web analytics

The current market environment reminds me of a famous Hank Williams Jr. song lyric…

The interest is up and the stock market’s down…

Just as Hank had faith in “country folks” surviving in the worst times, we know from experience that those in the finance industry that remain disciplined and unfazed by short term market volatility are often the ones deliver the best results for their clients.

Disciplined folks can survive!

It’s easy to panic and be tempted to reduce exposure to equities (or trade in and out of stocks) when the market is -20% in the first half of 2022.

News is bad, emotions are high, clients are calling to ask how you’ll protect their hard-earned money.

If you’ve set up a portfolio with broad exposure to great companies with great management teams (these firms tend to adapt well and figure out how to succeed in any environment), often the best approach is having the conviction in your process and portfolio holdings to do nothing.

It’s not easy to sit and watch the market take a dive in the short-term but attempting to time the market can be incredibly costly.

*Source – Timing the market is impossible, Hartford Funds

It’s important to remember that doom & gloom is often followed by opportunities as we discovered during the last big downturn (Covid). Those who panicked and missed the whipsaw recovery never quite recovered.

We’re not in the business of predicting where inflation or market returns will be over the next 6-12 months, but we can…

1. Help investors remain calm and maintain disciplined allocations
2. Help investors develop a consistent approach to stock selection
3. Offer top-rated equity strategies that have consistently outperformed

Following a disciplined approach of buying undervalued, wealth creating companies makes it easier to ignore short-term chaos and not panic.

We believe this approach is what sets our strategies apart and has served our clients well since the mid 90’s.

Just remember, there are better days ahead… make sure you are in the game.

Some recent work we’d like to highlight that can help investors make better investment decisions.

1. We’d like to introduce a research paper The Wealth Creation Effect

This research paper from the co-founders of Applied Finance along with Francesco Franzoni, PhD, Professor of Finance at Swiss Finance Institute challenges the existing asset pricing literature that suggests that higher investment is associated with lower expected stock returns.

Most practitioners (Investors with skin in the game) on the other hand, understand that investment is a value-creating activity when it generates payoffs above the cost of capital.

The paper reconciles these views and provides a more nuanced view that is more in-line with what many practitioners already embrace, that there is a delicate interaction between profitability and investment.

2. Our latest Quarterly Letter to Shareholders was released – Looking Back, Looking Forward – 2022Q2

In the letter, our Senior Analyst, Jun Wang, CFA, recaps the pain felt all around the market in Q2, and provides our outlook for Q3 and beyond.

We also provide some sensitivity analysis to answer questions like…

1. How much should the Russell 1000 decline if Cost of Capital increases 10%?
2. How would this effect high vs. low duration companies?
3. What happens in the worst case scenario? (Discount Rates travel back in time to 1980’s levels like Marty McFly)

3. Applied Finance’s Valuation Driven quarterly review is now available. Click Here to view the entire report.

Derek Bergen, CFA & John Holt, CFA provide some insights through a quantitative lens to identify which areas of the market look most attractive according to our measure of Intrinsic Value.

  • Russell 1000’s Intrinsic Value upside is 1.5% higher than Russell 2000’s Intrinsic Value upside. Prior to this convergence in relative valuation, US Large Cap stocks have had significantly higher Intrinsic Value upside for nearly the last two decades.
  • In general, small cap value indices and small/mid cap indices that exclude unprofitable firms currently offer the most attractive Intrinsic Value upside, while the Nasdaq 100 also offers elevated upside due to increased exposure to highly profitable megacap firms.
  • US Large Cap & Small Cap Valuation Gap levels

4. We’ve also started creating a library of threads on Twitter that highlight some common valuation mistakes and how we can help investors avoid these pitfalls.

Ignoring the impact of inflation on ROIC profit measures.
Ignoring the economic impact of R&D misrepresents corporate performance & intrinsic value.
Ignoring the economic impact of stock-based compensation in cash flow profit metrics.

If you find these types of threads helpful, give us a follow on the blue bird app @AppliedFinance.


  • Timing the market is incredibly difficult and can be COSTLY
  • The best defense against market downturns or inflation is to follow a disciplined approach of buying Undervalued, Wealth Creating companies and having a long-term outlook
  • Follow us on Twitter @AppliedFinance for helpful valuation tips to make better investment decisions

Best Regards,

The Valuation Edge

ValuationEdge™ Newsletter

Join to receive updates and exclusive

Valuation Driven® insights!

You have Successfully Subscribed!