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Drivers of Equity Returns

What are the Valuations Telling us about the Market

What are the Valuations Telling Us about the Market?

By | Drivers of Equity Returns, Global Equity | No Comments

Benjamin Graham had introduced the concept of a mythical “Mr Market” to describe how sentiment or emotions drive markets in the short term. His analogy cautioned us in getting swayed into making an incorrect decision because of Mr Market’s emotional make-up. Mr Market is prepared to make us an offer to buy or sell a piece of a fractional ownership in common equity every day. In doing so he indirectly informs us about the assumptions on growth (in sales or earnings) that are being built in the valuations. In a strong bull market these assumptions might be overly optimistic and vice versa in case of a bear market. The choice to transact at a particular price (and valuation), Mr Graham tells us, is ours.

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