Hey folks :)
I recently wrote an article about my views on valuation – deliberately opinionated. Curious to hear your thoughts / feedback.
In short, at one extreme, investors build elaborate models based on academic theories with discount rates calculated to two decimal places and with detailed five-year forecasts. At the other is chart-gazing: a stock used to trade at 25x earnings and now trades at 12x – it must be cheap then. My core argument is that you cannot compress a vastly complex, largely unforecastable world into an equation or pattern, hence the methodologies offer more certainty than they can deliver.
Canonical models such as CAPM, Modigliani–Miller, modern portfolio theory, Black–Scholes–Merton and Fama–French, serve as foundation in modern finance and underlie valuation/investment/portfolio decisions, yet do not hold reliably. The same problem appears in DCF valuation. The logic is sound — a business is worth the future cash it can generate — but almost every important input is unknowable. A WACC of 8% rather than 10%, a slightly different terminal growth rate, or a few optimistic margin assumptions can turn the same company from overvalued into an apparent bargain.
My practical response is not to abandon valuation, but to simplify it. I prefer broad discount-rate ranges, genuinely different operating scenarios and reverse DCFs that ask what expectations are already embedded in the share price. I also argue that a qualitative approach should precede any quantitative/modelling work because the financial results are an output of the underlying business activities. One needs to understand why a business could/should grow at low-single-digits or double-digits instead of plugging in the numbers and extrapolating the past into the future – very common pattern I observed in my professional environment.
Overall, I do not believe there is a single, true intrinsic value. The markets are in constant price discovery mode. Hence, my approach is to identify situations when the market has attached too much certainty to one version of an unknowable future.
Full article here: [Valuation: Between Theoretical Purism and Chart-Reading](https://theasymmetryletter.substack.com/p/valuation-between-theoretical-purism?r=8j3jz6)
I use AI tools to assist with research and polishing. The conclusions and the large majority of the writing are my own though :)
