Bogleheads On Investing Podcast · bogleheads

Episode 77: Aswath Damodaran, the Dean of Equity Valuation from the Stern School of Business, host Rick Ferri

December 19, 2024·56 min·9 clips

Rick Ferry introduces Aswath Damodaran as a Stern professor of corporate finance and equity valuation. He presents Damodaran as a key reference for investors because of the books, articles, and ongoing data he maintains on equity markets around the globe. Ferry also offers brief updates on Bogle Center materials and conference plans before the interview takes over. The discussion centers on how to estimate the equity risk premium without relying on long-run averages. Damodaran argues that backward-looking habits are a weak guide to current pricing. He compares them to driving down a highway while staring only into the rearview mirror. His preferred method starts with current stock prices and the cash flows the market appears to be implying. He treats the problem as an internal rate of return question rather than a slogan. Using the S&P 500 as the anchor, he explains that expected earnings and expected cash flows can be turned into an implied discount rate. That rate represents the market's built-in expectation of return. He says he runs the calculation at the start of every month. For early December 2024, he gives an implied expected return of 8.25 percent for U.S. equities. He pairs that with a 4.18 percent T-bond rate. The spread comes out to 4.07 percent over Treasuries. Ferry asks what that spread means for someone deciding whether stocks are attractive. Damodaran answers that the number itself is the benchmark. If an investor wants a different premium, then the current price may not be the right entry point. The conversation also touches on how earnings growth and economic growth fit into the same framework, though the episode cuts off before that answer. The close widens into the need for open space to think instead of filling every spare moment with phones and email.

As heard by us

A patient valuation conversation that turns stock prices into a question about return, not just risk.

Rick Ferri gives Aswath Damodaran room to do what he does best: make valuation feel usable instead of abstract. The conversation starts with equity risk premium and ends on a cleaner question than most market talk asks, which is what return the current price implies.

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Why you'd press play

You want to know what the market is actually pricing into stocks right now.

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