An Inflation Follow Up: Company Exposure to Inflation's Effects

In this session, I look at how inflation can affect the value of a company, through its value drivers, from growth to margins to reinvestment and risk. I argue that companies with significant pricing power, with low input costs and investments of short duration and high flexibility will have the strongest ability to pass inflation into their cashflows. The capacity to generate high and stable earnings, with little default risk, will determine how inflation affects discount rates. As a consequence, the effect of inflation, and in particular, unexpected inflation, can vary widely across companies. Looking at the last nine decades of US stock returns, I note that small cap and low price to book stocks have done much better during periods of high inflation. Focusing in on 2022, when inflation has been the lead story driving markets, I document that small cap and low price to book stocks have outperformed markets, just as in the 1970s. Adding on measures for risk and cash flows, it looks like less risky and higher cash flow (operating and dividend) have also outperformed the market. While value investors will view this as vindication, after a decade in the wilderness, it is still too early to draw the conclusion that value is back.
Slides: www.stern.nyu.edu/~adamodar/p...
Blog Post: aswathdamodaran.blogspot.com/...

[@pvnewport]

Still can't come to terms with the fact that we are able to see these sort of top notch quality lectures from people like you free of cost 😀.. Thanks for sticking to this cause of spreading financial wisdom 🙏

[@glutenfreeheaven7681]

Fr, the quality of his content makes me feel uncomfortable while watching

[@AR-go1rs]

Great lecture and insights as always. I can't properly express enough my gratitude. Thank you very very much Prof. Damodaran

[@zacharylockhart4550]

Rare communicator than can transfer knowledge and laughs in the same lecture. Thanks as always for your work and public releases.

[@crentistDaDentist]

This was pure gold. Thank you professor for yet another informative video.

[@99BHUVNESHJAIN]

Thank you prof Damodran , it’s a privilege to learn from you.

[@matteomannocci]

Thank you Mr Damodaran for this amazing piece. I loved the part of returns of market split by decile. Is that view available at vertical level ? My feeling is that Information Technology is behaving differently from market average.

[@bfraser1983]

Thank you, Professor. While the small cap premium reacts more to the degree of unexpected inflation (as you mentioned); is it fair to say that the duration of equities is more impacted by the level of inflation? As shorter duration typically also grouped with 'value' companies. While the difference between low PB and short duration may be small it would be interesting to hear your take. Is there a true distinction between the traditional value measures and low equity duration, or is it merely two sides of the same coin?

[@lenulan9409]

Thank you Professor! I wonder if the second derivative of inflation and rates would shed more light on how asset classes respond. It seems as though the rate of change is more powerful than the absolute movement. I just stumbled onto your treasure trove of educational content. Perhaps you have published or commented on this topic.

[@303Lyons303]

Great breakdown, and a simple explanation thank you.. Professor. 📊🙂

[@dodgingdurangos924]

Finally, this inflation effects on companies' cash flows is what I've been waiting for. Thanks. Professor.

[@manubhatt3]

He is The Great Madrasi Valuation Anna!

[@roym1444]

Have you anymore relevant information on this topic

[@Motivation2Invest]

Great stuff Aswath, Keep it up Signal from the Noise. 👍

[@Bigagoo]

An excellent perspective on how inflation affects value.

[@whatwelearned]

Thank you for continuing to put out great content, Aswath. Inflation IS boring but we'd better get used to it for the foreseeable.

[@ridzuanali1919]

Thank you, Prof. Take care. Stay safe. God bless.

[@marsaetos9610]

Great video, like always, professor.

[@michaelseldon3815]

thanks prof so basically own companies that have good free cash flow now vs later. And less investment commitments rather than more. But it’s not about tech or non tech as most amateurs argue

[@nanajus1]

thank you for your perspectives

[@venkynakhate5682]

WSB stonks and Dr Damodaran are two ends of the spectrum. Thanks for illustrating what investing should look like in 2022

[@ownthegame3]

grateful thanks for your sharing!

[@flamboyanz]

Thank you, Professor!

[@manubhatt3]

Can anyone please explain to me? The factors which The Great Madrasi Valuation Anna talked about regarding the effects of inflation on companies, seem to suggest that small cap companies would be more negatively affected by inflation, as: - most small caps are inherently growth or young companies - they would have higher cost of debt - they also have less pricing power due to them being new, small and low brand name/value - higher cost due to lack of scale So, how come there is a small cap premium in times of high inflation??! Intuitively, it seems the opposite!

[@alecouto]

Thank you professor!

[@oakley1910]

If you compare the Margin Accounts at Brokers/Dealers between 2020 Q1 and 2021 Q4, it's necessaey to raise interest rates in the coming months.

[@vicenteh.castexlaprida6711]

Thank you Professor

[@KingXKok]

Wouldn't long term investments but with a fixed long term contract price be beneficial in inflationary environment since it's cost priced in today's dollars but future cashflows will be inflated?

[@DeepakSingh-hl3er]

Thanks a ton guru ji!

[@KISHANKUMAR-xw8nl]

teaching one of the most expensive courses for free is the best form of charity i think, ASWATH sir is like KARAN in mahabharat(hindu mythology),i.e.karan was respected even by gods(hindu mythology) for his ability to give things for free(charity).🙏,sir can u make a hardcore course on portfolio management😬

[@eduardosanchez449]

Hi Aswath, Could you explain the valuation of an Employee Stock Option Plan? (SOP) please, regards from Mexico

[@Asim2846]

Thanks !

[@cos7575]

When riskier stocks with low margins and low pricing power have more trouble in an inflationary environment, why small cap value and large cap value outperformed the market during 1966 - 1982 ?

[@konzentrat]

Is he describing consumer staples as the ideal candidates?

