. it happened to a lesser extent, but it did happen with social media, and it's now happening where they are, perhaps on steroids, because the magnitude of the change that's coming. But I think that this is part and parcel of change. There will be a correction. There will be people who are hurt. The economy will be hurt, but there will be change that comes out of it.

It almost is a cycle that repeats itself, and this won't be the last time this happens. Once you do this, people say, I've learned my lesson. I will never do this again. And guess what? 20 years later, there will be a different bubble with a different acronym or a different buzzword or different change driving it. It's the way human, you know, change in human beings occurs. We overreach, we correct, and we overreach again and correct again. So to me, it doesn't surprise me that there's an AI bubble. And the reason I would be wary about trying to make money off

the bubble, because there are people saying if it's a bubble and it's going to burst, why can't I do the Michael Burry thing and sell short is you need a catalyst. Yes. And with AI, it's tough to see what that catalyst will be, right? It's not like you have a day of reckoning. You say, there aren't enough AI products and services. I'm going to correct.

That catalyst is going to be fuzzy. It's going to be difficult to kind of put together. And that's why I agree with Michael Berry that AI stocks are collectively overvalued. Whether you call it a bubble or not. But I'm not ready to come to the conclusion that they're overpriced. Because overpricing means that there's a catalyst, a demand supply change that's going to cause the pricing to move back down.

So you can believe that AI is overvalued, but the market is pricing AI, and it doesn't seem to be as concerned. And until there's a catalyst that causes the two to converge, you can believe there's a bubble, but not much you can do about it. I want to dig into this catalyst concept, because we discussed this on our Monday episode. I totally agree you need a moment, you need a shock, you need some sort of event catalyst to catalyze the correction.

If I had to make any bets on what the catalyst would be, I made the bet in our previous episode. It would be the implosion of Open AI because of the amount of spending that we've seen or the amount of promised spending that they've talked about, that Sam Altman has talked about one and a half trillion dollars in spending and the fact that they are only generating

$13 billion in ARR, so how are they going to pay for it? And the big tell, for me at least, I think for many, was this moment last week where Sam Altman was asked the question on a podcast, how are you going to pay for it?

And he had this incredible defensive reaction and we actually have that clip and I'd like to get your reaction to it. So let's just play that clip. How can the company with $13 billion in revenues make $1.4 trillion of spend commitments? And you've heard the criticism, Sam. We're doing well more revenue than that.

Second of all, Brad, if you want to sell your shares, I'll find you a buyer. I just enough. Like, you know, people are, I think there's a lot of people who would love to buy opening eye shares. I don't think you want to sell that. Including myself, including myself. of people who talk with a lot of breathless concern about our compute stuff or whatever

that would be thrilled to buy shares. So I think we could sell your shares or anybody else's to some of the people who are making the most noise on Twitter, whatever, about this very quickly. Incredibly defensive reaction, which leads us to believe perhaps that's going to be the catalyst. What is your reaction? It's not just defensive. There's no business argument in there, right? I mean, you run a business.

I want to hear your business rationale for why small revenues will become big revenues and you're going to be able to make profits on those revenues. He doesn't even try that. I mean, you may very well be right. Open AI might be the trigger. The only problem is that the money flowing into open AI is, I mean, today I heard that, you know, that SoftBank is pulling its money out of NVIDIA, but it's putting into open AI. It's buying in.

I think, unfortunately, there are a lot of people with deep pocket. who will keep open AI going. So even when you get those disappointments, the revenue is not going up, they'll find rational excuses. I think it's going to be a corporate governance issue at Open AI. In addition to not having business sense, they have a person at the top that at this point in time

is complete power over where this enterprise is going. If you don't know how to build a business, it's not going to build itself. So that might be the catalyst, but that catalyst could take three or four years to play out because there are enough delusional people supplying capital who will keep supplying capital because, you know, it'll take a lot of reckoning before they say, okay, this isn't working. So, but I think, you know, Sam should probably stay away from microphones because this

might speed up the process if you realize the person he might have had tens of billions to do, doesn't know how to build a basic business. We'll be right back after the break, and if you're enjoying the show, send it to a friend and please follow us if you haven't already. Support for the show comes from Zbiotics. We often look forward to a night out with friends, but we definitely don't look forward to the next morning. That's why there's Zbiotics.

