I knew that my post on Anthropic would draw strong reactions, when I made it public last week. I did mention in the course of the post that I have no interest in selling my estimate of value to the rest of the world, both because I don't own the high ground here and because it is meant to guide my decisions, not yours. That is why I made my model open to changes that you can make to my story and inputs, and while you have to trust my mechanics, I tried to carry your inputs into value. Much of the pushback I have received has been thoughtful and productive, some of it has been emotional (either from people who love Anthropic or from those who would not touch it with a ten-foot pole) and some of it, especially on the cost of capital, reflects a fundamental disconnect with market history, current market pricing and just basic business sense. I plan to play devil's advocate with my own valuation, looking at my story inputs, and ranking them in order of fragility, partly to stress-test my value estimate and partly to reinforce some corporate finance first principles, and then move on to your feedback and what I take away from it. Playing Devil's Advocate: A self-critique of my Anthropic valuation     Since I posted my valuation only a week ago, rather than rehash how I approached the valuation and my end results, you can read the gory details in the post that accompanied it. I will start with a summary of the valuation, though, and then list  the parts of my story that I believe are most directly driving my value estimate on both magnitude (how much it is affecting value) and fragility (how uncertain I feel about the part).  The IPO Valuation     I did summarize my valuation of Anthropic in a figure in my original post, but since there was that much to compress into that picture, I will try a different format for the same here: Download updated spreadsheet If you check against my estimates from my earlier post, you will notice that the equity value at $1.45 trillion is slightly lower than my prior estimate of $1.475 trillion, as I adjusted the trailing 12-month revenue and operating income numbers to include the just-leaked third quarter numbers. Note that replacing the third quarter revenues from 2025 with the third quarter revenues of 2026 raises the base revenues, and since I still believe that the revenues for the coming twelve months will stay at my original estimate of about $100 billion, the growth rate in revenues in year 1 has been adjusted down to deliver that result. This reframing allows me to add a few details that I might have glossed over in my last post, as well as correct errors (none of which thankfully changed by value estimate:  Value per share: Though I have a share count, created by adding the shares reported as outstanding in the balance sheet to the restricted shares granted to employees, that share count will change before the public offering, as bankers adjust it to deliver on a per share value that they believe will make the company more "sellable". I will revisit this number, and update it when the company does (and it has to, before setting an offering price), but it should not change the aggregate value of equity. Cost of capital choices: I used a 9.74% cost of capital which incorporates risky technology cost of equity and a cost of debt based on a BB+ rating for the company, putting the company at close to the 90th percentile of US companies in 2026. I know that some of you felt this was too low, and I will come back to address what a cost of capital can and cannot do for you in valuation, later in this post, and why I don't think that this is the input that most moves the valuation. Compute commitments: I wish that Anthropic had created a table in their prospectus, where they specifically listed total commitments, both contractual and total, by year, similar to the table that they have for purchase commitments. Instead, they have sprayed content commitment numbers in the text, with little detail on timing and contractual standing, which results in differences of opinion in what those commitments are., with estimates ranging from $400 billion to $800 billion, with no clarity on timing or contractual terms. In my valuation, my estimate of contractual commitments results in an aggregated value of just over $450 billion and a present value of about $373 billion. It is possible that these numbers will need revisiting as details emerge of these commitments, but this will remain a long term issue for anyone valuing or pricing the company. To offer an imperfect analogy, I struggle with dealing with content commitments at Netflix, whenever I value the company, and especially so in the early years, when the entire Netflix library was leased or rented from content providers. Dilution Risk: Anthropic, like many young companies, has used its equity as currency, paying employees with restricted stock and options, and used it as an add-on to borrow money in the form of convertible bonds. In addition, if the company needs to raise capital in future years, it will have to issue additional shares for that purpose, and the larger its ambitions, the greater these issuances will be. When valuing Anthropic, there is no escaping this dilution overhang, and here is how it is incorporated into the value per share. With stock-based compensation, I valued the equity options (at their option value, rather than exercise value) and netted that number ($472 million) from my estimated equity value to get to value of equity in common stock; I also included the restricted shares as part of my share count to compute value per share. With the convertible debt, I have assumed that the marked-to-market number (it was the marking to market that created the $72 billion hit to earnings in 2026) is close to fair value, and subtracting it out will remove the conversion option from the equity. The future share issuances are to fund negative free cashflows, and since those negative cashflows are already weighing down my present value, there is no need to add the shares issued to the share count; adding it will be double counting. If you are surprised that adding the third quarter numbers did not move my value by much, it is because it was an open secret that Anthropic's third quarter revenue growth had slowed and I had already incorporated that into my valuation story. Value Drivers     The equity value that I obtain for Anthropic is close to the lower end of the offering price estimates, but as I noted at the time that I posted it, and will reinforce again now, it is a function of not just my upbeat story about the company, but also one about how the AI products and services market will evolve over time. To the question that some posed about whether I was concerned that I could be wrong, of course I am, but as I will argue in the next section, I cannot let that concern paralyze me. I would, of course, rather be right than wrong, but I am trying to forecast the future, and it is a guarantee