In this part, Shah points out how valuations (in terms of P/E) may seem high but the reality could be very different. He also has a few suggestions for budding investors. Read on to know what the master has to say. Don't high-quality companies usually trade at expensive valuations? How do you account for this? What is your approach to valuation? Is it purely mathematical, or do you consider qualitative aspects as well? As mentioned before, investing is both an art and science, mathematics as well as a language expressing the diverse nuances, psychology and emotional makeup of investing. It is an intertwined blend of both, never just one. Conjecturing and contemplating the future is mostly a matter of art; the derived outcomes eventually get expressed in mathematical numbers. Similarly, judging a management is less of science and more of art, while judging a business is perhaps the other way round. Language and the art of investing express themselves through the science of investment techniques and mathematical assertions. Quantum of growth, its durability, pattern and potential are as much numbers as judgement. Capital efficiency and quality of growth are judgements, and the culmination of these judgements gets articulated in the form of numbers. It is the science of emergent, diverse, but connected numbers through which the art and language of investing reveal themselves. But as mentioned before, it is the tangibles that humans relate to more easily; they also appear more real. But it is the intangibles that matter more in investing. The relative role of the qualitative aspects of investing is superior to that of the quantitative ones. Judging the management's character may be largely in the realm of qualitative judgement, but a part of it is also a matter of mathematics. As Philip Fisher said, "Superior return on equity (ROE) is a holy grail of good management". Judging the character of a business, in many aspects, involv
This article was originally published on May 08, 2023.
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