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But when I look at these valuations, kind of baked into these valuations are either massive incremental revenues from new products as a function of these chips and LLMs, or efficiencies. And all I see in terms of an ROI in this unprecedented investment so far is the latter. And that is I don't see a lot of moisturizers from L'Oreal or cars from GM that were sort of AI-inspired. What I do see, and it's real, is companies saying we're going to cut our legal fees by 30 or 50 million using AI. But in order to justify these valuations, it strikes me that the level of quote unquote efficiencies, which is Latin for layoffs, is going to be pretty extraordinary. And if you look at, if you assume that 150 million jobs in the U.S., fewer people

work than people think, and if you assume half those jobs are somewhat immune to AI, you're a masseuse or a pipe fitter, so assume 75 million jobs are somewhat vulnerable, I see one or two things in the next 12 months. Either there is pretty serious chaos in the labor markets across some industries that are vulnerable or the Magnificent 70s get cut in half. It just feels like one of those two things has to happen. Your thoughts? The weakest link in the AI argument is a product and service market. The architecture, people have spent immense amounts on. Even the open AI, the other players in the middle of the game, you know, we're going to provide the software that's been built up. There is very little evidence right now that you're able to,

even the companies that are talking about cost cutting, you look at the actual amount of costs that have been cut. You look at their expenses across periods. You don't see a massive drop off in expenses. So right now, the product and service market is all talk. And my belief is the consumer side of that market is not going to be particularly lucrative. I look at the kinds of things I get as a consumer from AI. And I said, that's neat. But I'm not paying $10 a month for that. The business to business AI, there are segments, but only in the high-powered segments,

where the coming together of large data and computing power is going to make a difference. I don't think Open AI is going to make, you know, equity research better or portfolio managers perform better. So in those areas, I don't see the net plus that comes out of it. I can see the minus of people being laid off. But right now, it's still more talk than actual action. So I believe it when I see Fidelity layoff, half their analysts saying, we replace them at AI. No, either way, it's not good news because they're replacing with AI.

Those are people who will not have jobs. They don't replace them with AI. All this investment in AI has no real easy way to pay off. So I agree with the broader thesis. I'm not sure, though, it'll happen in the next 12 months. This is the problem with these open-ended, it's still developing. is we cut so much slack to companies. And they find a way to explain away

why it didn't happen in 12 months. And there will be enough people who buy into that explanation. So I think something else has to come in in addition to the numbers not coming in for that recognition saying, hey, guys, we've overshot. But I think you're right.

I don't see, I'll give you a rough estimate, given even what's already been spent on the AI architecture. The AI products and services market has to generate about $4 trillion in revenues, either in save costs or additional revenues. $4 trillion. $4 trillion. So basically take the architecture investment and multiply back, even with the high margins, you need to get $4 trillion.

And from that, because remember, you've got to pay for that investment to earn a reasonable return, so you back into it. And right now it's in the tens of billions. and you're looking at a $4 trillion target and I'm looking at how do we make up that difference and I don't see a way we get there. I don't see how you increase revenues by that much which is AI products and service or cut costs by that much.

You're right, something has to give. I'm just not sure when that moment of recognition will be when you start to adjust numbers down. And it's not all of the max seven, right? I mean, let's face it, it's meta, Microsoft. There's some big players, perhaps Alphabet. Amazon is still much less of its values coming from AI. Apple, I think, you know, much level.

So I think it's going to be a kind of a disjointed effect, even across the Mag 7. But I do think that there will be an adjustment. I'm just not sure when. And that's why I can't be on Michael Burry's bandwagon saying, let's sell short, because there your time arrives is set by somebody else. And that's not a place I want to be. So I agree it's overvalue, but I'm not comfortable enough to make the judgment that it's overpriced enough to go out and make a bet on the price correcting in the next six months or the next 12 months.

So across the Magnificent 10, and it's grown to 10 now, because the numbers get more dramatic when you bake in three more, not overvalued, but fully valued companies. But let's list them out. Nvidia, Apple, Amazon, Alphabet, Microsoft, Meta, Tesla, Advanced Microdevices, Broadcom, and Palantir, which now make up 40% of the S&P by total market cap. So you got the SMP 490 or 60% of the value, and the S&P 10, if you will, or the Magnificent 10 of 40%. Amongst those 10, have you done any analysis and are you comfortable saying which you think are most overvalued or most fairly valued? I'm going to go out on a limb here and say there aren't that it'd be difficult to find one that's undervalued. Nothing cheap, yeah.

Nothing cheap. What looks most irrational, if you will? I think Invidia. I mean, five trillion, as I said, it's an amazing company, but at five trillion, you're looking at the greatest company ever delivering 80% gross margins in perpetuity on revenues that are going to be a trillion dollars or more. And none of those things hold up to any kind of scrutiny. So from a pure over.

