Some of you might have heard of the Lindy Effect. Essentially, however long a given technology or idea has existed, it will probably exist for a time proportional to that.
The thing that strikes me is that equity valuations are a story we tell ourselves, an idea. Although the market is in the long run a weighing machine (weighing intrinsic value), it is made of human participants that believe and reinforce stories. Does the Lindy Effect hold for equity valuations? Not valuations in general, but potentially for specific industries or stocks.
For example, AMZN has traded at a hefty premium to the market for quite some time. Personally, I kick myself for not diving in earlier, but it just never seemed rational to pay close to 100x earnings ever. But AMZN continues to demand a premium. Some might say that this is because of the consistent growth, but what if it's just a story that keeps going?
Consequently, does it make sense to look at time weighted valuations? Does it make sense to look at volatility of multiples? Potentially, a traditionally overvalued company might be stable at that multiple and continue to demand a premium, signaling that it is OK to buy at the current level as long as one's other requirements are met.
Submitted February 28, 2021 at 10:29PM by Capn-Stabn https://ift.tt/3kvYxAt
