Thread by @chamath

How to spot a bubble:

I believe there are roughly 6 stages of a market’s valuation. People use different methods to justify buying stocks in each phase:

1. Multiple of FCF
2. Multiple of EBITDA
3. Multiple of Revenue
4. Multiple of ARR
5. Multiple of Bookings
6. Multiple of GMV

I propose we build a classifier that crawls research reports, online communities, fintwit etc to identify which version is mentioned most at any given time:

1s and 2s define a buyers market

3s and 4s indicate a topping market

5s and 6s point to an overvalued market

We can define market as “the market” or as a sub sector like Tech or SaaS

If someone wants to build this, maintain it and publish results quarterly, I’ll contribute some money to start it so we can all benefit.

Note: early stage tech investing is effectively buying 5s and 6s in a Series A and watching them migrate to 1s over time

Note: we can backtest usefulness by looking at +/- 6 mos of price performance for every transition from one label to another.

Note: eg $SHOP market cap

Also, for those that want to refine your toolkit when you read this, dont overreact with random single stock names.

The skill comes in figuring out what the market believes is the right window of time for acceptable returns and it’s WACC before you scream short or long.

Also re:$SHOP, I’m sure it’s obvious but in case it’s not, as a stock’s valuation/discussion framework “levels up” from label to label (ie from 4–>5–>6) the most profit maximizing thing to do is NOT short or sell but be levered long...