Tesla, I would put into that same grouping for a different reason. I'm not even sure what Tesla is as a company anymore. I've reached a point of I can't tell you what the story is because I'm not sure Tesla knows what the story is going forward. So I think if I were to build a portfolio around it, those would be the two companies that take out the first, and I'd probably leave Alphabet and Amazon in there as my two mag-7 companies that are least overvalued because, you know, Alphabet has had to struggle more during this year.

It doesn't have that AI boom to it that the other stocks have. And Amazon, I think, will find ways to make money which don't require AI at all. So I think they might be one of those companies, which actually is able to convert the promise of AI into lower costs. It'll be brutal in terms of the people hired at Amazon, but there will be ways I think they can convert to profit. But I think that to the extent that there's going to be a correction, there's no place to hide in stocks. I can't see a way because if the mag then go down by 40%.

It's not like the industries are going to hold their value while this happens. The panic that that's going to create is going to ripple through stocks. And I think there's a good reason why gold is hitting all-time highs at the same time that's unusual

because usually when gold goes up, it's in the context of a crisis where markets are collapsing or with hyperinflation. I think, you know, I describe gold as a niche market which in good times, when times is solid, that niche market is composed of paranoid people and doomsday fanatics,

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

And that's pushing up the price of gold. So there's a message there for investors. And if you're an investor, primarily investment stocks and bonds, my advice is, even though historically you might never have invested in non-financial asset categories, this might be a time where you think about, you know, kind of at least moving a portion of your portfolio, you know, bigger chunk than ever into cash or something close to cash or maybe even collectibles, things that I've never owned collectibles, but, you know, for the first time in my investing history, I'm saying, maybe I should hold something that is not going to be effective inflation goes to 10%. There's a market economic crisis that is potentially catastrophic because that's not being

priced in by markets right now. And, you know, the chance of it happening is perhaps greater than it's been in any time in the last 20 years. I was shocked that at the top of your list of companies most of are valued in those 10 wasn't Palantir at 120 times sales. I was counting on the Mag 7, you know, obviously when you add Palanty to the Mets, you know, you add, I haven't done a recent, my last valuation of Palantir was almost a year ago when the market cap was much smaller. Obviously, the story has changed, companies' market cap has changed. I haven't valued my Palantir recently.

So it might very well be competing with Nvidia at the top. And maybe that's the reason Michael Burry's picked Palantir's other choice is, you know, where's the number coming from? But I apologize. I was focusing on the MAG 7, but you were talking about the MAG 10 there. So just asking for a friend, if someone is thinking that not collectibles, but something that might be more inflation resistant, how do you feel about real estate right now as an investment? Rental property is more than traditional real estate. I think that that's income stream. So, you know, to the, again, it depends on where you buy the real estate. I live in San Diego. That bubble you see in stocks and bonds is playing out in housing, right? Because people are, feeling wealthy because their portfolio is up 30% they're going out and buying a house reflecting

that portfolio this bubble you know or let's put quotes around the bubble in AI or stocks is spilling over into the consumption and buying habits of the people who have a lot of money in the market which is one reason if you look at the economy it's the top 10 20% in terms of wealth that's driving a lot of the energy the economy is they're feeling rich because their portfolios look bed, right? And that's determining what house they buy. But if you're in real estate, I think you've got to be selective. It might not be buying a house in the city you live in. It might be buying a rental property in some other part of the country. That's not hot. Well, you get enough rental income that it covers what you have made investing in a T-Bond, but do you have something

physical, really you've invested in. So again, something I've never invested in the past, but something I'm more likely to look at now than I would have five years ago, 10 years ago, 20 years ago. I'm kind of amazed by almost how bearish you sound. Let's just go over what you said here. So, one, there is a bubble, an AI bubble. Two, there is no place to hide in the stock market. And three, for the first time you said ever,

you are looking at parking your money into one, cash and two, collectibles. Or physical assets which pay income. That, to me, is a very striking statement. I actually didn't expect that from you. What is different right now than, say, 20 years ago, 10 years ago, five years ago, the fact that this is the first time you're considering it in your time as an investor, and as a legendary investor and educator, what's different right now? We live in a world where everything seems to be correlated, right?