that I will be wrong. That said, I am more uncertain and exposed on some parts of my story line than others, and here is how I would rank them for Anthropic, from most critical to less so: Target Revenues: If I were forced to pick one variable around which my valuation revolves the most, it is my estimate of the target revenues for Anthropic, which I estimate to reach a trillion dollars in ten years. Not only would this put them at or close to the top of all companies, in terms of total annual revenues, but they will also be sharing that grouping with companies like Amazon and Walmart that deliver on scale, but at the expense of margins. The revenue assumption is also inextricably linked to not only what you think AI agents and products can do, but also how demand for these will be monetized. In addition, there is a company-specific component to this story, where Anthropic emerges as a winner in the premium portion of the AI market. capturing a dominant market share, with pricing power. The fragility of the target revenue assumption comes from it being susceptible to any of the parts failing, and if a part fails, revenues will end up below a trillion, and perhaps significantly so. That, in turn, will have ripple effects on the other parts of your story and inputs, with lower revenue growth pushing down margins, creating idle compute power and increasing the risk of failure.  Governance: I did use harsh words to describe the governance structure at Anthropic in my last post, describing the combination of its structure as a public benefit corporation and a voting share concoction that leaves founders in control, no matter how much capital the company raises in equity markets, as a red flag. I did get some pushback from some arguing that this is a good feature, not a bad one, since these are smart people who understand AI better than anyone else in the world. Even if you accept these views  I would still argue, perhaps even more forcefully, that concentrating power in the hands of founders is a bad idea, and here is why. Anthropic has a plausible or even probable pathways to business riches, but those pathways come with setbacks (technological, regulatory, competitive), and you need management that can respond quickly and decisively, sometimes abandoning existing policies. For the latter to happen, you often need outsiders, not as immersed or even as informed on the technology front, but with different  backgrounds and experiences, to call attention to management missteps and push for change. I don't know any of the founders of Anthropic, and this may be unfair, but they seem to share a common worldview and operate in an echo chamber. My concern, as an investor, would be that they will not see changes occurring in business economics, and even if they do, be unable to or unwilling to adapt to a changing environment, and for Anthropic, that may be fatal. Profitability: My story for Anthropic is that it will not only be able to deliver operating profits soon, but do so on a sustained basis, with a target operating margin of 32.5% (before taking the regulatory risk haircut). Implicit in my profit story are assumptions about pricing power, the unit economics of the AI business and economies of scale and each is breakable: One of the most frequent critiques I received in responses to my Anthropic valuation is that this is a business without moats, and while I agree that moats matter, I am not sure that I go along with the notion that this business will get commoditized. The truth in technology is that unlike consumer products or old economy companies, where the moats take the form of brand names, patents or cost advantages, the companies that win find ways to make their products stickier to their customers, where stickiness implies that customers will not switch to alternatives, even if these alternatives are technically superior and cheaper. I recognize that Anthropic has work to do in creating stickiness, but I can visualize ways in which Claude agents, twinned with client data on customers and employees, can become sticky, allowing the company to preserve its pricing power and market share. Continuing investment needs: While much of the focus on Anthropic has been on their compute commitments, disclosed (loosely) in their prospectus, my valuation of Anthropic is driven by expectations of what those commitments will look like over time, and especially if my growth story for the company comes into fruition. Delivering a trillion dollars of revenues will require Anthropic to not just maintain and replenish the compute power that is has already locked down, but add to that power over time. Implicit in my story line for the company, where the company is able to add this compute power at lower costs (reflecting declining chip prices) and in time, is the assumption that the compute power story moves along smoothly, working through resource constraints and pushback:  If you have been tracking news stories about data centers, it seems clear that building new data centers is getting more difficult, as local communities push back, and politicians realize that opposing them is a net vote winner.  Regulatory risk: You may find this surprising, but risk, in my story, is not as critical as my first four inputs, partly because it is determined by shifts in operating variables. Put simply, Anthropic will become riskier, if revenues do not measure up to expectations and the pathway to profitability becomes rockier, making it more an output than an input variable. I know that for some of you, the cost of capital of 9.74% is the main stumbling block, but I will provide a more cohesive (and hopefully) more persuasive argument of why it is not as critical to value as you may believe it is. I also know that for others, the notion of a money-losing company borrowing hundreds of billions, either directly as debt or through contractual commitments, creates a failure risk probability that is so high that the rest of the valuation is moot. I agree with you on the general argument that some players in the AI ecosystem, such as Coreweave, have abandoned corporate finance first principles and risk bankruptcy, but Anthropic is no Coreweave, especially if you consider that most of its debt is in contractual commitments spread out over time and that it will have a cash balance large enough to cover its first few years of those commitments. It is on the regulatory risk front that I worry the most about being wrong, because regulatory risk is as much driven by politics as it is driven by economics. You could be one major election away from onerous regulations on AI, where unlike my base case, where those regulations cost you only a small slice of your operating profits, they take a major bite out of revenues and profits.  In sum, not only will I be wrong on any of my key inputs, but being wrong on one (especially target revenues) will cause me to be wrong (in the same direction) on my other inputs, causing value to shift more dramatically in response.  