You Won't Pick the Next Amazon: Five Lessons from Aswath Damodaran
The Dean of Valuation on SpaceX, incomplete stories, and why future growth is the hardest asset to see.
Midway through our conversation, Aswath Damodaran turned the premise of a show about the intangible economy back on us. When people think about intangibles, he noted, they think about brand names. Then he asked whether we knew the biggest intangible of all. His answer: future growth. When a company’s worth rests almost entirely on what it has not yet done, the bulk of that value cannot be seen, which by our own definition makes it the ultimate intangible.
Few people are better equipped to price the invisible. Aswath has taught corporate finance at NYU for more than four decades, earning the moniker “The Dean of Valuation.” He joined us days after SpaceX went public and promptly ran to a $2.7 dollar market cap, roughly twice the value his own upbeat stories about the company could support. The hour that followed lived in the gap between those numbers, and in the very human ways investors of every stripe avoid looking into it.
Lesson 1: Don’t Confuse a Great Company with a Great Investment
Aswath has heard the vows. Too many value investors, he told us, declare, “I will never buy SpaceX. I will never buy Tesla.” He considers the vow a category error, and the first rule he offers investors runs straight at it.
Any company can be a good investment at the right price. Conversely, any company can be a bad company at the wrong price. So this notion of good companies are good investments, let that go.
SpaceX handed him a live test of the rule. He values it as three loosely connected businesses: the launch operation that reinvented its industry with relaunchable rockets, the Starlink satellite-broadband arm built on top of cheap launch, and the AI business that arrived with the xAI acquisition and drives the trillion-dollar pricing. For each he told what he considered an upbeat story, converted the stories into numbers, and arrived at roughly one point three trillion dollars. The market, within days of the IPO, said two point seven.
The gap did not turn him into a scold. He called SpaceX “an engineering marvel, an amazing company, a company that perhaps only Elon Musk could have created.” Nor did it make him certain. Given the uncertainty about the future, of course the company could be worth two trillion, and if someone wants to put money behind that story, “who am I to contest them?” He values, he explained, for “an audience of one,” himself. And that audience draws the line well before “two trillion, two point two trillion, two point seven trillion”; that, he said, is “a bridge too far for me to cross.” His verdict: “a great company, but at the wrong price.”
Lesson 2: A Big Market Is Not a Business
One of the first questions Aswath asks his MBA students is, “What are you more comfortable with? Working with numbers or telling stories?” The answers sort the room into the two tribes that dominate investing: bankers and value investors who live in multiples, founders and venture capitalists who live in narrative. His complaint is that each camp, left to itself, does half the job. The number crunchers extrapolate from what is already on the books, which for a young company is close to nothing; reading SpaceX’s financial statements, he said, is “like having a kindergartner’s report card and extrapolating from that what they will be doing in college.” The storytellers err in the opposite direction. Aswath watched CNBC make the case for a two trillion dollar SpaceX, and the case was the size of the AI market, pegged in the prospectus at twenty-six trillion dollars, the largest he has ever seen. “I wait for the rest of the story, and it doesn’t come.”
The rest of the story is where the value gets decided. A big market pays an investor nothing by itself; it has to be monetized as revenues, and the revenues have to survive unit economics that in AI remain unforgiving, since the data centers, power, and water resist economies of scale. Growth on those terms, he warned, “might not just be neutral to value, but actually be value destructive.”
The sharpest version of the point involved a contradiction. SpaceX says it will win a significant share of the AI market while collecting nearly two billion dollars renting data-center capacity to Google and Anthropic, its biggest competitors.
That’s like a manufacturing company claiming that they’re gonna get a big market share, but they built a big factory, and they rent out two-thirds of their factory to their two biggest competitors.
“Something in this story will have to gel,” he said. A landlord to your rivals and a conqueror of their market are two different companies with two different values, and he doubts anyone, SpaceX included, knows yet which one this will be.
Lesson 3: The Next Amazon Probably Isn’t on Your List
Aswath reached for Amazon because it is the stock people use to flatter themselves. Looking back, buying it in 1999 seems obvious: the internet was clearly going to take off, and Amazon was clearly going to win it. He rejected the premise outright.
Was it? I was there in 1999. Neither of those things were obvious.
The mechanism matters because it is pricing assets right now. Selective memory convinces us we would have picked the winner at the start. That hardens into what he calls “ROMO,” regret over missing out, and regret converts into FOMO, the fear of missing the next one. That is how an investor ends up paying two trillion dollars for SpaceX while telling himself he cannot afford to miss the next Amazon. What is moving the stock, Aswath argued, is that fear rather than anyone telling a bigger story than his and attaching numbers to it.
