On this tab I am going to talk about valuation and tie it into my investment strategy.

What does valuation mean in investing? Valuation is the process of figuring out what a company is worth, not just what the market says it’s worth today. The market can say Coca-Cola is worth a trillion dollars…maybe its warranted, maybe its not. That is where valuation comes into play, valuation looks at the fundamentals of the company and based on the fundamentals you can derive a value for the company.

How do you value a company? There are multiple approaches but my favorite way is the discounted cash flow model or DCF. The idea: a company is worth the cash it will generate in the future, discounted back to today’s dollars. I think of it like this: “If I owned this entire business, how much cash would it put in my pocket over time?”. A common quick metric people often refer to is the P/E ratio or Price to Earnings ratio. Let’s look at Coca-Cola (KO). KO has a P/E ratio of 23.08 as of 10/24/2025. This means that investors are willing to pay $23.08 for every $1 per share Coca-Cola earns.

One person’s or financial institution’s valuation can differ from another. The quality of the DCF comes down to the models inputs and what you believe the company is going to do in the future. If I expected Coca-Cola was going to grow at 30% over the next 5-10 years then I would be willing to pay more for the stock based on the higher potential growth…now Coca-Cola is not going to grow at 30% per year over the next 5-10 years but my point is the inputs, your belief about what the company can do, and the growth rate really influence the valuation of the stock you are trying to value.

Take technology stocks for example which is what we invest in, tech stocks generally trade at higher multiples because people expect more growth to come from them. If a company is expected to grow earnings rapidly, those future cash flows will be much larger, so investors are willing to pay a higher price today. Technology companies that have high growth can capture market share rapidly, can see profit margins expand as it quickly grows, and benefit from scalable businesses like in software or AI. The expected compounding justifies higher valuation multiples than say a Coca-Cola that is a mature business with lower growth potential.

What are some dangers or pitfalls in growth investing? There are a couple, but overpaying is a major one. I like the quote from Warren Buffett, “Price is what you pay, value is what you get.”. Valuation is how you make sure those two numbers — price and value — line up in our favor. When you invest in a higher growth technology company you are really chasing and dependent on growth. If the growth cannot keep up or falls off because of something you could see a really big multiple compression. Take for example Cisco in the 90s, at one point it was growing at over 50% per year, by March of 2000 it traded at over 100 times earnings. Investors believed based on the price it could continue this growth, you even had analysts predicting it would be the worlds first trillion dollar company. When the dot com bubble burst spending on networking gear collapsed and many of its customers went bankrupt or slashed budgets. Growth slowed sharply and investors realized it was overpriced. The stock fell nearly 90% from its peak in 2000 to 2002. The takeaway is not that Cisco is a bad company but at the market price people put on the company it was a terrible stock. Investors had priced in decades of growth that simply was unrealistic. I use a spreadsheet that helps me quickly gauge what P/E I’d be willing to pay at glance while taking into account my desired holding period, my required rate of return, company growth rate, and growth rate in perpetuity until company death. If for example I require a 10% rate of return and I expect the company to grow at 7% for 10 years and then at 2% for the remaining 40 years until the company dies I would be willing to pay around 16.6 times earnings. If I pay that I can get my return of 10%, if I pay higher and plan on holding the investment during the same length of time I won’t get my required rate of return of 10%. Length of time really matters, I might be able to get 10% but would need to be willing to hold the investment longer. My point? Investment holding period, expected company growth rate for the holding period, and perpetuity growth rate until company death will influence how much return you can get (this is all independent of company price). With higher valuations right now, I would expect a lower rate of return over the next couple of years unless something like AI can really spur growth. I look for market corrections, they give me the opportunity to get those lower valuations and change my investment outlook and holding period. You theoretically can pay whatever P/E you want, just realize you might have to wait a very long time to get your required rate of return and in Cisco’s case that return and growth that people expected never came.

Wrap Up: We are not investing in individual technology companies, we are investing in a basket of them through technology focused ETFs. Valuation still matters and valuations are high right now, not excessive, but high historically. Could we be buying at the top of a bubble? Maybe. Could we have 5-10 more years of high growth with zero hiccups? Maybe…truth is I don’t know but neither does anyone else for that matter. There are always going to be bears out there calling for Armageddon, you have to pick a lane, take a bet, choose a strategy and stick with it and base your decisions on the information available to you. I know the risk management procedures we have in place are adequate to protect us if there is a major correction in the market. The great thing about using PUT options is we can exercise our contracts at our strike price if we ever needed to and effectively cap our losses at a defined point. I wanted to write this to inform you that the risks of the current market are not lost on me right now and to let you know that valuation matters and that we have risk management procedures in place for when a negative market event occurs.

Below are some informational videos about the markets, valuation, and the “Mark Cuban Hedge” which we deploy into our portfolios. I have also attached a DCF valuation model I did earlier this year for Coca-Cola (KO).

Below is a button, if you click on that button it will take you to a valuation I did earlier this year (2025) for Coca-Cola (KO). This is called a DCF model like I talked about above. You can use a DCF model to value a business to see what the valuation should be based on your inputs and assumptions.