Investment Followthrough     At this point, you are probably why, if I am this uncertain about a company's future, I would even consider investing in it and it is a question that I have pondered as long as I have been an investor. Uncertainty is a feature of investing, no matter what you invest in, with the differences across investments lying in how much uncertainty you face, rather than whether you face. There are four responses that an investor can take to uncertainty: Ignore it: There are investors who are capable of ignoring uncertainty and going in fully even on the most uncertain investments. They are able to do so because they are far less risk averse than the rest of us and are willing to live with the consequences of investments (and their portfolios) blowing up. They are more gamblers than investors, but with good instincts and timing, gamblers can get wealthy too. Avoid it: If you completely want to avoid uncertainty, you cannot invest in equities, corporate bonds, which have risk of default, and even treasury bonds, which have price risk from shifting interest rates. Unless you want to hold just hold cash, you have to therefore decide what your threshold for risk is, and stay within that threshold. In conventional value investing, that would lead you to restrict your investments to companies with assets in place (captured in book value) and earning power from those assets (high current earnings and cash flows) and stay away from growth companies, since growth is "speculative" and therefore risky. While I understand the impulse, this choice comes with a cost, which is that your portfolio will be almost entirely invested in mature and declining companies, with no growth companies in emergent technology.  Margin of Safety: The third approach to dealing with uncertainty also borrows from conventional value investing and imposing a margin of safety, where you will buy a stock only if its price is less than your value estimate by a margin (20%, 30%, 40%) that you specify. While your inclination, if your risk averse, is to keep increasing your margin of safety, it is worth remembering that like almost everything else in investing, it creates a trade off between type 1 errors (where having a higher margin of safety protects you from the losses of investing in stocks that you should not be investing in) and type 2 errors (where that higher margin of safety keeps you from investing in good stocks that you should be holding): The question of whether you should have a margin of safety, and if so, how large it should be, will be a function not only of how many opportunities you see in the market, relative to your portfolio size, and how much cash you have in your portfolio (with larger cash balances suggesting that you should lower your margin of safety). Law of large numbers: If I had a million dollars in investable funds, would I invest that entire amount in Anthropic, even if it trades at well below my assessed value? The answer would be no, given the uncertainties associated with the future of the company, but that answer would change if my portfolio became less concentrated, since its performance would be less a function of any individual company's performance (good or bad). In effect, I am using the law of large numbers as an ally to not only reduce my risk exposure to individual companies, but also as a basis for making investments in far riskier stocks than I would be otherwise inclined to invest in. As you assess your story and valuation of Anthropic, it is crucial that you frame the question that you are trying to answer with your analysis. Is it whether you should buy or sell short Anthropic, as a stand-alone investment or are you looking at Anthropic as an add-on to an existing portfolio? If it is the latter, how concentrated (across stocks and sectors) is your existing portfolio? The answers will vary, as a consequence. Keeping the feedback loop open: Your pushback on my valuation   In the days since I posted my Anthropic valuation on multiple platforms (X, LinkedIn, Google, Substack and YouTube), I have heard from many of you, and in the interests of keeping the feedback loop alive, I did a breakdown of two statistics - the percent of people who thought that I was over valuing and undervaluing Anthropic, and among the majority who thought I was overvaluing, their reasons for disagreement. I used the Google shared spreadsheet that I created last week, where some of you were kind enough to enter your story/inputs and value for the company, and here is what you found: Clearly, a lot of people disagree with my assessment, with more feeling that I have over valued Anthropic, rather than under value the company, with the crowd assessment of its value closer to $1 trillion, rather than $1.5 trillion. I also used your inputs from the shared sheet, as well as a reading of the comments on my valuation, across platforms, to see the source of your disagreement, especially if you believed that I have overvalued the company. Among those who disagreed with me, the reasoning varied, but I was disappointed, albeit not surprised, that the biggest single reason outside of "my gut tells me that Anthropic is worth nothing" was a judgment that my cost of capital estimate for the company (9.74%) was much too low. I was disappointed because I don't think that the cost of capital is at the center of the DCF universe (and I used words to that effect in my original valuation) but the lack of surprise at its prominence comes from observing appraisers and analysts obsess over this number, often without understanding what it is designed to measure and without a frame of reference (as to what a reasonable value for it is), and using it as a receptacle for their hopes, fears and fantasies. The Cost of Capital - The Swiss Army Knife of Finance     I teach and practice across three different areas of finance - corporate finance, which looks at the first financial principles that govern how to run businesses, valuation, which looks at those businesses and tries to attach a value to them and investing, which is about finding market mistakes and taking advantage of them. I describe the cost of capital as the Swiss Army Knife of finance, because it is in every aspect of finance, performing different roles for different players (businesses, investors, activists). I won't bore you with an extended discourse of all of these roles, which I have expanded on in a practitioner paper on cost of capital, but you can get a glimpse of its uses in the figure below: For many analysts and bankers, the cost of capital is the discount rate that they use to value businesses, but its usage in corporate finance is deeper and more impactful. It is the hurdle rate that businesses use to decide whether to invest in a project or make an investment, tailored to the risk in the business, the optimizing tool that businesses can use, if they so choose, to determine the right mix of debt and equity to fund themselves and the divining rod to determine whether businesses should be returning more or less cash to their owners.  It is true you can break the cost of capital into its components, by categorizing the funding into debt and equity and attaching a cost to each: At the risk of stating the obvious, all debates about cost of capital become discussions of what comprises a reasonable cost of equity, what the cost of debt should measure and how they should be weighted. Estimating the Cost of Equity - Checks and Constraints     While there is much to be learned from modern portfolio theory, one of its more deleterious consequences has been a dumbing down of the cost of equity, where intuition and common sense are supplanted by heated arguments about asset pricing models and parameters.  To bring the discussion back to steady ground, start with a recognition that the cost of equity for an investor should reflect what investors can earn elsewhere in the market on an investment of equivalent risk, i.e. it is an opportunity cost,  and understand that is what you are trying to measure, often imperfectly, in every model. That number has subjective elements, and can vary across investors, based on risk aversion, but the requirement that you can earn that number elsewhere creates reality checks.  a. History     What do you think the cost of equity for the average US company is today? In an unbounded world, you can give me any answer you want, from 3% to 30% or higher, but one check you can run is against history. On my webpage, I maintain a dataset of historical returns on US stocks from 1928 to 2025, and in the graph below, I compare the average annual returns you would have earned on US equities (all as well as just small cap) over 25 years (2001-2025), 50 years (1976-2025) and close to a hundred years (1928-2025) to annual returns on treasuries (3 month and 10-year): There are two ways this historical data can be used to frame cost of equity estimation. You can use the average annual return on stocks over the period, which ranges 8.74%, if you look at just this century (2001-2025), 11.92%, if you go back fifty years (197-2025) or 10.13%, if you go back all the way to 1928 (1929 -2025), and use that as your cost of equity. Since investors had the alternative of investing in treasuries, and rates over treasuries have varied over time, a second option is to look at the premiums you would have earned investing in stocks instead of treasuries. That number has a tighter range, between 5.5% and 5.75% over the 10-year bond and 7-7.5% over treasuries; using the 10-year treasury rate of 4.9% on October 26, 2026, that would yield a cost of equity of about 10.4-10.65% for the average risk firm. There is value in knowing history, but it is worth recognizing that these returns capture stock market performance over a century in the United States,  the most successful equity market in the world over that period. There is a selection bias that may be leading to overestimate future returns, if you use historical averages. That would make using a cost of equity higher than what this history delivers even more indefensible. b. Market-Implied     If the essence of cost of equity is estimating an opportunity cost, i.e., a return you can make investing elsewhere, I would argue that a better way of estimating the cost of equity for a company is to back it out of market prices. In effect, you can start with what the market is pricing equities in the aggregate, estimate expected cashflows from buying these equities and solving for the expected rate of return. If that sounds familiar, it is the process I use at the start of each month to compute the implied expected return and resulting equity risk premium for the S&P 500: In a post earlier this month, I reported on what those numbers are at the start of October 2026: Note that the expected return from investing in US equities, in the aggregate, at the start of October 2026 was 8.99%, and this number is model-agnostic. Thus, you can choose to believe or disbelieve the CAPM and think that betas are a waste of time, but the expected return from investing in US equities will still be 8.99%. I know that there are estimates of growth and cash flows that help determine the number, but almost every pushback I get (the cashflows cannot be sustained, the growth rate is too high etc.) will lead to a lower expected return, not a higher one.      So what? If this is the market you are in, contending that the cost of equity for a median US company should be 12% or 15% borders on the delusional, since you cannot make that return on an investment of equivalent risk in this market. To see why costs of equity that are 15% or higher are indefensible, you can check out the graph below where I report the expected return on US equities (using the implied premium approach) going back to 1960: The expected return on US equities, and by extension, the cost of equity for the average US company has not exceeded 10% since 1994. If you are reaching for 15-20% costs of equity, you have to go back to the early 1980s, when the 10-year treasury rate was 10% or higher.  c. A Pricing Perspective     There is a third way to assess the reasonableness of a cost of capital, and this approach is especially effective if you think in terms of pricing multiples (PE and price to book ratios) and have a frame of reference on those (in the sense that you have a measure of what a reasonable multiple of earnings stocks should trade at). There is a simple (and perhaps simplistic) way to think about the cost of equity and capital in terms of pricing multiples.  You can convert a cost of equity assessment into a price earnings ratio, with relatively few assumptions. To see how, start with a simplistic valuation model where the value of a stock is the present value of its expected dividends over time, and the company is in stable growth: If you believe that the cost of equity is 15% for the average US firm, given that nominal growth in the US economy is about 5% and that the average return on equity across US firms is about 20% (and that is a generous estimate), the PE ratio for US firms today should be roughly 7.5. Given that the actual forward PE ratio is closer to 20, you have two choices. One is to sell all your equities, though I am not sure where you would put that money, and the other is to revisit your cost of equity assessment. The cost of capital maps on to enterprise value multiples, using a similar approach, with a 12% cost of capital translating into an enterprise value multiples of 9 times operating income and  6-7 times EBITDA for the entire market, numbers that are vastly below today's values. Put simply, if you content that the cost of equity for US firms is 15% and in the same breath argue that a PE ratio of 15 for the market is reasonable, you are being internally inconsistent, and you have to decide which of these assertions you plan not just stick with, but act upon, as an investor. The Cost of Debt: Intuition and Estimates     One reason that the Anthropic cost of capital discussion may have been hijacked is the almost mindless use of debt in funding data centers, a practice that I have attacked as senseless for both the borrowers and for the lenders. With Coreweave as poster child, this has led to an explosion of concerns about default risk and in  market-implied default rates and spreads for some companies in this space. By extension, Anthropic has become part of this discussion because of the compute commitments that it has locked in, for good and bad reasons. In fact, the argument for a higher cost of capital goes as follows. If it costs Anthropic 10% or more to borrow money today, it should have a much higher cost of equity to reflect the residual risk.      It is true that the cost of debt will tend to rise as worries about default risk rise, and that ratings operate as a shortcut to measuring that default risk. Using the default spreads that you can observe in markets right now, with a 10-year treasury bond rate of 5% as the base, here are updated default spreads and costs of debt, by bond rating: As you can see, the default and cost of debt for companies rises as the rating drops and kicks into hyper drive at a B rating. You may have a hard time reconciling the very high costs of debt at the lowest ratings with the earlier table that constrained cost of capital, but that is because at the lowest ratings, the risk of default is imminent and large. It would be inconsistent to incorporate this cost of debt, in its entirety into a cost of capital, a going-concern concept, and that is why I separate out failure risk as a way of capturing that risk.      My estimate for the cost of debt for Anthropic reflects my estimate of a bond rating of BB+, and a recent news story in the Financial Times suggests that they will remain below investment grade. Anthropic may owe a lot in commitments, but they are spread out over time, with about $70 billion coming due next year and $76 billion the year after. Those are large commitments, but Anthropic has a cash balance of $114 billion, which will increase to over $200 billion after the IPO. There are lots of reasons to take issue with Anthropic, but worries that it may default in the next year or two or even the next five don't make it to my top ten list. That does not mean that I am ignoring the risk of default, because I am incorporating a failure risk of 10%, where Anthropic does run into headwinds, is unable to meet its contractual obligations and has to have fire sales. If your concerns about default are higher, teh failure risk is the number you should be moving, not the cost of capital. In fact, if you were ignore failure risk, as many analysts do, and try to jam default risk it into cost of capital, you would need a cost of capital of about 11% to arrive at an estimate of value close to mine, in my valuation. Cost of Capital - The Cross Section     I know that you may still argue that if you have a very risky company, and you throw Anthropic into that grouping, you could have a much higher cost of equity than a median company. That is true but you may be vastly over estimating the divergence in costs of equity across companies, when you do so. At the start of every year, I estimate the cost of equity for every public company in the world, and graph the distribution to get a sense of what high, low or typical numbers look like, and the start of 2026 numbers are shown below: In almost every sector, take heed of the tight range between the first and ninth deciles. In technology, a sector where investors perceive wide differences in risk, 80% of all firms have costs of equity between 9.88% and 14.49%, and costs of capital that range from 9.02% to 12.27%.  When you have this little room to diverge, you can see why spending your time finessing the cost of capital is an exercise that will bear little fruit, especially if you also factor in that your starting numbers for these costs in valuation will change over time, as your company becomes larger and more profitable.  This table is in US dollars and for US companies, and if you are working with a different currency and with a company in a different country, you should add the differential inflation and country risk premium to the cost of equity. In the table below, I have the adjustment computation for a subset of currencies/countries: Thus, if the inflation rate is 1.77% higher in Indian rupees, and the Indian equity risk premium is 2.49% more than the US, you should add 4.26% across the table to get the ranges in rupees for Indian companies. A median Indian company would therefore have a cost of capital of around 12.05%, in Indian rupees, and a median Swiss company would have a cost of capital of about 5.85% (adjusting for an inflation rate about 1.71% lower than the US and an equity risk premium about 0.23% lower).     It is true, based on this table, that you could push the cost of capital for Anthropic higher, perhaps towards the 90th percentile of technology firms, and give it a cost of capital of 12%, but there are two caveats. The first is that you would then have to set the failure rate to 0%, since the costs of capital in this table do not adjust for failure (and especially so at the higher risk percentiles). The second is that your cost of capital, in your valuation, has to change over time to be consistent with your story line for Anthropic as a company. Thus, if you see Anthropic scaling up revenues over time and turning the corner on profitability, its cost of capital will move towards a more typical cost of capital for tech companies over time. If you don't see that happening, you don't need a high cost of capital to conclude that Anthropic is worth little or even nothing.     You will notice that nowhere in this discussion have I used a greek alphabet (beta) or a finance acronym (CAPM) because not only do I not need either to make my point about costs of capital but also because they have become easy excuses for laziness on the cost of capital front. I don't estimate costs of capital as an academic exercise, but for purely pragmatic reasons, since I need them in my corporate financial analysis and valuation. I need a relative risk measure for a firm to estimate how much higher or lower than the average company its cost of equity should be, and all that beta provides is an estimate of relative risk. If you like it, use it. If you don't it, come up with your alternative, and if you cannot think of any, try any of the following: Put simply, if you don't like betas (or the CAPM), you should consider why (and it cannot just be because Buffett or Munger told you so) and follow through to come up with your proxy for risk. I am okay with any of your choices, since I can use them to estimate costs of equity and capital, and to be honest, none of them will make or break my valuation. Cost of Capital Delusions - Investors and Businesses     I know that there are analysts and investors out there who have picked a required rate of return as their hurdle rate, sometimes arbitrarily,  for investing and never revisit that number, and almost as many CFOs who do the same for the hurdle rates at companies. That number can be 10%, 12% or 20%, and when you push back, the response is that it their choice to make, and that they are just setting high standards. With individual investors and privately owned businesses, the consequences of setting an artificially high cost of capital are personal, and if, after being made aware of them, they stick with a 25% cost of capital, they are entitled to do so. With institutional investors and publicly traded companies, where you are investing other people's money, you have to consider the costs that they will bear for your overreach. Professional Investors - Grasp exceeding Reach!     With subgroups of professional investors, especially venture capitalists and private equity, the numbers that they offer as target or expected returns are so staggeringly out of sync with reality that the cynic in you should wonder whether these numbers are marketing props, rather than  financial metrics. Let's start with venture capital, where VCs routinely set target rates of 20%, 30% or even 50% for their investments, depending on how early in the process they invest, with angel financing commanding the highest rates. Private equity fund sponsors also present potential investors with investments that least on paper deliver internal rates of return of 20% or higher. We know that these target returns are fiction, because the returns that venture capitalists and private equity investors actually deliver are not just much lower but surprisingly close to what investors can earn on public equities, say on index funds.  Cambridge Associates Note that not only do VC and PE funds lag public equity indices over long periods, there is not a single number in these tables that comes remotely close to the target returns that PE and VC claim up front.      You may be tempted to cut venture capitalists and PE investors slack for using fictional target returns,  viewing them as sales and negotiating tools, but those fictional values feed back into how much founders have to give up in exchange for capital, and may also explain the failure of VCs and PE investors to deliver value for their investors. As a generalization, I believe that active investors who promise their clients too much (as an expected return) will overreach in terms of the risks they take, and if the target returns they promise are set too high (relative to what they should be), they will spend their time looking for ten or hundred baggers, rather than solid long term investments. Publicly Traded Companies - Inertia and Herding     While it is true that company hurdle rates are for internal use and not often visible from the outside, surveys of CFOs, asking them about what the costs of capital are for their company, often come back with the conclusion that hurdle are set about 2-3% higher than justified by market numbers. Often, these hurdle rates are either arbitrary or reflect the history of the company, where high returns earned on projects taken in the past are employed as hurdle rates for the future. You may be tempted to let this practice go, as just being conservative, and protecting companies from taking bad investments, but here again, there is a trade off. For companies that estimate returns on projects rigorously, having a higher hurdle rate than justified will mean the good investments will be left untaken. Early in a company's life, when project choices are plentiful, this may not be a deal breaker, but as companies mature, that underinvestment will cost them (and their investors).      There is another, and potentially an even more dangerous consequence that undermines the entire process of investment analysis. When hurdle rates are set unrealistically high, relative to what you can earn in the market, managers, recognizing that they will never find projects that earn more than those hurdle rates will start to skew cashflows and growth upwards to compensate for discount rates being too high. Top managers will then push up hurdle rates to compensate for the bias, and when managers respond with even more positive skews in cash flows, you have set in motion a process where both the cash flows and the discount rate become fictional and made-up numbers, rendering the entire process moot.     Ultimately, though, as with PE and VC, the proof is in the pudding, and with publicly traded companies, the returns on equity and invested capital reflect what they actually earn on projects, rather than what they claimed they would in the original analysis. With my sample of publicly traded companies, in 2025, here is what the numbers look like: As you can see from the 2025 statistics, and this is with my cost of equity and capital calculations from the earlier table (which you may have found too low), less than 30% of companies earn returns on equity (capital) that exceed their costs of equity (capital) and less than 20% beat their hurdle rates by more than 5%. If you raise the costs of equity and capital to 12% or 15%, that underperformance will only get worse.  Individual Investors and Privately owned businesses     As an individual investor, investing your own money, you do have more freedom on setting your required returns, but there will be consequences to setting unrealistically high hurdle rates.  If you stick with these "high" hurdle rates. you will find it difficult, if not impossible, to find equities that can deliver those rates. I can assure you that with a 20% cost of equity, for instance, there is not one firm in the S&P 500 that will be undervalued for you to invest in, and if you do find firms that look undervalued in the broader market, it is because they are basket-case firms on the verge of tipping over. Thus, a reasonable and logical follow-up would be to reduce or even eliminate your equity exposure in your portfolio, though if your unreasonableness on hurdle rates carries over into other asset classes, you will find no risky asset class that meets your rate of return criteria. More dangerously, it will leave you open to scams, where your search for high return investments will lead you invest with a "friend of a friend" or a "YouTube investment celebrity", claiming to have found a way to deliver more than your hurdle rate with investing alchemy. I have long heard critics of intrinsic valuation argue that it does not work for them because it seems to find everything that they try to value to be over valued. That is less a problem with the approach and more a reflection of using unrealistically high costs of equity and capital in your valuation.     For businesses with private owners, setting the hurdle rate too high will lead them to be more conservative in taking investments, opening the door to more aggressive competition, often from publicly traded companies or private business competitors with more reasonable hurdle rates. The bigger danger here again is when you get ready to sell, you will sell your business  for too low a price. You will facilitated in this process by private company appraisers who come up with costs of capital that are outlandishly high, usually getting there with what they call the "build up" approach, a  piling on of premiums that are either thinly sourced (a small cap premium that ceases to exist in 1981), double counted (an illiquidity premium, with an additional illiquidity discount of value) or just made up to (a non a company-specific risk premium,  where a number is added on to get to whatever discount rate you want).  Conclusion     This post started with a sell assessment of my Anthropic valuation, and I hope that you can see that while I believe in the plausibility of my valuation, there are multiple dimensions on which I can (and will) be wrong. In my view, the key assumption that drives almost of the others is my trillion-dollar revenue projection in a decade for that company, insofar that if that does not come to fruition, it will ripple through my other assumptions, with lower profit margins and higher failure risk following. That should make it the central question that we should be debating, and my extended discourse on why making cost of capital your central discussion point is misguided is designed as much to bring attention back to things that matter as it is to restoring balance to discussions of what a reasonable or high cost of capital for a company can be.      You are, of course, welcome to quote any number you want as the cost of equity and capital (and they are not interchangeable), but while you are entitled to your opinions, you are not entitled to make up facts. When you claim that the cost of equity is 12%, 15% or 20% for a typical firm, you are either valuing a company in Turkish lira or Zambian kwacha (where inflation is 15%+) or a company in Afghanistan or South Sudan (where country risk is daunting) or you are just making up stuff! Would I like to make 20% returns on the stocks I invest in? Of course, but I would also like to have a milk shake with every meal, without affecting my glucose and cholesterol scores, and get older without any of the symptoms of aging.  YouTube Video Data Costs of equity and capital (in US $), by Industry (US, Global) Historical returns on US stocks. bonds and bills: 1928 - 2025 Implied Expected Returns for US equities: 1960 -2025 Blog Posts on AI in 2026 To a Trillion Dollars and Beyond: A SpaceX Odyssey! Revisiting SpaceX: A post-Prospectus valuation OpenAI, Anthropic and SpaceX: The S&P 500 Inclusion Question and Investment Consequences AI Scenarios: From Doomsday to Do-nothing! AI's Bar Mitzvah: From hope & hype to business questions! Stock Prices, Earnings and Cashflows: The AI Effect! From Eyeballs to ARR: Buzzy Pricing Metrics and the Anthropic Pricing The Anthropic Prospectus Arrives: My (but not the) valuation of Anthropic

This is Essay #9 in the series Truth Be Told. The core dynamic of this era is the notion that controlling the narrative controls the world, as persuading the populace to believe something is true controls their convictions which then control their behaviors. Centralized powers discovered the potential for narrative control to control the world in the 20th century, as mass communications enabled centralized control of what is presented as true and important. Propaganda has an ugly tone, so now we say narrative control, which is of course a comically obvious propaganda technique. We call propaganda designed to financially benefit a private entity marketing, a key component in what I call privatized totalitarianism: establish a monopoly that controls a key mass communication technology--a social media platform, search, smart phones, etc.--and voila, privatized totalitarianism controls the medium which controls the message. Controlling what the populace believes to be true appears to control the world, but Controlling the Narrative Is Not the Same As Controlling the World. This is becoming increasingly clear as the status quo narratives--everything's going great, AI will deliver super-abundance to everyone, inflation is low, etc.--are now so detached from what we experience that they are inducing mass psychosis. The incentive is obvious: persuade the populace to accept an arrangement that enriches and empowers those in control, and you no longer have to deliver authentic Progress or Prosperity, you only need to deliver artifice: fake statistics, fake claims presented as certainties, a ceaselessly promoted narrative in which everything is fake. But narrative control doesn't actually control the world. A rancher told us the cost of fodder has doubled in the past year. That's the real world of weather and the cost of energy. Telling us that inflation is only 3.6% while healthcare premiums go up 13% a year, insurance costs triple and beef is now a luxury item is a parody of factual reporting. The Pendulum of History has reached an extreme of artifice and narrative control that will break the status quo as the gulf between the fake and the real widens to the point the bridge connecting them collapses. The social control of replacing authenticity with artifice will backfire and the pendulum will swing back to punishing self-serving artifice rather than rewarding it. Yes, yes, I know this is "impossible." Those wielding the machinery of social control have god-like powers that will never diminish, they will only increase, etc. But everything is fake and mass psychosis are not stable arrangements. Artifice is self-liquidating. The pendulum has reached an extreme of parody that cannot be pushed any further, and as the real world intrudes, all the narrative control in the world won't actually control the real world. New podcast: Global Uncertainties may result in Nonlinear, Self-Reinforcing Instability (26:31 min) New collection of five intriguing stories: Jumble Bin Stories (Kindle $6, print $12) read samples for free (PDF) My book Investing In Revolution is available ($18 for the paperback, $24 for the hardcover and $8.95 for the ebook edition). Introduction (free) Subscribe to my Substack for free NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency. Thank you, Paul C. ($300), for your beyond-outrageously generous subscription to this site -- I am greatly honored by your support and readership.   Thank you, James B. ($70), for your monstrously generous subscription to this site -- I am greatly honored by your support and readership. Thank you, Craig F. ($150), for your beyond-outrageously generous subscription to this site -- I am greatly honored by your support and readership.   Thank you, Gary F. ($100), for your outrageously generous subscription to this site -- I am greatly honored by your support and readership. Go to my main site at www.oftwominds.com/blog.html for the full posts and archives.

