I believe that ever since the “Great Recession/Financial Crisis/Mortgage Debacle” or whatever label you use to reference the 2008/2009 economic and capital market crash/correction, congressional and Federal Reserve actions have changed the way valuations must be considered. I had always considered myself amongst the “semi-efficient market” camp, with a preference for fundamental rather than technical analyst. Yet even with a preference for “intrinsic” value, the prudent investor cannot ignore certain technical metrics, such as momentum. And while never fool-proof, fundamental analytics, sprinkled with a little technical consideration, added to my confidence that left to their own devices the markets tended to be relatively efficient pricing mechanisms.
But the capital markets have not been left to their own devices for over a decade now. First there were various bailouts followed by waves of stimulus packages. And virtually every developed country acted similarly to various degrees. While I am keenly aware of the difference between correlation and causation, I find it inconceivable that all this intervention (read “printing of money”) has not skewed traditional valuation metrics, such as P/E ratios and even free cash flow to some extent. (After all, when companies can borrow at will for next to nothing, why hold cash?)
Consequently, the active investor has had to rethink valuation metrics. While basic fundamentals such as company and even industry viability must never be ignored, nearly as important is price. One can pay so much for an otherwise sound investment that you never make any money on it.
In Part Two of New Realities, I will provide some examples of suspect valuations. Stay tuned!