An argument on social media went like this. “Look at how this stock price has been rising continuously without any let up? How can you say this stock is overpriced?” The question was from an investor in his first market cycle. He owned a company that was trading at thrice its historic valuation. And he didn’t even like to be cautioned that valuations were too high. His belligerence towards critics almost matched the gravity-defying stock price.

When we are onto a good thing, we simply don’t feel like letting go of it. This is typical of most investors and stereotypes the momentum investor. The last year has seen several stocks rise one way, & retail participation at near peak levels is the highest. Nobody is willing to listen to any criticism of the prevailing valuations.

But history is clearly a great teacher. And what does it teach us? It teaches us a simple lesson. That price may go out of control, defy gravity and look infallible. But eventually, price gravitates towards the intrinsic value of the company. If we overvalue something, it eventually corrects and also falls below even what is its intrinsic value. This market is probably waiting for this to happen with several overvalued stocks.

Price will always meet value. So, when it overshoots value significantly, an investor should know what to do. The time to know it is now.

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Posted on October 16, 2021
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