[@Ridewithjst]

Firms that have borrowed in nominal dollars but have non-amortizing debt with longer maturities shouldn’t be punished that hard, especially if they are relatively stable, cash generating businesses, at least vs highly indebted companies with less stable cash flows or even lesser indebted companies. Optimal capital structure would be an interesting tangent (and now we can look back with the wisdom of 3 quarters hindsight)

[@JohnDoe-fb1uk]

EVERYBODY is reaping EXACTLY what they sowed. ZERO EXCEPTIONS. ZERO EMPATHY.

[@Rocket_Man]

So, where’s tha intro to fin, for your vids. A place where I can build foundation off of?

[@sumanashakya5016]

Is banking affected by inflation?what about electricity company?

[@karanmadnani7723]

Every sector nis affected.

[@sumanashakya5016]

Law of motion is applying in stock market.That mean our economic is running well before covid.But because of covid our economic is totally stopped and the stock market went up and up.But now we start to run our economic but stock market went down and down.That means when we start to run from stop position we have to go back for some momement.But after wards we will go smoothly or even faster .

[@darthbrejinn6162]

Thanks for all the help, I've been following you for 10 years. Ever plan on going live?

[@Ridewithjst]

Gotta buy the Stern MBA for that

[@darthbrejinn6162]

@@Ridewithjst sounds like a waste of money

[@manavpatel6575]

sir, please add real case study.

[@ami156]

Sry bro in cost equity divergence small typo "teh"

[@adityasingh9712]

Waiting for the crash anticipation videos .prof

[@seanlu1254]

It's time to invest in houses. House and gold are good hedges against inflation.

[@ericguo8209]

love your jokes :)

[@Tonyforeman659]

Let's not forget that the biggest payouts in the markets don't come from great performances but rather it's great promotions. Stay invested, diversification for streams of incomes is very important

[@Maricel_oronan]

Facts! Every new day, Bitcoin gains support and patronage of more and more politicians, billionaires, finance institutions and institutional investors. Could even surpass the 60k June 2022 forecast.

[@jasmineitzen8228]

I urge everyone to start somewhere now no matter how small, this is literally the time for that, forget material things, don't get tempted,i became more better the moment realized this.

[@Rick.4890]

@Victoria Arhth If you are new, then you definitely need some guide from an experienced investor or a professional. That's the most ideal way to jump into the market these days.

[@SimonKelly7836]

Well said,. Investing is good but investing in the right things is the actual key to success. I think Investing in the CRYPTO, and FOREX market is the future to financial freedom 🔆💯

[@stephenadams8698]

There might be so many investment out there but if profit must be considered which is the actual sole aim of every investment then I'll advice you to go into bitcoin trading because it has a higher profit rate than most investments.

[@SimaanFreeloader]

Why do people always talk about inflation risks, but never about inflation opportunities? On the whole, inflation doesn’t make anyone richer or poorer. It just moves wealth around. So there should be just as many who gain from inflation as lose from it. I think a savvy investor should look to gain from inflation, not just minimize risk from it. That can for instance be by investing in companies with lots of long maturity fixed rate debt.

[@tornado1031]

HEY EVERYONE DOES ANYONE KNOW THE CORRECT EMAIL TO REACH ASWATH SIR. I NEED TO ASK SOME QUESTIONS FROM HIM.

[@SpaceTravel1776]

Leave him alone, he's a busy man.

[@yogeshpandey4356]

Hello Sir, I am from India, Can you please value LIC ???

[@ami156]

I watch Aswath because according to the plain bagel I'm a psychopath

[@spidercat2841]

Meow

[@charlesstones1608]

The wisest thing that should be on everyone's mind currently should be to invest in different streams of income that doesn't depend on the govt. Especially with the current economic crisis around the world. This is still a good time to invest in Gold, Silver and digital currencies (BTC,ETH...)

[@JoelMOrtiz]

It made perfect sense, as he said for an investment, the person has to consider the rate of profit versus the rate of loss at least 2% minimum risk and also experience for you to guide and help them.

[@jefferysimmons6705]

That’s why Expert Jessica Leigh Caden is the best, she analyzes the profit margin and manages the level of risk in order to earn your profit.

[@lauren5422]

@@jefferysimmons6705 Honestly I would like to get in touch with this expert, how do I go about that?

[@jefferysimmons6705]

@@lauren5422 write her on..

[@jefferysimmons6705]

Her whats-app info below 👇👇👇

[@dellwalker430]

Scam artist. Just a smart one. The entire market is a fraud, and people like this just make their money on youtube and teaching because it's impossible in the markets, lol.

[@SpaceTravel1776]

That's because you think the stock market is about people getting rich off buying and selling shares when it's really about giving competent people with an idea money to introduce their idea into the world, and giving supportive people who have their shit together a reason to give them that money.

[@dellwalker430]

@@SpaceTravel1776 This is not what public companies are. You're thinking about Kickstarter campaigns. S&P companies don't need people to buy their stock.. just their products, right?

[@SpaceTravel1776]

@@dellwalker430 Can't tell if you said it exactly backward because you are trolling or out of ignorance. Kickstarter is the one that is about taking money in return for a product that more often than not is a complete scam, which you accuse the stock market of being. Stocks are about taking money, helping create a viable business, and when it's not a total scam, it gives the original investment back and them some. There are always exceptions for both (Kickerstarter produces real viable products, stock market produces scams), but on average and in the long run, stock market produces real, world-changing products.

[@SpaceTravel1776]

@@dellwalker430 You need to read up on stock IPO (initial public offering). I just realized you think people buy share of stock shares like a ticket at a race track. No, you are buying ownership of a business.

[@DK-qf6pr]

He is a professor in NYU, doesn't make money from KZbin