4Q 2019 Market Commentary
Like biology or chemistry, asset valuation is a science of ratios, formulas, models, and rules of thumb. As with any science, the theories behind asset valuation are based on empirical evidence vetted by academics and practitioners alike. At the same time, however, asset valuation is also a bit of an art. The ratios and formulas only take us so far, and they rely on many assumptions. Ask ten painters to paint the same landscape, and you’re unlikely to get the same painting twice. Ask ten stock analysts to analyze the same company, and each analyst will develop their own picture of the firm and its outlook. That’s the art of valuation.
Now, take this concept, as messy as it is, and apply it to something as complex as the stock market. Are stocks overpriced? Are we due for a correction? Ask ten portfolio managers, and you might just get ten different answers. There is as much artistry in valuing the overall market as there is in valuing an individual stock.