\n
![](\"https:\/\/content.fortune.com\/wp-content\/uploads\/2024\/03\/GettyImages-1370757951-e1709663490721.jpg?w=2048\")
<\/p>\n [ad_1]
\n<\/p>\n
With investor enthusiasm over AI reaching a fever pitch<\/a> this year and leading stocks ever higher, there have been some concerns<\/a> about valuations. Most experts have told Fortune<\/em> that they don\u2019t believe we\u2019re in a bubble yet\u2014from the billionaire entrepreneur Mark Cuban<\/a> to some of Goldman Sachs\u2019 top analysts<\/a>. But it might not be so bad even if we were, says Aswath Damodaran, a finance professor at NYU\u2019s Stern School of Business.<\/p>\n \u201cI\u2019m going to raise a point that sounds weird, but humor me,\u201d Damodaran, who is known as the \u2018dean of valuation\u2019 for his research and books on valuing securities, told CNBC<\/em><\/a> Tuesday. \u201cI don\u2019t see what\u2019s so bad about bubbles. I think bubbles are how markets deal with change.\u201d<\/p>\n Damodaran argued that throughout the history of the U.S. stock market, investors have \u201ctended to overdo it\u201d when a new technology or innovation appears. From the rise of the internet in the dot-com era to social media\u2019s dominance in the early 2000s, bubbles are a natural part of market behavior, according to the professor, and they aren\u2019t always a bad thing.<\/p>\n \u201cThat\u2019s the way human beings get change. They get over-optimistic, they overreach, there\u2019s a correction. But every bubble leaves change that\u2019s long term,\u201d he said.<\/p>\n Damodaran went on to reference his 2019 paper, \u201cThe Big Market Delusion: Valuation and Investment Implications<\/a>,\u201d which studied the market bubbles of modern American history and found that they might be a net positive for economic innovation.<\/p>\n \u201cIn the aftermath of every correction, there are many who look back at the bubble as an example of irrational exuberance. A few have gone further and argued that such episodes are bad for markets, and suggested fixes. We believe that these critics are missing the point,\u201d Damodaran and his colleague, professor Bradford Cornell of UCLA, wrote in the paper. \u201cNot only are bubbles part and parcel of markets, they are not necessarily a negative.\u201d<\/p>\n Damodaran and Cornell pointed to the impact of the dot-com era on every facet of American life, from how we shop to our transportation methods, and noted that giant multinational firms like Amazon<\/a> also rose from the dust when the bubble of that era burst, driving economic and market growth for years to come. The pair then came to the conclusion that politicians, regulators and investors should actually \u201cstop trying to make bubbles go away\u201d because they boost innovation. \u201cThe benefits of that innovation, in our view, outweigh the costs of the Volatility,\u201d Damodaran and Cornell wrote.<\/p>\n The dean of valuation reiterated this point in his interview with CNBC<\/em> Tuesday, discussing the last major market bubble. \u201cThe dot-com bubble that burst, it changed the way we live, right?\u201d he said. \u201cEvery bubble leaves residue.\u201d<\/p>\n To his point, Goldman Sachs\u2019 chief macro strategist and head of research in Europe, recently told Fortune<\/em><\/a> about how the rise of canals in the U.K. during the 18th helped to usher in a new age of productivity and trade\u2014even though canal stocks ended up in a bubble that eventually burst. And in his influential 1999 book Devil Take the Hindmost: A History of Financial Speculation<\/em>, the financial historian Edward Chancellor delves into the history of investors\u2019 love for speculation and how it has always created market bubbles in the U.S. and abroad, giving the example of the railway mania of the 1840s.\u00a0<\/p>\n Lax regulation and the thirst for outsized profits led to a railroad boom in the 1840s in the U.K. that saw some towns connected by multiple private lines which competed for customers. The enthusiasm eventually made its way to the stock market, where a bubble developed and then quickly popped.\u00a0But although the railway bubble led to misfortune for some unlucky, or unwise investors, Chancellor noted that it also \u201crepresented a transfer of wealth from middle class speculators to needy labourers\u201d and left the country with a robust railway network.<\/p>\n In his conversation with CNBC on Tuesday, Damodaran went on to question what investors who do believe the stock market is in a bubble today would do with that information, and whether or not it would actually be useful. \u201cI mean, if you say: \u2018Look I\u2019m going to sell short on every stock in the bubble.\u2019 You\u2019re going to go bankrupt, perhaps before the bubble bursts,\u201d he said.<\/p>\n The professor argued that investors tend to waste time worrying about market bubbles when valuations rise, when they could be using their energy on something more productive. \u201cThere are actionable things you could be doing in the market right now that are not in a bubble,\u201d he noted.<\/p>\n Damodaran had a message for critics of current stock market valuations as well, particularly those of AI-linked companies like the chip designer Nvidia: \u201cIf you don\u2019t want to buy Nvidia<\/a>, don\u2019t buy Nvidia. But don\u2019t wag your finger at people who do and say you deserve to be in some kind of investment hell because you broke the rules that I\u2019ve set.\u201d<\/p>\n<\/div>\n\nA look at the dean\u2019s bubble research<\/h2>\n
Ignore market bubbles?<\/h2>\n
Subscribe to the CFO Daily newsletter to keep up with the trends, issues, and executives shaping corporate finance. Sign up<\/a> for free.<\/div>\n