I mean, it used to be even 10, 20 years ago, I said, I'm going to put my money in European stocks or Asian stocks or Latin American stocks, you know, if I thought U.S. stocks were overvalued. Or I'm going to move my money out of this sector into this one because utilities then not to go down as much during the crisis than technology companies. You know, one of the problems, and maybe you can lay passive investing for this and the flow of money is the correlations across asset classes, across sectors, across geographies, has risen to the point where, you know, that classic rule, if you spread your money across multiple geographies, multiple sectors, you're going to be more protected. That advice is not holding up anymore because of the core rate, because the markets seem to be moving so much more.

So you almost have to struggle to find something that doesn't move with markets, where you didn't have to do that 10 or 20 years ago. Now, part of this might be globalization. Part of it might be the way in which people invest through funds and through large index funds that move their money to wherever the largest market cap is. But it does make investing a lot more dangerous because, you know, I can't tell you, as I said, no, people call me on the send. I feel worried where should I put my money. Twenty years ago, the kind of advice I had given them. You can stay in the stock market, but try to shift your money out of this sector into this one.

you're going to be more protected. I don't feel as inclined to give that advice anymore because I don't see that protection playing out as much. So you're assuming that there's going to be some very, very large, I assume correction in the stock market? It could be a large correction or a long and painful correction, right? You could have a 35% drop in the market over a couple of weeks or you could have a market that stretches out doing nothing down six or seven percent.

a year for three or four or five years, right? This is in 1970s, much, you know, so either way you're hurt, the second is an easier way for you to kind of at least manage the decline. The first is a shock. I'm not sure which one's better as an investor, to be quite honest. Get it out of the way and say, okay, now my portfolio is now down. Let me start building up again. Because long stretches of flat or down markets are incredibly, you know,

how difficult to deal with this in investor. They suck all the energy out of you, right? Which is one reason. By the time you got to the late 70s, people had stopped investing in stock. There were some people who said, I will never invest in stocks again. Because that's what long stretches do. And that's what we don't know yet, how this will play out. Will it be this climactic moment where everybody wakes up and says, this is terrible?

What are we done and have this massive correction? Or is it going to be something that's going to be an... drip, drip, drip correction that occurs over time, and, you know, we're going to find out at least, and we won't know into hindsight, but, you know, that's what I'm watching for, is where, you know, how will that play out? For those who would say to you, I've heard investors get concerned before. The people who say, you know, economists have predicted eight out of the last three recessions or whatever the phrase is.

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

I'm not selling all the stocks in my portfolio. I'm not running for the hills. I'm not putting all my money in gold and Bitcoin. Because I think that's the kind of action where even if you're right, you end up losing in the long term. Because once you get out of stocks entirely, it becomes very difficult to get back in. You stay out of markets too long. I know people are sold in 2008. They got the timing right.

But they stayed out for the next decade. And in hindsight, I wish I hadn't done that. I'm not selling everything, but I'm mopping and lopping portfolio positions. And it's nice to be in a position where you're taking a stock that's up 20, 20, 200 percent, or 2,000 percent in your portfolio. You're selling 25 percent of it. I'm not even selling all, you know, even my Nvidia, I staggered out over four different, and I still hold onto a quarter of the Nvidia that I tended to hold. So I'm not suggesting drastic selling everything, but I'm suggesting taking your profits, don't get greedy,

and taking those profits, and rather than putting in the next hot stock, holding it in cash, so my portfolio allocation has adjusted only gradually over the last 10 years. Michael Burry would look at my portfolio and say, you're overinvestment stocks, and he's probably right. I will probably feel more pain in a correction than somebody who steps out of stocks entirely now. But I also feel more comfortable in the long term doing this gradual. and kind of doing this adjustment because I'm never completely,

I will never completely be out of stocks and bonds. It's not my nature. It doesn't work with my risk conversion. But I have less of my portfolio invested in long-term bonds and stocks. I don't own much bonds to begin with stocks than probably any time in the lot. But that's not come from just selling off everything,

but for selling off my most profitable, my biggest winners, and bring them back in line. Now, I have this upper limit of no stock should be more than 15% of my portfolio. And that served me well to get a lot of cash on the side because I've had a lot of positions on my biggest winners to get there. So I would say, don't do anything right. I'm not suggesting you sell everything.

