In the bull market of 1999-2000, many loss-making DotCom companies’s shares were valued based on the number of eyeballs visiting their websites. It was assumed that the higher number of visitors to the websites would result into (1) some e-commerce business, and/or (2) advertising revenue.
Roughly eight years later in 2007-08, in India, many retail companies were valued based on the footfalls in their malls. Once again, it was assumed that the footfalls would lead to higher sales revenue.
In both cases, the expectation of sales revenue turned out to be much higher than the actual numbers.
The expectation of higher sales in future reflected in the current valuations. The prices rose. When the purchase price is high, the future returns are muted – a simple law, forgotten often.
Read more on the Chapter on “Valuation” in the book, “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget”
#RidingTheRollerCoaster – 103