The challenging market environment in 2022 was long overdue, said Aswath Damodaran, professor of finance at New York University Stern School of Business, in a keynote event at the Morningstar Investment Conference in Chicago on Tuesday.
Mr. Damodaran, who is known in investor circles as the "Dean of Valuation," said the median cost of capital of a typical global company at the beginning of 2022 was 6%. One year later, at the beginning of 2023, that number was almost 10%.
It is "the single biggest change in the cost of capital" he has ever seen, Mr. Damodaran said. The miserable market performance seen during the year, he said, was not an aberration, but might represent a return to pre-2008 numbers.
Since then, "too much money flowed to companies that didn't deserve it," he said. Companies that have thrived on trading and increases in valuations, now need to revisit their business models and concentrate on making money as a business.
"That still matters if you're a business," Mr. Damodaran said.
Also during the event in which Mr. Damodaran was on a panel with Adam Fleck, director of equity research, ESG, at Morningstar, he said investors in ESG funds just to earn alpha will not succeed.
"A constrained optimal can never beat an unconstrained optimal," Mr. Damodaran said. Noting that investors will have to concentrate on a measure of goodness to justify investing in ESG, he said investors need to make the decision on what ESG is actually measuring.
Currently, though, he said "ESG is stronger on the badness front than on the goodness front," in terms of measuring "potential badness," capturing potential exposure to risk and potential exposure to catastrophe.