I don't, I'm not suggesting buying puts on the index. I mean, those are the kinds of things that get people into trouble. But at least gradually start thinking about how much, you know, at least for, you know, in terms cash needs for the next two or three, see if you can get a portion of your portfolio where you don't have to sell things because you need to pay for your kids tuition, college tuition, because who knows what price you might be selling at. So think ahead, think of ahead of what your cash needs are going to be

and start thinking about what in your portfolio you might want to take your profits on. You mentioned maybe you want to put it in cash, maybe you want to put it in physical assets, real estate, maybe rental properties, collectibles. Could you just describe what collectibles are, what fits into that category? Gold is the classic one, right? Now, basically, collectibles is entirely driven by scarcity and enduring demand. Now, would I put my money in Pokemon cards? No, not, you know, that's not my, the collectible I would go with. I would look for collectibles that have survived the test of time. It's one reason I would put gold over Bitcoin, because much as Bitcoin has been a better money maker

for you in the last 15 years, I'm not sure it survives that shakeout that comes when people say, oh, my God. So you want to steer money to collectibles, and if it's a collectible which you truly enjoy, you get emotional dividends. So you love paintings, you know, and this is what you work with.

If that's where you want to put some of your money into is baseball cards because you've truly done your work on baseball cards, where am I to step in and say, that's not a great place to put your money? Now, so I think collectibles, it has to depend on where you get your emotional dividends. What makes you happy?

Because a collectible is not going to give you any dividends while it's sitting in your portfolio. You might as well look at it and enjoy it while you have it. So maybe enjoy looking at gold. Maybe you like wearing jewelry. Maybe like art on the wall. But collectibles, I think, there is no one size fits all. It really depends on your makeup as a person

and what you think your collectible class is. And yet it does seem to fly in the face of the principles of value investing a little bit where you're investing in cash flows for the value investors who would say, you know, if you're trying to invest in downturns, you want assets that produce cash flows that can pay dividends. And put your money in cash, right? Put your money in tables. It's as simple as that. So if you don't feel comfortable with collectibles, I completely understand.

Man, I mean, I'm not comfortable with delectables. So it's not my first instinct. But I think one of the problems is if your worry is not about market and economic crisis, but hyperinflation. All those temporary things we started after COVID have become permanent things. And we're not willing to raise the revenues to cover those expenses. We're setting ourselves up for double-digit inflation, then even cash is not going to protect you because your currency is going to devalue. So it depends on what scares you, if it's economic or market crisis and holding your money in cash works.

If it's inflation, then I think you've got almost leave the financial asset domain, and that includes cash even in short-term investments, and think about what do I put my money in. And it's not easy to find something. It's not a healthy place to be as a marketer in an economy where that's what we're looking for. But I'd wait that there's a subset of the investing community, which is really good. that place. I'm not sure about the Ray Dalio or

Jamie Diamond owned gold, but they talk a lot like they should be owning gold, right? You listen to them and say, what exactly are you holding? I know Ray has. Ray's big on gold right now, yeah. That's uncommon, right? Because if you had asked Ray Dalio for 40 years ago, would you buy gold, my guess is

he'd have looked at you like a two heads saying, are you crazy? Why would I buy gold? I'd go by Chinese companies or by undervalued companies in this economy. The very fact that Ray Dalio is holding gold, tells you something about safe places and how difficult it's become to find them within the financial asset markets. We'll be right back. And for even more markets content, sign up for our newsletter at profligemarkets.com slash subscribe.

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Well, each year, Aswath, we do a predictions deck, and one of the things we do is we try and pick one of the big tech stocks or one of the Magnificenton 10 that we think it's going to outperform the others. And it's key that we say outperform the others because I don't think anything looks cheap right now. I'm not comfortable saying this is a good buy, but I think it will outperform, meaning it might go down less than the others. And this year, we're thinking that it's going to be,

our pick is going to be Amazon. Last year was Google. It just looked cheap relative to the rest of the S&P because of this existential overhang that we thought was overblown about the existential threat of AI relative to its search business. By the way, search business was up 14 percent and the stock's up 63 percent in the last 12 months. But the pick this year we're thinking, and I'd love to get your thoughts, is Amazon. And that is, it's not cheap, but it doesn't look historically expensive. It's trading in a P of about 34. They've announced that they're retail unit, they may achieve double the revenues with the same number of people. It feels like the collision of AI and robotics and the early investments that made in robotics is really starting to pay off. And then some, you know, free gifts with purchase, an AI business or a cloud business that's the leader that hasn't gotten the valuation that some of the other cloud or attention players have gotten because it's seen as not the AI capable cloud. We think they will fix that. Kuiper, you know, putting satellites, we think that it'd be interesting if they get any traction

there. In sum, how do you feel about our pick of Amazon being on a risk-adjusted basis outperforming the rest of the Magnificent 10 over the next 12 months? I think I, you know, I would pick Amazon and Apple as my picks. And the reason is they haven't gone crazy on their AI spending. I mean, to me, the caution, the natural caution that Tim Cook has in terms of throwing money at new businesses is going to be a plus, not a minus. So I know equity research analysts pick on Apple for not being aggressive in their AI. And I think that's going to be a good thing because when the correction comes, the people who have been most aggressive are the ones who are going to be most exposed.

And Apple's lack of aggression, I think, might work in their favor because they haven't been throwing the $50, $60, $80 billion that you see some of the big tech companies throwing at it. So Amazon's been in my portfolio now for a few years. And as I said, it's one of those companies that I would hold on to here, even through a correction and continuance. Because let's face it, it's become such a central part of so many people's lives. I don't see it kind of having a collapse of business, you know, even with an economic contraction, the correction.

In fact, it might benefit from that. Who knows, Target might get so cheap that Amazon could pick it up for pennies on the dollar. So who knows where it's going to go next. So, you know, I like your pick. I mean, Amazon would be my pick as well. Going back to what you're thinking about in terms of trimming your positions, I'm wondering if you have any, if your thoughts differ depending on someone's risk profile, risk appetite, and perhaps their age as well.

So me as an example, I'm a young person. AI is the big, hot new thing. You know, I want to get involved. I want to be on the train somehow. Does your advice change depending on your age and what you're looking for for someone like me, for example? I agree there's going to be a correction. But I've also got to tell you I don't want to dump AI and get in cash. I don't want to do that.

I think, you know, if I were advising you, I'd say, do what you're doing, but do it. with caution. So, you know, you're not only have a portfolio, you're adding to that portfolio, presumably each year with, you know, savings and additional money. My advice is that additional money you're putting into a portfolio, don't all, I mean, if you're traditional practices, I'm going to buy the index fund every year, you know, which is what I advise my kids to do, take your savings, buy index funds, go back to doing your regular jobs, because I don't want you spending evenings trying to pick stops. It's not worth the effort. Now, this year, my advice to them is that the savings you got from your income this year, instead of putting it all

into stocks, why don't you hold it as cash? So it's not advice about changing your existing portfolio. It's about additions to your portfolio being more cautious in those additions, at least for the near term. Or if you're, I'm not a great fan of doing things on a staggered basis, but maybe rather than putting it all at one goal, rather put it in four installments over the next four quarters. If nothing else, if there's a correction there, then you don't get it all up front.

So it's just a little more caution about increments to your portfolio, but you have two things going through you. One is the fact that you have a longer time horizon. The other is you don't need your portfolio to supply you cash to meet needs. For people who don't need their portfolio to provide cash, you get an advantage.

You get an advantage because you have a downturn. You don't need to. a portfolio. You don't need to sell it to get the cash. So people who are closer, so it's not as much age as how close are you to having to cash out your portfolio to do something, to buy a house, to go to college. The closer you are to that, the more cautious I would suggest to become or maybe convert more of your portfolio into cash, because those are the people who will be most damaged by a correction that happens just before they were planning to take the cash out. Because then your lifestyle will have to change.

Your choice of college might have to change. And that's not something you want coming out of your portfolio. So my advice would depend on your age, how much cash needs you have, what are you looking to do? Because those will all play out and what you should be doing. But I'm not a great fan of these drastic actions. You sell everything in your portfolio and you try to move it all into something else. because often the long-term consequences of that are, you know, you end up worse off

than somebody rode through the correction and was able to kind of come back from it. I'm glad you bring it up because I think it gets to the heart of what the problem is with corrections, which is it is a timing problem. And you mentioned that with Michael Burry. It's like, yes, you can go short, but that's not the question.

The question is the timing. It's like, are you going to time it right? And then the same thing is true of what does the timeline look like on your life? When will you need the cash and what position will you need to be in on that time frame, which I think is helpful. But I am struck by even for those who are not so worried about timing, for those who have a somewhat steady income and who are young and who are trying to build the portfolio, your view is still maybe don't keep dollar-colder. cost averaging into the market, maybe get into cash, which is striking to me, especially given inflation, which is high, appears to be going even higher. It doesn't look like we're going to be in a 2% inflation world. What would you say to those people?

