Thread by @dampedspring

Equity valuation 101 - Firstly even if you know with certainty the "Fair value" of an equity or equity index or for that matter any asset or any relationship between assets the path to convergence to FV is rocky. I spent decades in the RV space before learning macro and have ...

Traded many absolute and statistical arbitrage relationships. Convergence to FV for many of these strategies often depended on macro conditions. This generated track records that often were simply levered beta with bad drawdowns and expensive transaction costs and fees.

The path to convergence generated p/l volatility which impacted risk adjusted returns. The returns from knowing FV just don't compensate investors for the risk significantly more than owning a passive beta portfolio. Tl;dr alpha is hard to get.

So why try at all. TBH it is arrogant to believe you or I have alpha and it is unlikely that we do. But that's another debate. The goal of this thread is to review equity valuation methods. There is no right answer and all can be used if used appropriately to triangulate FV

Let's start with DCF. A fixed income instrument has a price. With that price we can precisely determine its yield to maturity. As a side note this YTM is generally accepted but in actuality ignores the scientific approach of discounting each flow at it's appropriate discount rate