I love the point about multiples being a measure of trust - never thought about it that way.
I also liked the formula you made to define changes in the S&P 500. It’s probably as good as most other more serious models out there haha
A key point I think many people miss about models is that they should be used as tools to help guide and improve our understanding of a situation. Some models are really good (e.g., F = ma) and some (like whatever inflation models they were looking at inside the Fed last year) are not so good.
A lot of people expect a model to give us an exact answer and criticize models when they are wrong (which in the financial world is almost always) versus praising them when they provide nuance that is slightly better than a blind guess. At the end of the day, a tool is useful to some people and maybe not others. Some people want something fancy like a really nice guitar but a great guitar player would sound way better on even a cheap guitar compared to a rookie on a fancy piece of equipment. Same with models - an I-banker might sell the heck out of a few multiples and the quant who spent weeks on a complicated model will crash and burn in front of the same audience.
My philosophy, therefore, is to start with the simple stuff and add complexity as needed and note where the complex stuff disagrees with the simple stuff and iterate from there. A truly great simple test of doesn’t even need numbers - just use the smell test.
As for how the market looks now? I’m comfortable investing right now just off the smell test. Why? Because optimism always beats pessimism in the markets in the long run and especially when pessimism is running high.
Hey! That first chart looks familiar : )
I love the point about multiples being a measure of trust - never thought about it that way.
I also liked the formula you made to define changes in the S&P 500. It’s probably as good as most other more serious models out there haha
A key point I think many people miss about models is that they should be used as tools to help guide and improve our understanding of a situation. Some models are really good (e.g., F = ma) and some (like whatever inflation models they were looking at inside the Fed last year) are not so good.
A lot of people expect a model to give us an exact answer and criticize models when they are wrong (which in the financial world is almost always) versus praising them when they provide nuance that is slightly better than a blind guess. At the end of the day, a tool is useful to some people and maybe not others. Some people want something fancy like a really nice guitar but a great guitar player would sound way better on even a cheap guitar compared to a rookie on a fancy piece of equipment. Same with models - an I-banker might sell the heck out of a few multiples and the quant who spent weeks on a complicated model will crash and burn in front of the same audience.
My philosophy, therefore, is to start with the simple stuff and add complexity as needed and note where the complex stuff disagrees with the simple stuff and iterate from there. A truly great simple test of doesn’t even need numbers - just use the smell test.
As for how the market looks now? I’m comfortable investing right now just off the smell test. Why? Because optimism always beats pessimism in the markets in the long run and especially when pessimism is running high.