Market Legend Says Rethink Everything You Know About Stocks

When it comes to investing, few names carry the weight of Aswath Damodaran, the NYU professor who literally wrote the book on valuation.

In a wide-ranging conversation with Motley Fool, Damodaran shared a masterclass on navigating markets in uncertain times.

From the political entanglement of major corporations to the dominance of passive investing, his insights are grounded, thought-provoking—and, most of all, timely.

Here are the five biggest lessons we took from it:

Key Points

• You can be right on a stock’s value and still lose if the market doesn’t agree—diversification and patience are critical.

• Political risk now affects company valuations, and passive investing is reshaping market dynamics so old rules no longer apply.

• In volatile times, rigid dividend policies should give way to flexible returns like buybacks.

Valuation Isn’t Enough, The Market Has to Agree

Let’s say you find a stock you believe is worth much more than it’s trading for. Should you go all-in? Not so fast.

Damodaran posed this exact question to his students. Even if you’re 100% confident in your valuation, you’re not in control of whether the market will recognize that value. And if it doesn’t, you could be holding the right thesis… and still lose money.

“You can be right about value and still not make money if the price doesn’t move,” he said.

That’s why diversification matters more than ever in uncertain times. Damodaran says he owns 30 to 40 companies—not because he’s unsure about his process, but because he knows that even great analysis can take time (or may never) to play out.

The U.S. Isn’t Immune But It’s Still the Safe Haven

Damodaran has worked with investors across the globe, from Turkey to India to Latin America. When asked whether today’s uncertainty feels different, he replied: it depends where you’re standing.

While American investors might feel unsettled by political divides, inflation, or interest rates, he reminds us that the U.S. remains remarkably stable relative to many regions. That said, it’s time to let go of the illusion that markets are always rational or that economies always revert to the mean.

The old playbook of buying low P/E stocks or small caps and assuming mean reversion just doesn’t work the way it used to.

“We got spoiled,” he said of 20th-century investing. “The U.S. was the most mean-reverting market in the world. But the world has changed.”

Politics Are Now Part of the Valuation

Once upon a time, U.S. companies operated in a world where politics played little role in stock valuation. That world is gone.

Take Tesla, for instance. Damodaran says it’s now impossible to value the EV giant without accounting for Elon Musk’s political affiliations and how they impact brand perception and potential government incentives.

Even Disney isn’t immune due to political sparring with Florida officials may affect consumer sentiment, regulatory oversight, or long-term profitability.

“We’ve entered a world where political alignment is now part of a company’s risk profile.”

Investors must now factor politics into assumptions about margins, revenue growth, reinvestment, and risk because markets are.

Passive Investing Is Here to Stay

Damodaran is blunt: active investing has historically underperformed. Now that data is transparent and moving money is just a tap away, investors are voting with their wallets and pouring more capital into ETFs and index funds than ever before.

But does this distort markets?

Yes and no.

He acknowledges that passive investing adds momentum to the largest companies, especially those in cap-weighted indexes. But he cautions against blaming it entirely for the dominance of the “Magnificent Seven” Apple, Microsoft, Amazon, Nvidia, Meta, Alphabet, and Tesla.

“These companies are dominating because many of their industries have become winner-take-all,” he explains. “This isn’t just an indexing story—it’s an economic reality.”

Still, Damodaran believes price discovery is alive and well, just more complicated. Smaller, non-index stocks can remain undervalued longer, but eventually value shines through if you’re patient enough.

Rethink Dividends, Embrace Flexibility

In a world of lumpy earnings and unpredictable markets, companies should stop clinging to rigid dividend policies, Damodaran argues. Instead, they should shift toward flexible payouts, like buybacks or performance-tied dividends.

Buybacks, he says, are often misunderstood. They don’t create value but they can transfer it. If a company is overvalued and repurchases shares, it rewards the sellers and punishes the loyal shareholders who stay.

“If you’re going to return cash, make sure your stock isn’t grossly overpriced or else you’re just subsidizing the people heading for the exits.”

Especially in capital-intensive sectors like energy or banking, dividends should ebb and flow with the business cycle. Fixed payouts don’t make sense when free cash flow is volatile.

Adapt or Fall Behind

Damodaran’s key message is simple that the world has changed, and investors need to evolve with it.

Markets are no longer predictable. Political risk is real. Passive investing is not a phase. And even if you’ve nailed a company’s intrinsic value, the market may take its sweet time to catch up.

That’s why perspective and discipline matter more than ever.

“You’ve got to live in the world we’re in, not the one we wish we were in.”

If you want to win in this market, don’t chase certainty. Embrace discomfort, stay grounded in fundamentals, diversify smartly, and never stop questioning the assumptions that got you here.