P/E Tells You the Price. Reality Gap Tells You the Delusion(hstre.github.io) |
P/E Tells You the Price. Reality Gap Tells You the Delusion(hstre.github.io) |
> A higher RG value indicates a larger gap between market valuation and the estimated fundamental base — meaning the market is pricing the company at a significant multiple of what the fundamentals alone would support. A lower RG value suggests that the market price is closer to being covered by the fundamental base.
This is dumb. They’ve decided that their estimate of the true value is the correct one, and then calculate the difference from that. But of course, the fundamental issue is everyone has a different estimate. There’s no reason to believe their estimate is better than anyone else’s
Somebody who seriously works in finance will have a more enlightened view than me, but it seems to me that they defined a heuristic by combining existing heuristics. I don’t think that’s necessarily wrong, but there’s also no reason I can see that it should be right. And because it’s complicated, i think it obscures some of the confusing bits that you’d directly face if you used traditional metrics