Aswath Damodaran: Investor Awareness: The Changing Relationship with Cash and Risk Capital

In this interview with Invest Like The Best, Aswath Damodaran discusses a notable change in investors’ behavior. In the past, they didn’t pay much attention to the cash sitting in their brokerage accounts due to low interest rates. However, with current higher inflation rates, they have become more aware of the need to invest their cash to avoid losing its value. He also points out that there was an excess of risk capital available to companies in the past decade, which led to reckless spending. Here’s an excerpt from the interview:

Damodaran: As investors, I’ll tell from a personal perspective, there’s a very, very specific change I’ve noticed. And 3 years ago, if you asked me how much cash I had in my online brokerage account, I didn’t know and I didn’t care. After all, what was I going to do with the cash, put it in T-Bills and make 0.3%.

Today, I’m acutely aware of cash when it’s sitting around. And that’s something that people have become used not to doing that you have to start because idle cash is losing cash. Because when you have 3% or 4% inflation, that cash is losing value, and you’ve got to get it into places. T-Bill rates might not stay at 5.5%, but they’re definitely not 0.

So some of the things we got sloppy on as investors and companies over the last decade, I think we need to revisit.

The other, and this has got to do with the risk capital question, which I think is a separate issue, sometime in the middle of last year, we noticed that risk capital went to the sidelines. Just to put it in perspective, for a decade, risk capital was not just accessible, it was excessively accessible.

I mean, I know that sounds like a strange one. It’s like how can you have too much risk capital. Because when you have too much risk capital, companies are able to raise money too easily. So as a consequence, businesses that should never have become businesses with founders who are borderline sociopaths were able to raise billions of dollars and then burn through them because risk capitalists threw money at them.

That’s hopefully not going to come back. So I think that there are things that you saw in the last decade that reflect the environment where we are in, low rates, lots of risk capital, that I don’t think we’re going to revisit even after we come out of this downturn into a recovery.

You can listen to the entire discussion here: