ProblemMarkets can price attention faster than businesses can create durability.
PrincipleSeparate the number people pay from the economics the asset can produce.
UseAsk what has to become true for the valuation to make sense.
Separate the number people pay from the economics the asset can produce.
The move
Valuation compresses expectations into a number. That number may be rational, emotional, strategic, or temporary.
Value is slower. It comes from future cashflows, competitive position, and the durability of returns.
The gap
A high valuation can be justified if the market is huge, margins can expand, and the company can defend its position.
It can also be a momentum story wearing finance clothes.
Use it
Translate valuation into required performance. How much revenue, margin, retention, or market share must appear? Then judge the path, not the headline number.