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

stocks. This is what happens. Once the cash sits there for six months and nine months, it almost an autopilot moves into my index fund. So you're not changing a historical pattern of being invested in risky assets and looking for the higher return. You're just slowing the process down, so you're not jumping in at a time just before a correction hits and then facing. No. So I think that's all you're doing is kind of giving yourself a little slack in this process. When we last chatted, it was in August and we were talking about big tech valuations. We were talking about not that there was an AI bubble, but that there were, there was a lot of momentum and perhaps a lot of hype. And you were somewhat bearish on AI or somewhat bearish on tech at the time. Now you are more bearish, it appears to me, at least. I'm wondering if there was a moment or maybe a specific company or a specific valuation that sort of changed your tune on this. I know that it wasn't a 180, but there's certainly been an acceleration in your views.

I think it's more incremental, and part of it is watching these companies invest in each other, right? I mean, there's this almost incestuous relationship between the big AI players. And one or two things can be driving. One is that they want to dominate the AI space that's going to emerge five years from now, and they want to create these barriers to entry. The other is this is almost like a Ponzi scheme where they have to keep investing in each other, making each other look more valuable because that's the only way they can get the rest of the market to go in. I'm not ready to make a decision that it's the latter, but watching that happen,

and has made me more negative about AI. If you really feel, as in VETI or Open AI, that you're going to carry the game, why would you need these cross-investing in other players in the game? Because that seems like you hedging your bets and protecting yourself and making sure that nobody knew is going to break in.

So that suggests to me that much as they convey confidence in the market, that they think they're going to rule the world of AI, that within these companies they're still uncertainly about whether they will in fact rule the world of air and what they're creating is this preemptive barrier to other people entering. So that's the one thing that I think has changed for me is watching that cross-company investment and what it tells me about what's in their mindsets about the future of air. Going back to the beginning of this episode where I asked about this conventional wisdom, the idea that a lot of people are saying that there is a bubble

And a lot of people are also pointing out what you just said, which is the circular investments, the incestuous relationships, and all the negative connotations that come about. And yet, we're looking at all-time highs. And yet we're looking at, you know, 56 times earnings on InVIDA. We are looking at very, very rich valuations while everyone says, yeah, it's a bubble. Even the people who run these companies, in some cases, are saying, maybe not it is a bubble. but it certainly could be a bubble. Is that unusual? Does that surprise you?

Not at all, right? Because take our portfolio managers to get evaluated, right? They get evaluated against other portfolio managers. So if you did not own the Mag 7 over the last five years, all the money's left your clients have left.

If you do buy into InVadio now, even if it's a high and there's a correction, guess who you get measured against? other portfolio managers also own InVidio also see the same correction. You're down 37%. But if everybody else is down 43%, you still say, look, I came out of this much better off. And because we let people create their own pathways, I'm a tech investor, they essentially have this argument.

Look, I had no choice. I had to invest in this because this is what tech looked like. I think the way we reward and punish success in active. money management doesn't reward people who lead the herd, right? So if I had a son or a daughter as a portfolio manager, I'd say, look, you know, pile into with the momentum because even if you're wrong, you'll have lots of company when you're wrong, and nobody gets fired when 90% are wrong, but if you have a contrarian path and you decide to sell short on the max seven and you turn out to be wrong.

you lose your job. So I think the way we, and that's why it's only people like Michael Burry who can do this, I'm going to sell short, because they're not managing conventional money. They've got a subset of clients who bought into what they do, but you can't do this if you're a big portfolio manager, a big endowment fund,

because the way you get judged, where you get rewarded and punished essentially keeps you on that stay with the crowd, even if that crowd is wrong, it's better to be with the crowd and be wrong than to break away from it. For those who are listening to this and feeling perhaps anxious, I mean, there are a lot of concerns.

There's the valuations that you're describing, the possibility of a correction, there's the fact that AI could have massive effects on the job market. Perhaps some people, I know many listeners, feel that they are concerned about the security of their jobs. What would you say to those people? What would be your advice?

You can control only what you can control. So my advice is take your job, take a look at what you do. If 99, 98, 97% of what you do is mechanical, whether AI is here or not, you're asking to be replaced by a machine. So try to create a component of what you do that is going to be difficult for a machine. do. I mean, I gave a talk right after, you know, about AI bots because I had an AI bot that was trying to replicate me. And I said, look, I'll make your job easier. Here are the things that I do

that you can replicate. Does datasets that I upgrade every year? Hey, you can do that. So I actually took out the 80% of what I do. So you can do this. Here's the part that I think I can do, that you're going to have a much tougher time. I would say impossible because who knows how sophisticated. I think we all need to do a personal inventory of what we do at our jobs and whether it's something that a machine could do better. Now, I'll give me a very simple example. Now, people keep sending me ways and they could beat the market. If I do this and this, and I have a very simple response to them. Can't chat CPT do what you've just described as doing? So I buy low PE stocks with high growth rates. Will I make money? And I said, how difficult do you think

