Read on Twitter
1/ Thread: Mr. Market is NOT a charity
I usually joke with my friends that there are 3 topics that are interesting but have an extremely low barrier to entry to have an opinion which make these conversations largely unproductive and mostly not good-faith discussions.
I usually joke with my friends that there are 3 topics that are interesting but have an extremely low barrier to entry to have an opinion which make these conversations largely unproductive and mostly not good-faith discussions.
2/ These topics are religion, politics, and valuation.
When it comes to valuation, there are two groups of people I deeply disagree with.
They are at the two extremes but essentially have the same argument: Mr. Market runs a charity.
When it comes to valuation, there are two groups of people I deeply disagree with.
They are at the two extremes but essentially have the same argument: Mr. Market runs a charity.
3/ At one side, we have people who are hyper-focused on valuation at the expense of everything.
God forbid if anything trades at >10x revenues, they run after to google and find Scott McNealy quote to justify their razor focus on valuation.
God forbid if anything trades at >10x revenues, they run after to google and find Scott McNealy quote to justify their razor focus on valuation.
4/ Tbh the first time I read that quote, I thought it was onto something.
Thankfully, I eventually realized it makes zero sense.
Thankfully, I eventually realized it makes zero sense.
5/ They consider Mr. Market as charity because they think stocks should trade at some “cheap” multiples even though trillions of bonds are trading at negative yield.
6/ On the other side, we have YOLO investors who are willing to slap $20 Bn mcap on some drawing of a car.
They also think Mr. Market is a charity because it just doesn’t matter at all what you pay for a stock.
Why?
“Stocks always go up.”
They also think Mr. Market is a charity because it just doesn’t matter at all what you pay for a stock.
Why?
“Stocks always go up.”
7/ The truth is valuation is hard. And most people underappreciate just how hard it is.
There is no magic multiple number that can whisper us in our ears whether stocks are cheap or expensive.
There is no magic multiple number that can whisper us in our ears whether stocks are cheap or expensive.
8/ You cannot expect to pull up your FactSet and miraculously conclude just by looking at multiples whether a stock is cheap or not.
9/ If you really want to have an opinion, you have to do it the hard way. You need to understand the business reasonably well and its competition to have an opinion on whether the margins and ROIC can sustain in future.
Of course, forecasting the future is no child’s play.
Of course, forecasting the future is no child’s play.
10/ Even if you have excellent understanding on those aspects, you can still be prisoner to long-term treasury bond yields which is of course way above anyone’s paygrade.
End/ As investors, we are bound to wrestle with the idea whether valuation is cheap or expensive.
There is almost never an easy answer. Because Mr. Market is NOT a charity.
There is almost never an easy answer. Because Mr. Market is NOT a charity.
