How can we ever trust individual stocks if market narratives can completely change valuation multiples? (Adobe vs AMD)
Value investing theory says that over long periods, stock prices should follow fundamentals and intrinsic value. But when I actually look at how the market behaves, it feels way more unstable than that.
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Take Adobe for example (Forward PE 8). The business is still profitable, still growing, still producing strong free cash flow. Nothing looks “broken” in a traditional sense. But the valuation multiple has compressed a lot compared to where it used to trade. And it seems like a big part of that is just how the market is feeling about it now, growth concerns, narrative shifts, AI fears, etc.
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That makes me wonder something more uncomfortable:
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What if the same thing can happen to companies everyone currently trusts?
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Like Microsoft, Meta, Amazon, Visa, Apple… even if they keep executing and growing steadily, what actually stops the market from just deciding one day that they deserve a much lower multiple?
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For example, what if Microsoft keeps growing FCF for 10 years, but the market at that time just says:
“Yeah but we only want to pay 5x earnings for it now because sentiment changed or something new became the dominant narrative.”
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I get the argument that cash flows matter in the long run. But in the real world, it feels like multiple compression can dominate returns for long periods of time, even for good businesses.
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So I’m trying to understand this better from people who’ve done this for a long time:
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\- How do you actually trust that multiples won’t just collapse for basically “non-fundamental” reasons?
\- Is there a real mechanism that forces the market back to fair value over time, or can sentiment override fundamentals for decades?
\- And what would stop high-quality companies from just becoming “cheap forever” if narratives shift enough?
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Not trying to argue a point here, I’m genuinely trying to understand how experienced value investors deal with this uncertainty when they buy individual stocks and hold them for the long term.