"Coming back to this - while the metrics you employ may be absolute, they all contain a variable which is determined by market forces (prices, discount rates including the risk-free rate of return), which in turn is driven by underlying macroeconomic factors like interest rates."
@thunderhead1,
Sure, in theory, but not in practice.
In the real world, while low interest rates tend - generally - induce expansion valuation multiples, that is not universally consistent across every single listed company.
Even with interest rates where they are presently, there are a number of stocks with very modest valuation multiples (in absolute terms). Of course, very often there is a very good reason for that, in terms of business model or other company-specific issue, but sometimes it is simply because a stock is inefficiently priced.
I
n that context, how do you approach the deployment of your capital? Do you just stick to your rules/limits and wait it out? Or do you pay up and accept a lower future return potentially (that is still better than no return at all i.e. too much cash burning a hole in your pocket!).
I always try my hardest to avoid "paying up, thereby potentially accepting a lower future return". But that mindset doesn't automatically result in holding cash.
The reason being that there are always some stocks/sectors out of favour with the consensus opinion which might be chasing some other "hot and liquid" sector (case in point currently: tech names, infrastructure and resources).
Another thing that is being highly sought in the current market is liquidity, at the expense of illiquid stocks. My sense is that the valuation disparity between large cap and small cap stocks is the largest I can recall it ever being
By coincidence, the following article - which deals with the issue of valuation divergence - formed part of my e-mails just yesterday:
https://www.livewiremarkets.com/wires/waaax-and-the-disconnect-not-making-headlines
For ease of reference, here is a relevant graph taken from that article (it's starting date is December 2018, but one could go back for 12 months prior to that start and the picture would look very similar).
View attachment 1613557
And that kind of chart can also be drawn groups of stocks in different economic sector.
The point being made with this post as an answer to your question is that because of this selective mood characteristic of equity markets - where the herd is at any time engaged in indiscriminately selling certain stocks/sectors as it indiscriminately chases others - the ability to remaining consistently disciplined with valuation limits and being fully invested at all times, are not mutually exclusive in my experience.