I’ve been thinking about valuation multiples in a slightly different way.
When you pay a high multiple for a company, you are not necessarily saying that it is a bad investment or that its growth expectations are unreasonable.
You are making a larger bet on your assumptions being correct.
The higher the multiple, the smaller the gap between the discount rate and the expected growth rate. That also means relatively small errors in either assumption can cause a much larger change in value.
For example, if you pay 10× cash flow, a one-percentage-point mistake matters, but it is manageable. At 50×, the same mistake can completely ruin you.
The point is not that high multiples are always bad. It is that the multiple tells you how much confidence the valuation requires.
I wrote a longer explanation with the maths and some examples here:
[https://www.jeravalue.com/en/blog/multiple-is-the-size-of-your-bet](https://www.jeravalue.com/en/blog/multiple-is-the-size-of-your-bet)