We raised his work with Brad Cornell on the “big market delusion,” and he laid out the ingredients. “You have to be overconfident to be an entrepreneur. You have to be overconfident to be a venture capitalist.” Pour that self-selected overconfidence into a genuinely enormous market and you get overreach, and after the overreach, a correction. What you do not get is a verdict on every company in the space. “The correction will be in the aggregate, but there’ll be a few winners that come out of this space.” By his count, one AI company in ten will look like Amazon thirty years from now, and it may be a name nobody recognizes today.
Lesson 4: Homework Doesn’t Entitle You to Returns
In his writing Aswath has argued that value investing lost its edge by becoming “rigid, ritualistic, and righteous,” and he stood by every word.
The conventional wisdom holds that value investing used to work, and Aswath asked what that belief rests on. Anecdote, mostly, plus a famous academic result: Fama and French showed in 1992 that stocks cheap on price-to-book beat expensive ones. But a simple index fund could have harvested that premium without any of the craft’s baggage, and the average twentieth-century value investor, he argued, underperformed a value index fund. The edge was thinner than the folklore, and the folklore bred entitlement. Value investors “drank too much of their own Kool-Aid,” concluding they were “the chosen ones,” owed an excess return for doing the homework.
The rituals calcified alongside the confidence. You are supposed to have read Ben Graham’s Security Analysis; he likened it to scripture believers claim to have read. You are supposed to make the annual trip to Omaha to hear, as he put it, “two octogenarians.” And the rules at the heart of the discipline exist “to stop human beings from using judgment to override what the numbers should be,” a playbook ChatGPT can now run in an instant. Then the returns stopped coming, and the righteousness did its worst work.
When you’re righteous and you underperform, you know who you blame. You never blame yourself. You don’t take responsibility. You blame the rest of the world.
For two decades, he argued, that has meant blaming passive flows instead of asking whether the fixation on book value should be retired; he would wager that 98 percent of companies’ book value bears almost no relationship to what liquidation would fetch. None of this is contempt for the greats. He admires Warren Buffett for holding a clear philosophy and staying consistent with it, and loved Charlie Munger even more for speaking his mind; what he rejects is treating either as gospel. The way back, in his own written words, is for value investing to “get over its discomfort with uncertainty” and widen its definition of value to take in intangible and growth assets.
Lesson 5: Be Wary of the Track Record, Including Your Own
We closed with the question we ask every guest: what does he believe about investing that most of his peers would dispute? He went straight to error. Being wrong a lot of the time is the nature of the game; the real trouble, he answered, is “the big mistakes you make that you refuse to acknowledge.” The damage comes “when you’re wrong and you dig in and you double down, you triple down, you quadruple down.”
Then he offered the sharper heresy. “The least persuasive evidence you can show me that you’re a successful active investor is your historical returns.” The reason is luck, and how stubbornly it hides inside performance. He pointed to Mike Mauboussin’s book on separating luck from skill, and to how much harder the separation is in markets than in sports.
You can’t be a lucky basketball player and make 15 out of 20 three-pointers. It’s not gonna happen. But you can be a lucky investor and beat the market 15 years out of 20 all the time.
He closed with a story about a bettor on one of the betting platforms who put a million dollars on Spain to beat Cape Verde. The payoff was about eight percent, Spain was the overwhelming favorite, and the bettor had made a habit of exactly this trade, backing 90 percent favorites with serious money and collecting small, steady wins. Then Spain tied, and the million was gone. “There’s a subset of investment strategies where you will win most of the time. But when you lose, you wipe out ten years of returns.” A decade of statements said the strategy worked; every one of them was measuring the wrong thing.
The Bottom Line: Give Your Rational Side a Chance
Ask Aswath why investors fail and the answer is bracingly even-handed. The storyteller quits at the size of the market, and the numbers person will not look past the books. The righteous investor blames the world for twenty years of underperformance, and the streak rider trusts a record that luck assembled. Different corners of the market are making the same move, defending a decision that has already been made. “We make decisions first, and then we look for rationalizations later. It’s human nature.”
That is what makes the biggest intangible so dangerous. When most of a company’s value sits in a future nobody can see, human nature will happily fill the space with regret, ritual, or a borrowed story. The apparatus Aswath has built, the stories tied to numbers, the distributions in place of point estimates, the audience of one, exists for a humbler purpose than being right. He is buying time. “I want to slow the process down and give my rational side a chance to at least mount an argument.”
Watch the full episode here: