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Today we’re going to talk some more about valuations. The market is really quiet right now and when the market is quiet it’s easy to get distracted from the things that are most important.
Ultimately, valuations are what drive the bus. Over large windows of time, they’re the only thing that really matter and we must continually ask, “is this investment a compelling value at today’s price?”
I also had a brief exchange with Barry Ritholtz over Twitter a few weeks ago, the result of which was some research that led to a new way of looking at valuations. I have no idea if it’s any good or of any use, though. And I really have no idea why someone of Barry’s stature chooses to engage with an obscure guy like me. But there are very few people in that corner of the industry that I respect more than him and I’m thankful for the inspiration.
I guess that’s one of the rare happy, positive things about the financial industry. On occasion, it really is a community where people can share ideas and dialog that leads to productive new research. The truth of the matter is that none of us in the business have any idea about what’s going to happen. Not really. But we’re good at faking it, and we’re good at telling stories, and the most interesting and useful of us are legitimately focused on honest insight & data that can give us any sort of edge, however slight it may be.
I know that sentiment is really “meh” right now. The latest AAII survey shows slightly below average levels of both bullishness and bearishness. Valuations, however, are the truest measure of psychology.
Valuations represent what investors are willing to pay for one dollar of earnings. This isn’t theory. This is law.