Return VS investment timing

Of course we can analyse each company business and its other non operating asset to come out with our valuation. But the valuation depends on our expectation, and our expectation is influenced by current market situation. Of course we can made our investment decision according to our valuation, whether it is overvalue or undervalue. To be safe, we try to tweak our expectation towards conservative when we do valuation for investment purpose, and tweak our expectation towards more aggressive when we do valuation for the purpose of selling.

But most of the time, we underestimate extremity of investor behaviour as how undervalue the valuation will go, and how overvalue the valuation will go. So we tend to buy in too early and sell out too early. We also underestimate how good the economy will bring and sell too early; and underestimate how severe the economy will go down and buy too early. And economy is always the most decisive factor to determine how much return one will make.

The best return is is made during investment in the bottom of the business cycle, and sell during the peak of the business cycle.
The second best return is made during investment in dip along the business cycle.
The third best return is made during investment in confusion of market, but we realised that the future is still promising.

It is very easy to misjudge the economy stage. We loss money if we invest but don't see the economy downturn coming or underestimate the severity of the downturn. We incur huge opportunity cost if we hold too much cash and don't realise the economy is actually slowly moving upwards or underestimate the prosperity of the economy.

Thought of monetary tightening impact on company valuation

Current world is flushed with money, supply of money is so large that interest become so low. It pushed up all the asset price.
When tightening happen, supply of money reduce. It put pressure on asset price.

Those company with high asset dependent base, its valuation will suffer.
It is because company usually finance the asset with financing. Tightening will not just putting pressure on the asset value, but will cause the interest rate to rise, which then reduce the EBIT coverage ratio and affect rating. Thus interest rate paid by the company will likely raise faster than the general interest rising trend. This will raise the cost of capital of the company too. Higher interest payment will reduce the future cash flow, and the reduced future cash flow discounted by higher cost of capital, further reduce the firm value.


Those company with asset light business model will outperform.

Bank will take a hit as its collateral asset under price pressure.

Insurance will likely do well as its liabilities is not asset base, but either event base or personal life base, and its income will rise upon rising interest rate.