Plus! Pulled IPOs; Non-Fungibility; The News Business; Opt-Outs; Writing

Binance’s first day back, OpenAI wants a nicer word for data centers, Google prices space compute at 100x, and a benchmark where the best AI scores 12%.

The ultimate truth is revealing the truth of the situation and our feelings about it are a relief, and the starting point to moving forward in a positive direction. This is the first in a series of posts around the theme of Truth Be Told, a theme that demands some interpretative explication / context. There is a spectrum of ways to tell the truth. There's the angry rant ("I'm mad as hell and I'm not gonna take this any more!"), the tearful confession, the accusatory diatribe ("you can't take the truth!"), the dispassionate accounting of facts and evidence, and many variations that combine the human emotions these express. My series is built around a special form of Truth Be Told, the kind only a true friend can tell us. It's human nature to hide truths that hurt, and it's human nature to lie to ourselves to maintain a front that all is well and whatever's crumbling can be shored up by our belief that everything is still as it's always been. The acquaintance responds to our doubts and fears with superficial encouragement: you'll get through this, it's just a rough patch, every relationship / enterprise goes through these low spots, you just need a weekend off to regain your perspective, and so on--well meant but not the truth. Only a true friend will risk telling us the truth, knowing it will be painful and that we will likely respond poorly, defensively at best and lashing out attacking the friend at the worst. The true friend accepts the responsibility reluctantly, torn between the desire not to hurt us and the knowledge that the only way out of our misery is to finally face the truth, mourn what is no longer what it once was and accept the truth of what we feel beneath what we've been telling ourselves to keep going. A true friend is not passing judgement, they speak the truth with sympathy for our plight, sympathy for the suffering of living a lie, however attractive the lie may be, fully aware of the pain we're experiencing as the gulf between what we tell ourselves and what we truly feel widens to the breaking point. The truth is the most personal, consequential truths are often painful because accepting them means the end of something we wanted and cherished, the end of an era and the acceptance of an uncertain, perilous future. I use the examples of relationships and enterprises, because these are life's most demanding commitments. To end a relationship or close an enterprise is difficult on multiple levels, and the true friend knows this from their own experiences. The path of least resistance is to maintain the facade of a happy marriage and successful enterprise, even as living a lie eats away at us. It's often a shock that someone else sees through the facade and discerns the truth within us. The true friend must make a difficult calculus, as truth be told risks the friendship for a highly uncertain gain. The true friend is aware that sometimes we're not ready to confront the truth, and the precipice has to crumble beneath our feet before we're ready to accept the truths behind the facade. Or we're finally at a point where hearing the truth from a trusted friend who has our best interests at heart unleashes a great relief, for the truth is not just pain, it's also relief. A true friend is more likely to expose the truth by asking us questions rather than making statements. Our answers to questions such as "when was the last time you had an honest heart-to-heart with your partner?" reveal the truth we've avoided. I anticipate angering many readers in this series, because deeply held mythologies will be bulldozed. In a very real way, the facades we cling to to maintain relationships and enterprises are personal mythologies, and their collapse generally spawns an emotional tornado. The ultimate truth is revealing the truth of the situation and our feelings about it are a relief, and the starting point to moving forward in a positive direction. To share a series around Truth Be Told makes me feel like the guy in a bedraggled white robe on the street corner, murmuring about redemption while passersby cross the street to avoid me. So be it. I'm just asking questions, and the truth is revealed by your answers and your emotional reactions. New collection of five intriguing stories: Jumble Bin Stories (Kindle $6, print $12) read samples for free (PDF) My book Investing In Revolution is available ($18 for the paperback, $24 for the hardcover and $8.95 for the ebook edition). Introduction (free) Subscribe to my Substack for free NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency. Thank you, Darth L. ($70), for your marvelously generous subscription to this site -- I am greatly honored by your support and readership.   Thank you, Djanyja ($70), for your monstrously generous subscription to this site -- I am greatly honored by your support and readership. Thank you, Amarnakar ($25), for your massively generous subscription to this site -- I am greatly honored by your support and readership.   Thank you, Eugene K. ($20), for your most generous subscription to this site -- I am greatly honored by your support and readership. Go to my main site at www.oftwominds.com/blog.html for the full posts and archives.