Fundamental value estimates
Fundamental value seems like a straightforward investment approach. One simply looks for assets that are “cheap” or “expensive” relative to their rationally expected risk-adjusted discounted cash flows. In reality, conscientious estimation of fundamental value gaps is one of the most challenging strategies in asset management. It requires advanced financial modeling and often long waiting times for payoff. Few managers have the resources and patience for it. In macro trading, cheapness or dearness is commonly inferred from simple valuation metrics, such as real interest rates, real exchange rates or equity earnings yields. However, by themselves, off-the-shelve metrics cannot create much information advantage. Indeed, they regularly confuse forward-looking expectations with mispricing and lure investors into crowded value traps. Fundamental value should be estimated conscientiously or not at all. The minimum requirement for a valid valuation metric is some reasonable integration with related economic states and trends.