Really thoughtful breakdown — love how you demystified the five core factors. It’s so true that focusing only on ‘value’ can make you miss some of the biggest winners. Some of the best compounders never looked cheap but had that momentum and quality edge. This post really helps investors look through a clearer lens - thanks for sharing it!
Thank you so much! Glad the post resonated with you.
Totally agree!!! Some of the market’s best performers rarely looked “cheap” on traditional metrics, but they had the right mix of quality, momentum, and long-term reinvestment power.
The point is that valuation is always relative. But it unfortunately starts from risk management assumptions that are totally based on misconceptions. Finance has tried to make sense of risk so that we can all do calculations on sheets of paper. But we live in a world of nuances and interconnections where finance does not come into it at all.
We preferred to develop our own internal models. Nice post!
Yes, Quantis!!! That’s exactly it. Excel accepts anything - but the market has so many other variables at play. To actually make money, we need to connect all of them.
Part of my analysis process calculates the correlation for common metrics such as PE. The higher the PE for the current year relative to the last 7 years is usually the better the time to buy that company. The lower the current PE to the range, the worse it is. This assumes the business is sound. People are using PE wrong; it's best used as a relative value for the company as a cycle timing tool. A relatively low PE is a sign of a cycle top, a relatively high PE is a sign of a cycle bottom. I plan to write about this soon.
Really interesting take, my friend. I totally agree that most people misuse the P/E ratio.
That said, I imagine this kind of contracyclical logic works best for companies in oil and commodity sectors - where multiples are often lowest at the top of the cycle, since the commodity is hitting record highs and cash generation is peaking. When the multiple is high, it's usually because the commodity is in a slump - and might soon mean revert.
Yes, I’ve mostly used it on commodity stocks, but it seems like it can work with most stocks for a starting point. Low current earnings on a cyclical stock with a strong balance sheet (antifragile as they can buy up assets from distressed competitors for pennies on the dollar), and quality management in an industry aligned with the macro economic trends is what I like to look for.
Buffett & Munger tell different stories.
Yeah, was Apple a "value" stock in their definition?
What story?
https://youtube.com/shorts/PyHO-dlHSuw?si=2HK_XoY4SoOrUod7
Really thoughtful breakdown — love how you demystified the five core factors. It’s so true that focusing only on ‘value’ can make you miss some of the biggest winners. Some of the best compounders never looked cheap but had that momentum and quality edge. This post really helps investors look through a clearer lens - thanks for sharing it!
Thank you so much! Glad the post resonated with you.
Totally agree!!! Some of the market’s best performers rarely looked “cheap” on traditional metrics, but they had the right mix of quality, momentum, and long-term reinvestment power.
The point is that valuation is always relative. But it unfortunately starts from risk management assumptions that are totally based on misconceptions. Finance has tried to make sense of risk so that we can all do calculations on sheets of paper. But we live in a world of nuances and interconnections where finance does not come into it at all.
We preferred to develop our own internal models. Nice post!
Yes, Quantis!!! That’s exactly it. Excel accepts anything - but the market has so many other variables at play. To actually make money, we need to connect all of them.
Thank you!!
I've found that the inverse PE ratio for a quality company is a great place to start. Always start with quality if the goal is quality and value.
Tell me more about that, Jeremy...
Are you saying we should start with the earnings yield?
Part of my analysis process calculates the correlation for common metrics such as PE. The higher the PE for the current year relative to the last 7 years is usually the better the time to buy that company. The lower the current PE to the range, the worse it is. This assumes the business is sound. People are using PE wrong; it's best used as a relative value for the company as a cycle timing tool. A relatively low PE is a sign of a cycle top, a relatively high PE is a sign of a cycle bottom. I plan to write about this soon.
Really interesting take, my friend. I totally agree that most people misuse the P/E ratio.
That said, I imagine this kind of contracyclical logic works best for companies in oil and commodity sectors - where multiples are often lowest at the top of the cycle, since the commodity is hitting record highs and cash generation is peaking. When the multiple is high, it's usually because the commodity is in a slump - and might soon mean revert.
What’s your take on that?
Yes, I’ve mostly used it on commodity stocks, but it seems like it can work with most stocks for a starting point. Low current earnings on a cyclical stock with a strong balance sheet (antifragile as they can buy up assets from distressed competitors for pennies on the dollar), and quality management in an industry aligned with the macro economic trends is what I like to look for.