it is going to be to find low P.E. stocks with high growth, especially when you look at past growth. Chat GPD can do that. And while you think you're going to be able to make money on something that a machine can do effortlessly. So my advice to people is act like AI is going to take your job because it's better to do that and not have AI measure up to its promise than the alternative, which is think AI is never going to take off. You keep doing what you're doing. one day you walk into your office and you've been fired and replaced by a bot that essentially does what you do. Can I just ask for you personally, when you eliminated all the 80% of the things that you

believe that AI could replicate in your work, what were you left over with? What can AI not do that you do? Imagination and created the kinds of things where my family takes issue with me. I'm a daydreamer. I connect these unconnected things. in my mind. And most of the time it's used to, you know, people say I'm wasting time because I'm doing this, but some of my most productive thoughts have come from connecting. And I wrote a piece on this about catastrophic risk. And I don't know whether I ever mentioned. This was about

started this year. I got an email from somebody in Iceland and read my blog and he said, look, I've been reading a blog, but I have a valuation challenge. I'm valuing this Icelandic spa called Blue Lagoon. It's a legendary spa. And I'm facing a problem I've never faced before. There's this volcano that's erupted and the lava is flowing in the general direction of the Blue Lagoon. And I don't know how to bring that in the valuation. I've looked at all the books. There's no lava risk in any of the books.

So I read the email. I'd never an answer to him, but I took my dog for a walk. And while I was in the walk, I was thinking about this. And I started thinking about the fact that fossil fuel companies, you know, you have COP 30 and you talk about, no. How come fossil fuel companies? companies are trading at much higher multiples of earnings, and there isn't this catastrophic risk looming. And while I'm thinking about fossil fuel companies, I remember the house I own two blocks from the Pacific Ocean, one of the worst earthquake falls, and I said, what was I thinking

when I paid the money that I paid for that house? It gained catastrophic risk, and I'm acting like it's not there. And while I'm still there, I'm thinking about the Mad Max movies. I'm thinking about how often in the Mad Max movies do people check their portfolios? Almost never. And the conclusion I came to was we as human beings take catastrophic risk and we don't build it into our expectations. We set it to the sack. Because our view is if that happens, who cares what your portfolio looks like? We don't build a nuclear war into our expectations.

We don't build in the fact that the oceans could rise three feet because if that happens, none of the other stuff matters. And that all came from a 30-minute walk where I let my mind wander. so I don't think a computer is going to do it because it's going to be too I mean it's not that's what makes us human beings the capacity to connect disconnected thoughts and apple falling on your head and the law of gravity how the heck do you go from one to the other but Newton did this right some of the greatest insights of mankind have come from people connecting disconnected things so keep an idle mind read less think more daydream more. I mean, and I think, unfortunately, if you were a conspiracy theorist, you would argue that technology companies

are setting us up to be replaced because they're taking every space of idle time we have and filling it up with something. I mean, you go to catch a flight. Take a look around you. Every person is checking their iPhone, right? You're filling your space,

reading Facebook posts, reading and looking at it. We are not giving ourselves that idle time to let our mind connect. And I know it's a strange thing to say, but that's an advantage I have over a machine that's going to be very difficult for the machine to replicate. So you know what I'm going to do? Read less, daydream more. And I've been doing that a lot because for the last three months, I've been looking after my granddaughter who just done six months. And when you're

with, and I'm the caregiver, so you don't have the luxury of reading or, so basically I'm spending all my time holding a baby feeding it, putting it to sleep. And it's an amazing. time to let your mind wander. And to me, I don't know what will come out of this. Maybe nothing will, but I'm glad I have that time. So if you have a vital time, cherish it, because that's when I think you can find your AI beater within you. Aswate Demoder is the Kirchner family chair in finance education

and professor of finance at NYU Stern School of Business, where he teaches corporate finance and valuation. You can also read his research on his blog, Musings on Markets. Professor Demoderan, always a pleasure. Thank you so much. Thank you for having me. Very much appreciate your time, As well. Take care, Scott. This episode was produced by Claire Miller and Alison Weiss and engineered by Benjamin Spencer.

Our research team is Dan Shillan, Isabella Kinsel, Chris Nodonoghue, and Mia Silverio. Drew Burroughs is our technical director, and Catherine Dillon is our executive producer. Thank you for listening to Profty Markets from Proffty Media. If you liked what you heard, give us a follow, and join us for a fresh take on markets, on Monday. in love of life